10-Q 1 0001.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period from _____________ to _____________ Commission File Number 001 - 12231 -------------------- CB RICHARD ELLIS SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 52-1616016 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 200 North Sepulveda Boulevard El Segundo, California 90245-4380 (Address of principal executive offices) (Zip Code) (310) 563-8611 Not Applicable (Registrant's telephone (Former name, former address and formal number, including area code) fiscal year if changed since last report)
-------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]. Number of shares of common stock outstanding at October 31, 2000 was 20,581,985. ---------- 1 CB RICHARD ELLIS SERVICES, INC. FORM 10-Q September 30, 2000 TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Condensed Financial Statements Consolidated Balance Sheets at September 30, 2000 (Unaudited) and December 31, 1999......................... 3 Unaudited Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999 and for the nine months ended September 30, 2000 and 1999........................................ 4 Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2000 and 1999............................................................................... 5 Notes to Consolidated Condensed Financial Statements........................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................................................ 24 Signatures............................................................................................................... 25
2 CB RICHARD ELLIS SERVICES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share data)
September 30, December 31, 2000 1999 ------------- ------------ (Unaudited) A S S E T S ----------- Current Assets: Cash and cash equivalents............................................................... $ 20,724 $ 27,844 Receivables, less allowance of $13,213 and $15,560 for doubtful accounts at September 30, 2000 and December 31, 1999............................................ 156,395 167,122 Deferred taxes, net..................................................................... 11,543 11,758 Prepaid expenses........................................................................ 7,448 8,370 Other current assets.................................................................... 6,944 11,750 --------- --------- Total current assets................................................................... 203,054 226,844 Other investments........................................................................ 25,452 3,278 Property and equipment, net.............................................................. 72,048 70,149 Goodwill, net of accumulated amortization of $52,241 and $41,008 at September 30, 2000 and December 31, 1999................................................................... 424,468 445,010 Other intangible assets, net of accumulated amortization of $286,336 and $279,156 at September 30, 2000 and December 31, 1999............................................. 48,582 57,524 Investment in and advances to unconsolidated subsidiaries................................ 44,073 38,514 Deferred compensation plan cash surrender value.......................................... 45,968 20,442 Deferred taxes, net...................................................................... 27,164 28,190 Prepaid pension costs.................................................................... 24,104 26,323 Other assets............................................................................. 15,116 13,209 --------- --------- Total assets........................................................................... $ 930,029 $ 929,483 ========= ========= L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y -------------------------------------------------------------------- Current Liabilities: Compensation and employee benefits...................................................... $ 101,238 $ 119,126 Accounts payable and accrued expenses................................................... 88,177 99,497 Reserve for bonus and profit sharing.................................................... 34,329 46,625 Current maturities of long-term debt.................................................... 2,710 5,268 Current portion of capital lease obligations............................................ 1,067 1,497 --------- --------- Total current liabilities.............................................................. 227,521 272,013 Long-term debt: Revolving credit facility............................................................... 196,000 160,000 Senior term notes....................................................................... 15,502 16,502 Senior subordinated notes, less unamortized discount of $1,723 and $1,892 at September 30, 2000 and December 31, 1999............................................... 173,277 173,108 Other long-term debt.................................................................... 5,845 8,262 --------- --------- Total long-term debt................................................................... 390,624 357,872 Deferred compensation liability.......................................................... 68,233 47,202 Other liabilities........................................................................ 31,240 38,787 --------- --------- Total liabilities...................................................................... 717,618 715,874 Minority interest........................................................................ 2,842 3,872 Commitments and contingencies Stockholders' Equity: Preferred stock, $0.01 par value; 8,000,000 shares authorized; no shares issued or outstanding......................................................................... Common stock, $0.01 par value; 100,000,000 shares authorized; 20,246,122 and 20,435,692 shares outstanding at September 30, 2000 and December 31, 1999.............. 213 213 Additional paid-in capital.............................................................. 358,424 355,893 Notes receivable from sale of stock..................................................... (7,537) (8,087) Accumulated deficit..................................................................... (110,011) (122,485) Accumulated other comprehensive loss.................................................... (15,676) (1,928) Treasury stock at cost, 1,072,150 shares and 885,100 shares at September 30, 2000 and December 31, 1999.................................................................. (15,844) (13,869) --------- --------- Total stockholders' equity............................................................. 209,569 209,737 --------- --------- Total liabilities and stockholders' equity............................................. $ 930,029 $ 929,483 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 CB RICHARD ELLIS SERVICES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share and per share data)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenue: Leases.................................................. $ 129,734 $ 111,430 $ 369,938 $ 295,954 Sales................................................... 97,846 106,695 257,800 268,704 Property and facilities management fees................. 27,528 26,689 78,453 80,515 Consulting and referral fees............................ 17,715 16,931 52,144 47,090 Appraisal fees.......................................... 18,885 16,699 55,651 52,290 Loan origination and servicing fees..................... 14,368 11,593 37,408 30,387 Investment management fees.............................. 13,952 7,854 31,107 20,725 Other................................................... 6,493 9,127 22,823 21,721 ----------- ----------- ----------- ----------- Total revenue......................................... 326,521 307,018 905,324 817,386 Costs and Expenses: Commissions, fees and other incentives.................. 156,348 142,919 424,494 369,007 Operating, administrative and other..................... 134,455 134,052 392,028 376,714 Depreciation and amortization........................... 10,834 10,001 32,134 29,963 ----------- ----------- ----------- ----------- Operating income......................................... 24,884 20,046 56,668 41,702 Interest income.......................................... 919 791 1,500 1,861 Interest expense......................................... 10,958 10,294 31,628 29,670 ----------- ----------- ----------- ----------- Income before provision for income tax................... 14,845 10,543 26,540 13,893 Provision for income tax................................. 7,868 5,895 14,066 7,642 ----------- ----------- ----------- ----------- Net income............................................... $ 6,977 $ 4,648 $ 12,474 $ 6,251 =========== =========== =========== =========== Basic earnings per share................................. $0.34 $0.22 $0.60 $0.30 =========== =========== =========== =========== Weighted average shares outstanding for basic earnings per share............................................... 20,806,651 21,098,757 20,834,943 21,021,512 =========== =========== =========== =========== Diluted earnings per share............................... $0.33 $0.22 $0.60 $0.30 =========== =========== =========== =========== Weighted average shares outstanding for diluted earnings per share...................................... 20,881,092 21,162,334 20,917,544 21,103,139 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 CB RICHARD ELLIS SERVICES, INC. UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine Months Ended September 30 --------------------- 2000 1999 --------- -------- Cash flows from operating activities: Net income............................................................... $ 12,474 $ 6,251 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization excluding deferred financing costs........ 32,134 29,963 Gain on sale of properties, businesses and servicing rights............. (9,306) (1,287) Deferred compensation deferrals......................................... 23,954 10,782 Equity interest in earnings of unconsolidated subsidiaries.............. (5,973) (6,731) Minority interest....................................................... 155 1,717 Provision for doubtful accounts......................................... 2,496 1,282 Deferred taxes.......................................................... 1,447 1,334 Decrease (increase) in receivables....................................... 4,463 (13,436) Increase in deferred compensation plan cash surrender value.............. (25,526) (8,203) Decrease in compensation and employee benefits payable and reserve for bonus and profit share.................................................. (26,219) (10,200) Decrease in accounts payable and accrued expenses........................ (12,722) (17,412) Net change in other operating assets and liabilities..................... 134 8,777 --------- -------- Net cash (used in) provided by operating activities................... (2,489) 2,837 --------- -------- Cash flows from investing activities: Purchases of property and equipment...................................... (17,763) (19,213) Proceeds from sale of inventoried property............................... - 7,355 Proceeds from sale of properties, businesses and servicing rights........ 16,180 662 Purchase of investments.................................................. (22,993) - Acquisition of businesses including net assets acquired, intangibles and goodwill............................................................ (3,088) (10,353) Other investing activities, net.......................................... (708) 199 --------- -------- Net cash used in investing activities................................. (28,372) (21,350) --------- -------- Cash flows from financing activities: Proceeds from revolving credit facility.................................. 159,000 146,000 Repayment of revolving credit facility................................... (123,000) (98,000) Repayment of inventoried property loan................................... - (7,093) Repayment of senior notes and other loans................................ (5,239) (10,388) Repurchase of common stock............................................... (2,016) (1,794) Repayment of capital leases.............................................. (1,073) (1,037) Other financing activities, net.......................................... (1,158) (3,079) --------- -------- Net cash provided by financing activities............................. 26,514 24,609 --------- -------- Net (decrease) increase in cash and cash equivalents....................... (4,347) 6,096 Cash and cash equivalents, at beginning of period.......................... 27,844 19,551 Effect of exchange rate changes on cash.................................... (2,773) (525) --------- -------- Cash and cash equivalents, at end of period................................ $ 20,724 $ 25,122 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (none capitalized)............................................. $ 29,110 $ 25,302 Income taxes, net....................................................... $ 19,279 $ 9,957
The accompanying notes are an integral part of these consolidated financial statements. 5 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Organization Organization. CB Richard Ellis Services, Inc. (the Company) is a holding company that conducts its operations primarily through approximately 75 direct and indirect operating subsidiaries. In the United States (US) the Company operates through CB Richard Ellis, Inc., L.J. Melody & Company (L.J. Melody) and CB Richard Ellis Investors, L.L.C. (CBRE Investors); in the United Kingdom (UK) through CB Hillier Parker Limited and in Canada through CB Richard Ellis Limited. The Company operates through smaller subsidiaries in approximately 33 other countries and pursuant to cooperation agreements in several additional countries. Approximately 77% of the Company's revenues are from the US and 23% from the rest of the world. Nature of Operations. The Company is the largest provider of commercial real estate services in the world. Through its 250 offices, the Company has built a global network that is organized in three geographic divisions. The Americas is the Company's largest division and includes the operations of North, South and Central America. Operations in the United States are the most significant component of this division. Asia Pacific is comprised of operations in Asia, Australia, New Zealand and the Pacific Islands. EMEA is the European, Middle East and Africa division. In July 1999, the Company undertook a reorganization to streamline its US operations which resulted in a change in its segment reporting from four to three segments. The Company has a number of lines of business which is aggregated, reported and managed through these three segments: Transaction Management, Financial Services and Management Services. The Transaction Management segment is the Company's largest generator of revenue and operating income. It includes brokerage activities that provide sales, leasing and consulting services in connection with commercial real estate and is the Company's primary revenue source. Corporate Services focuses on building relationships with large corporate clients which generates recurring revenue. Investment Property activities provide brokerage services for commercial real property marketed for sale to institutional and private investors. The Financial Services segment provides commercial mortgage, valuation, investment management and consulting and research services. The Management Services segment provides facility management services to corporate real estate users and property management and related services to owners. A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and cash flow from operating activities to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact on its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand rather than general inflation. 2. Basis of Preparation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all information and footnotes required for interim financial statement presentation. In the opinion of the Company, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ materially from those estimated. All significant intercompany transactions and balances have been eliminated and certain reclassifications have been made to prior periods' consolidated statements to conform to current period presentation. The results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2000. 6 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) The consolidated financial statements and notes to the consolidated financial statements, along with management's discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company's recent filing on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, as of and for the period ended December 31, 1999. 3. Acquisitions and Dispositions In August 2000, the Company acquired Boston Mortgage Capital Corporation (Boston Mortgage), through L.J. Melody, for approximately $2.3 million, as well as additional payments over the next five years based on an acquisition earnout agreement. These payments will supplement the purchase price and be recorded as additional goodwill. Boston Mortgage provides further mortgage banking penetration into the Northeast. It services approximately $1.8 billion in loans covering approximately 175 commercial properties throughout New England, New York and New Jersey. In February 2000, the Company sold certain non-strategic assets for cash proceeds of $8.4 million, resulting in a pre-tax gain of $4.7 million. 4. Goodwill and Other Intangible Assets Net goodwill at September 30, 2000 consisted of $406.1 million related to the 1995 through 2000 acquisitions which is being amortized over an estimated useful life of 30 years and $18.4 million related to the Company's original acquisition in 1989 which is being amortized over an estimated useful life of 40 years. Net other intangible assets at September 30, 2000 included approximately $6.5 million of deferred financing costs and $42.1 million of intangibles stemming from the 1995 through 2000 acquisitions. These are amortized on a straight line basis over the estimated useful lives of the assets, ranging from 3 to 15 years. 5. Other Assets Other long-term assets at September 30, 2000 include $6.3 million in receivables from the sales of various non-strategic offices. This balance also includes $4.9 million of notes receivable from stock options exercised. 6. Employee Benefit Plans In 1994, the Company implemented the Deferred Compensation Plan (DCP). Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive amounts deferred at a future date either in cash, which is an unsecured long-term liability of the Company, or in shares of common stock of the Company which elections are recorded as additions to stockholders' equity. In May 2000, the Company began repurchasing stock from the open market in order to fund the stock portion of the DCP. As of September 30, 2000, the Company has repurchased 185,800 shares of common stock for $2.0 million, which is reported as an increase in treasury stock. In 1999, the Company revised the DCP to add insurance products which function like mutual funds as an investment alternative and to fund the Company's obligation for deferrals invested in such insurance products. Prior to July 1, 2000, cash payments to purchase additional insurance products were made on the third business day of the month following the related DCP participant deferral. Currently, payments are made twice a month. For the nine months ended September 30, 2000, $24.0 million was deferred and mainly allocated to the other investment products. The accumulated non-stock liability at September 30, 2000 was $68.2 million and the assets (in the form of insurance proceeds) set aside to cover the liability was $46.0 million. The total liability of $79.5 million, including $11.3 million deferred in stock, was charged to expense in the period of deferral and classified as deferred compensation plan liability, except for stock which is included in stockholders' equity. On July 17, 2000, the Company announced a match of the stock portion of DCP for the Plan Year 1999 in the amount of $4.5 million. The vesting period 7 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) is over five years with 20% vesting each year at December 31, 2000 through 2004. The related compensation expense will be amortized over the vesting period. The Company, through the CB Hillier Parker Limited (HP) acquisition, maintains a contributory defined benefit pension plan (DBP) to provide retirement benefits to existing and former HP employees participating in the plan. It is the Company's policy to fund the minimum annual contributions required by applicable regulations. At September 30, 2000, DBP plan assets exceeded DBP plan liabilities by $24.1 million and the net prepaid pension asset is reflected in the accompanying balance sheet. In May 2000, the Company amended and restated, effective July 1, 2000, its 1998 employee stock purchase plan designed exclusively for employees who earn less than $100,000 in total annual compensation. Under the plan, the eligible employees may purchase common stock by means of contributions to the Company at a price equal to 90% of the fair market value of such share on the last trading day of the purchase period. The plan provides for purchases by employees of up to an aggregate of 150,000 shares each year for 2000, 2001 and 2002. This program was discontinued effective October 2000. 7. Debt In October 1999, the Company executed an amendment to the revolving credit facility, reducing the facility to $350.0 million, eliminating the mandatory reduction of the facility on December 31, 1999, and revising some of the restrictive covenants. The new amendment is also subject to mandatory reductions of the facility by $80.0 million and $70.0 million on December 31, 2000 and 2001, respectively. The amount outstanding under this facility was $196.0 million at September 30, 2000. Interest rate alternatives include Bank of America's reference rate plus 1.00% and LIBOR plus 2.50%. The weighted average rate on amounts outstanding at September 30, 2000 was 9.34%. The revolving credit facility contains numerous restrictive covenants that, among other things, limit the Company's ability to incur or repay other indebtedness, make advances or loans to subsidiaries and other entities, make capital expenditures, incur liens, enter into mergers or effect other fundamental corporate transactions, sell its assets, or declare dividends. In addition, the Company is required to meet certain ratios relating to its adjusted net worth, level of indebtedness, fixed charges and interest coverage. The Company has Senior Subordinated Notes (Subordinated Notes) due on June 1, 2006. The Subordinated Notes are redeemable in whole or in part after June 1, 2002 at 104.438% of par on that date and at declining prices thereafter. On or before June 1, 2001, up to 35.0% of the issued amount may be redeemed at 108.875% of par plus accrued interest solely with the proceeds from an equity offering. The amount included in the accompanying balance sheet for the Subordinated Notes less unamortized discount was $173.3 million at September 30, 2000. The Company has a credit agreement with Residential Funding Corporation (RFC). The credit agreement provides for a revolving line of credit, which bears interest at 1.25% per annum over LIBOR. On July 19, 2000, the Company executed an amendment to the revolving line of credit, increasing the line of credit from $50.0 million to $100.0 million, decreasing the interest rate from 1.25% to 1.00% per annum over LIBOR and extending the expiration date from August 31, 2000 to August 31, 2001. In addition, on October 4, 2000, the Company obtained a temporary line of credit increase of $40.0 million, resulting in a total line of credit equaling $140.0 million, which expires on November 30, 2000. During the quarter, the Company had a maximum of $133.0 million revolving line of credit principal outstanding. At September 30, 2000, the Company had $0.2 million revolving line of credit principal outstanding. 8. Income Taxes The provisions for income taxes for the nine month periods ended September 30, 2000 and 1999 were computed in accordance with Interpretation No. 18 of Accounting Principals Board (APB) opinion No. 28 on reporting taxes for interim periods and were based on projections of total year pre-tax income. In accordance with APB opinion No. 23, no US taxes have been provided on earnings of foreign subsidiaries because it is the intent of the Company to permanently 8 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) re-invest the unremitted earnings of foreign subsidiaries. 9. Commitments and Contingencies In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against Prudential Realty Group (Prudential) and the Company in the Superior Court of Pennsylvania, Franklin County, alleging various contractual and tort claims against Prudential, the seller of a large office complex, and the Company, its agent in the sale, contending that Prudential breached its agreement to sell the property to GMH, breached its duty to negotiate in good faith, conspired with the Company to conceal from GMH that Prudential was negotiating to sell the property to another purchaser and that Prudential and the Company misrepresented that there were no other negotiations for the sale of the property. Following a non-jury trial, the court rendered a decision in favor of GMH and against Prudential and the Company, awarding GMH $20.3 million in compensatory damages, against Prudential and the Company jointly and severally, and $10.0 million in punitive damages, allocating the punitive damage award $7.0 million as against Prudential and $3.0 million as against the Company. Following the denial of motions by Prudential and the Company for a new trial, a judgment was entered on December 3, 1998. Prudential and the Company filed an appeal of the judgment. On March 3, 2000, the appellate court in Pennsylvania reversed all of the trial courts' decisions finding that liability was not supported on any theory claimed by GMH and directed that a judgement be entered in favor of the defendants including the Company. The plaintiff has filed an appeal with the Pennsylvania Supreme Court. The Supreme Court of Pennsylvania has denied the petition of GMH for review by the Supreme Court. In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $1.5 million in general damages and $5.0 million in punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages. On March 9, 1999, the appellate court ruled in the Company's favor, reversed the trial court decision and ordered a new trial. On February 16, 2000, the Supreme Court of New Jersey reversed the decision of the appellate court, concluded that the general damage award in the trial court should be sustained and returned the case to the appellate court for a determination as to whether a new trial should be ordered on the issue of punitive damages. In April 2000, the Company settled the compensatory damages claim (including interest) and all claims to date with respect to attorneys fees by paying to the plaintiff the sum of $2.75 million leaving only the punitive damage claim for resolution (the plaintiff also agreed, with very limited exceptions, that no matter what the outcome of the punitive damage claim the Company would not be responsible for more than 50% of the plaintiff's future attorney fees). Based on available reserves, cash and anticipated cash flows, the Company believes that the ultimate outcome of this case will not have an impact on the Company's ability to carry on its operations. The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of these lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. In 1999, the Company entered into an agreement with Fannie Mae in which the Company agreed to fund the purchase of a $103.6 million loan portfolio from proceeds from its RFC line of credit, which was temporarily increased to $140.0 million. A 100% participation in this loan portfolio was subsequently sold to Fannie Mae with the Company retaining the credit risk on the first 2% of loss incurred on the underlying portfolio of commercial mortgage loans. The Company has collateralized a portion of its obligation to cover the first 2% of losses by pledging a letter of credit in the amount of $1.0 million to Fannie Mae. The Company has a participation agreement with RFC whereby RFC agrees to purchase a 99% participation interest in any eligible multifamily mortgage loans owned by the Company and outstanding at quarter-end. This participation agreement, which originally expired on August 31, 2000, has been extended to August 31, 2001. 9 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) 10. Stockholders' Equity The translation of foreign currencies into US dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. The cumulative gains or losses resulting from translations are included in other comprehensive loss in stockholders' equity. In May 2000, the Company began repurchasing stock from the open market in order to fund the stock portion of DCP. Through September 30, 2000, the Company has repurchased 185,800 shares of common stock totaling $2.0 million. The Company completed the 1999 stock repurchase program on January 5, 2000. A total of 397,450 shares of common stock were purchased for a total of $5.0 million. In 1998, a total of 488,900 shares of common stock were repurchased for $8.8 million. The shares repurchased in 1998 and 1999 will be used to cover the exercise of stock option plans to offset the dilution caused by these plans. 11. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income and other comprehensive loss. Accumulated other comprehensive loss consists of foreign currency translation adjustments. For the nine months ended September 30, 2000, total comprehensive loss was $1.3 million which includes foreign currency translation loss of $13.7 million. For the nine months ended September 30, 1999, total comprehensive income was $4.5 million which includes foreign currency translation loss of $1.8 million. 12. Per Share Information Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share further assumes the dilutive effect of stock options and stock warrants, as well as the DCP stock fund company match for the 1999 Plan Year. When the Company is in a net loss position for a particular reporting period, the stock options and warrants outstanding are excluded as they are anti-dilutive. 10 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) The following is a calculation of basic and diluted earnings per share (in thousands, except share and per share data):
Three Months Ended September 30 ------------------------------------------------------------------- 2000 1999 -------------------------------- --------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ------- ---------- --------- ------ ---------- ---------- Basic earnings per share Net income.......................................... $ 6,977 20,806,651 $0.34 $4,648 21,098,757 $0.22 ======= ========== ===== ====== ========== ===== Diluted earnings per share Net income.......................................... $ 6,977 20,806,651 $4,648 21,098,757 Diluted effect of exercise of options outstanding... 35,261 63,577 Diluted effect of DCP stock fund company match...... 39,180 - ------- ---------- ------ ---------- Net income.......................................... $ 6,977 20,881,092 $0.33 $4,648 21,162,334 $0.22 ======= ========== ===== ====== ========== ===== Nine Months Ended September 30 ------------------------------------------------------------------ 2000 1999 -------------------------------- -------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ------- ---------- --------- ------ ---------- --------- Basic earnings per share Net income.......................................... $12,474 20,834,943 $0.60 $6,251 21,021,512 $0.30 ======= ========== ===== ====== ========== ========= Diluted earnings per share Net Income.......................................... $12,474 20,834,943 $6,251 21,021,512 Diluted effect of exercise of options outstanding... 31,466 81,627 Diluted effect of DCP stock fund company match...... 51,135 - ------- ---------- ------ ---------- Net income.......................................... $12,474 20,917,544 $0.60 $6,251 21,103,139 $0.30 ======= ========== ===== ====== ========== =========
The following items were not included in the computation of diluted earnings per share because their effect was anti-dilutive for the periods ended September 30:
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------------------ ------------------------------------------- 2000 1999 2000 1999 --------------------- ------------------ -------------------- -------------------- Stock options Outstanding......... 2,579,421 2,081,032 2,579,421 1,955,355 Price ranges........ $11.81-$36.75 $16.38-$36.75 $11.81-$36.75 $18.04-$36.75 Expiration ranges... 6/8/2004-12/31/2025 6/8/2004-5/31/2009 6/8/2004-12/31/2025 4/15/2006-5/31/2009 Stock warrants Outstanding......... 598,719 599,967 598,719 599,967 Price $30.00 $30.00 $30.00 $30.00 Expiration.......... 8/28/2004 8/28/2004 8/28/2004 8/28/2004
11 CB RICHARD ELLIS SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (Unaudited) 13. Industry Segments In July 1999, the Company announced that it changed its segment reporting from four segments to three segments. Prior periods were restated to conform to the new segmentation. The three segments are Transaction Management, Financial Services and Management Services. The factors for determining the reportable segments were based on the type of service and client and on the way the chief operating decision makers organize segments within the Company for making operating decisions and assessing performance. Each business segment requires and is responsible for executing a unique marketing and business strategy. Transaction Management consists of commercial property sales and leasing services, advisory and consulting services and investment property services (acquisitions and sales on behalf of investors). Financial Services consists of mortgage loan origination and servicing through L.J. Melody, investment management and advisory services through CBRE Investors, capital markets activities, valuation and appraisal services and real estate market research. The current year results of Financial Services include a $4.4 million pre-tax gain from the sale of loan servicing rights. Management Services consists of facilities and property management and related services. The current year results of Management Services include a nonrecurring pre-tax gain of $4.7 million from the sale of certain non-strategic assets of the Company. The following unaudited table summarizes the revenue, cost and expenses, and operating income (loss) by operating segment for the periods ended September 30, 2000 and 1999:
Three Months Ended Nine Months Ended September 30 September 30 -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Dollars in thousands) Revenue Transaction Management.................. $232,695 $225,099 $641,376 $582,405 Financial Services...................... 56,139 42,922 148,911 122,670 Management Services..................... 37,687 38,997 115,037 112,311 -------- -------- -------- -------- $326,521 $307,018 $905,324 $817,386 ======== ======== ======== ======== Operating income (loss) Transaction Management.................. $ 17,261 $ 20,824 $ 40,236 $ 36,939 Financial Services...................... 6,590 (345) 11,973 4,364 Management Services..................... 1,033 (433) 4,459 399 -------- -------- -------- -------- 24,884 20,046 56,668 41,702 Interest income.......................... 919 791 1,500 1,861 Interest expense......................... 10,958 10,294 31,628 29,670 -------- -------- -------- -------- Income before provision for income tax... $ 14,845 $ 10,543 $ 26,540 $ 13,893 ======== ======== ======== ========
14. Subsequent Event On November 10, 2000, the Company received a "going private" proposal from a group led by several directors of the Company. That proposal and various related information are the subject of a Form 8-K filing which is being made contemporaneously with the filing of this report on Form 10-Q. 12 CB RICHARD ELLIS SERVICES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - Management's discussion and analysis of financial condition, results of operations, liquidity and capital resources contained within this report on Form 10-Q is more clearly understood when read in conjunction with the Notes to the Consolidated Financial Statements. The Notes to the Consolidated Financial Statements elaborate on certain terms that are used throughout this discussion and provide information on the Company and the basis of presentation used in this report on Form 10-Q. The Company is the world's largest provider of commercial real estate services. Operations are conducted through 250 offices located in 36 countries with over 10,000 employees. The Company provides a comprehensive array of services to owners, users and investors of commercial real estate. The Company has worldwide capabilities to assist buyers in the purchase and sellers in the disposition of commercial property, assist tenants in finding available space and owners in finding qualified tenants, provide valuation and appraisals for real estate property, assist in the placement of financing for commercial real estate, provide research and consulting services, help institutional investors manage portfolios of commercial real estate, provide property and facilities management service and serve as the outsource service provider to corporations seeking to be relieved of the burden of managing their real estate operations. As part of its strategic emphasis in developing a worldwide business, the Company has, since the beginning of 1995, completed multiple acquisitions, an $87.0 million public offering of common stock and a $175.0 million offering of senior subordinated notes. The Company is continually assessing acquisition opportunities as part of its growth strategy. Because of the substantial non- cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting and because of interest expense associated with cash acquisition financing, management anticipates that past acquisitions have and future acquisitions may adversely affect net income, especially in the first several years following the acquisition. This problem is compounded when, as in the case of the 1997 acquisition of Koll Real Estate Services (Koll), the amortization of goodwill must be deducted for financial reporting purposes but is not deductible for tax purposes with the result that the provision for taxes for financial reporting purposes will for some period of time be 50-55% when the actual cash tax rate is 40-45%. In addition, during the first six months following an acquisition, the Company believes there are generally significant one-time costs relating to integrating information technology, accounting and management services and rationalizing personnel levels of the combined operation (costs which the Company intends to take as a single charge at the time of the acquisition to the maximum extent permissible). Management does not intend to pursue acquisitions unless they are accretive to income before interest expense and provision for amortization of goodwill and intangibles and to operating cash flows (excluding the costs of integration). Revenue from Transaction Management, which constitutes a substantial majority of the Company's revenue, is subject to economic cycles. However, the Company's significant size, geographic coverage, number of transactions and large continuing client base tend to minimize the impact of economic cycles on annual revenue and create what the Company believes is equivalent to a recurring stream of revenue. Approximately 56% of the costs and expenses associated with Transaction Management are directly correlated to revenue while approximately 24% of the costs and expenses of Management Services and Financial Services, are directly correlated to revenue. A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and cash flow from operating activities to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand rather than general inflation. 13 CB RICHARD ELLIS SERVICES, INC. (continued) Results of Operations The following unaudited table sets forth items derived from the Company's consolidated statements of operations for each of the periods presented in dollars and as a percentage of revenue (dollars in thousands):
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------------ ----------------------------------------- 2000 1999 2000 1999 ----------------- ----------------- ----------------- --------------------- Revenue: Leases.......................... $129,734 39.7% $111,430 36.3% $369,938 40.9% $295,954 36.2% Sales........................... 97,846 30.0 106,695 34.7 257,800 28.5 268,704 32.9 Property and facilities management fees................ 27,528 8.4 26,689 8.7 78,453 8.7 80,515 9.8 Consulting and referral fees.... 17,715 5.4 16,931 5.5 52,144 5.8 47,090 5.8 Appraisal fees.................. 18,885 5.8 16,699 5.4 55,651 6.1 52,290 6.4 Loan origination and servicing fees................. 14,368 4.4 11,593 3.8 37,408 4.1 30,387 3.7 Investment management fees...... 13,952 4.3 7,854 2.6 31,107 3.4 20,725 2.5 Other........................... 6,493 2.0 9,127 3.0 22,823 2.5 21,721 2.7 -------- ----- -------- ----- -------- ----- -------- -------- Total revenue.................. 326,521 100.0% 307,018 100.0% 905,324 100.0% 817,386 100.0% Costs and expenses: Commissions, fees and other incentives..................... 156,348 47.9 142,919 46.6 424,494 46.9 369,007 45.1 Operating, administrative and other...................... 134,455 41.2 134,052 43.7 392,028 43.3 376,714 46.1 Depreciation and amortization... 10,834 3.3 10,001 3.3 32,134 3.5 29,963 3.7 -------- ----- -------- ----- -------- ----- -------- -------- Operating income................. 24,884 7.6 20,046 6.5 56,668 6.3 41,702 5.1 Interest income.................. 919 0.3 791 0.3 1,500 0.2 1,861 0.2 Interest expense................. 10,958 3.4 10,294 3.4 31,628 3.5 29,670 3.6 -------- ----- -------- ----- -------- ----- -------- -------- Income before provision for income tax...................... 14,845 4.5 10,543 3.4 26,540 2.9 13,893 1.7 Provision for income tax......... 7,868 2.4 5,895 1.9 14,066 1.6 7,642 0.9 -------- ----- -------- ----- -------- ----- -------- -------- Net income....................... $ 6,977 2.1% $ 4,648 1.5% $ 12,474 1.4% $ 6,251 0.8% ======== ===== ======== ===== ======== ===== ======== ======== EBITDA........................... $ 35,718 10.9% $ 30,047 9.8% $ 88,802 9.8% $ 71,665 8.8% ======== ===== ======== ===== ======== ===== ======== ========
Geographic Information
Three Months Ended Nine Months Ended September 30 September 30 --------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenue Americas United States.................................. $255,298 $237,954 $699,498 $633,591 Canada, South and Central America.............. 10,582 12,229 30,842 27,663 -------- -------- -------- -------- 265,880 250,183 730,340 661,254 Asia Pacific...................................... 19,506 20,304 59,073 54,308 EMEA.............................................. 41,135 36,531 115,911 101,824 -------- -------- -------- -------- $326,521 $307,018 $905,324 $817,386 ======== ======== ======== =========
14 CB RICHARD ELLIS SERVICES, INC. (continued) Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 The Company reported consolidated net income of $7.0 million, or $0.33 diluted earnings per share for the three months ended September 30, 2000 on revenues of $326.5 million compared to consolidated net income of $4.6 million, or $0.22 diluted earnings per share on revenues of $307.0 million for the three months ended September 30, 1999. The current quarter results include a pre-tax gain on sale of loan servicing rights totaling $2.6 million. Revenues on a consolidated basis increased by $19.5 million or 6.4% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. This was driven by a 16.4% increase in lease revenue due mainly to a higher average dollar amount per deal, slightly offset by a lower number of completed deals compared to the prior year quarter. Investment management fees increased by $6.1 million or 77.6% due to higher incentive fees on several properties in North America and Asia, as well as greater managed assets. Sales revenue decreased by $8.8 million. In North America, sales revenue declined primarily due to a lower number of completed transactions, as well as a lower average revenue per deal. In addition, sales revenue decreased in Asia Pacific primarily due to a weaker economy mainly driven by higher interest rates and a weak currency in Australia. This was offset by increased sales in Europe due to a strong commercial market in France, as well as increased investment property sales in Spain and France. Commissions, fees and other incentives totaled $156.3 million on a consolidated basis, a 9.4% increase from the third quarter of 1999 due primarily to $9.2 million higher lease commissions, slightly offset by a $3.7 million decline in sales commissions. In addition, variable commissions, which increase as a percentage of revenue as certain earnings levels are met, became effective earlier than prior year due to the higher overall revenue. As a result, commissions as a percentage of revenue increased from 46.6% to 47.9% during the current quarter. Operating, administrative and other on a consolidated basis was $134.5 million, an increase of $0.4 million or 0.3% as compared to the third quarter of 1999. This is mainly due to higher bonus incentives and profit share driven by the better quarterly results, offset by higher earnings from unconsolidated subsidiaries in the current quarter. Consolidated interest expense was $11.0 million, an increase of $.7 million or 6.5% for the quarter. This primarily resulted from the renewal of the revolving credit facility at a higher borrowing rate offset by slightly lower average borrowing levels during the current quarter. Provision for income tax on a consolidated basis was $7.9 million for the three months ended September 30, 2000, as compared to $5.9 million for the three months ended September 30, 1999. The increase is mainly attributable to an increase in pre-tax book income for the quarter. The effective tax rate was 53% for the three months ended September 30, 2000 as compared to 56% for the three months ended September 30, 1999. Decrease in effective tax rate is primarily due to the Company projecting a higher annualized pre-tax book income for 2000 as of the current quarter than what was projected for prior year as of the third quarter of 1999. Greater annualized pre-tax book income results in lower effective tax rate when permanently nondeductible items such as goodwill remain relatively constant from year to year. EBITDA was $35.7 million for the three months ended September 30, 2000, as compared to $30.0 million for the three months ended September 30, 1999. EBITDA effectively removes the impact of certain non-cash and nonrecurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger-related and other nonrecurring charges, extraordinary items, and income taxes. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated (subject to the payment of interest and income taxes) that can be used by the Company to service its debt and for other required or discretionary purposes. Net cash that will be available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA. EBITDA should not be considered as an alternative to (i) operating income determined in accordance with US GAAP or (ii) operating cash flow determined in accordance with US GAAP. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 The Company reported consolidated net income of $12.5 million, or $0.60 diluted earnings per share for the nine months ended September 30, 2000 on revenues of $905.3 million compared to consolidated net income of $6.3 million, or $0.30 diluted earnings per share, on revenues of $817.4 million for the nine months ended September 30, 1999. The current year-to-date results include a $4.7 million non-recurring pre-tax gain from the sale of certain non-strategic assets of the Company, as well as a $4.4 million pre-tax gain from the sale of loan servicing rights. 15 CB RICHARD ELLIS SERVICES, INC. (continued) Revenues on a consolidated basis increased by $87.9 million or 10.8% for the current year, mainly due to increased lease revenue of $74.0 million. North America lease revenue increased due to a higher number of completed transactions as well as a higher average revenue per deal. Lease revenue increased in Europe due to strong activity in the Netherlands, France and Spain. Lease revenue in Asia Pacific increased primarily due to better economic conditions in China. Investment management fees grew due to higher managed account assets as well as incentive fees from several properties in North America and Asia. Loan origination and servicing fees increased by $7.0 million, of which $2.5 million is attributable to the acquisition of Eberhardt Company in late 1999. Excluding any acquisitions, production fees increased by $2.8 million or 13.0% over the same period last year while loan servicing fees increased by 5.0%. Average fees per loan transaction increased by over 20.0% from the same period in 1999. These increases were offset by lower sales revenue of $10.9 million. In North America sales revenue declined due to lower sales of investment properties. Sales in Asia Pacific also decreased primarily within Australia due to a weaker economy as a result of higher interest rates and a weak currency. This was offset by strong investment property sales in Europe, particularly in the UK and France. Commissions, fees and other incentives on a consolidated basis totaled $424.5 million, an increase of 15.0% from prior year. Lease commissions rose significantly due to the higher lease revenue. In addition, the overall revenue growth resulted in higher variable commission expense compared to prior year and contributed to an increase in commissions as a percentage of revenue from 45.1% to 46.9% for the current year. Variable commissions increase as a percentage of revenue as certain earnings levels are met. Operating, administrative and other on a consolidated basis increased by $15.3 million or 4.1% to $392.0 million, compared to the nine months ended September 30, 1999. The increase is mainly attributable to higher bonus incentives and profit share due to the better current year results. Consolidated interest expense of $31.6 million increased by $2.0 million or 6.6% in the current year, due to higher interest rates for the revolving credit facility, offset slightly by lower average borrowing levels compared to prior year. Provision for income tax on a consolidated basis was $14.1 million for the nine months ended September 30, 2000, as compared to $7.6 million for the nine months ended September 30, 1999. The increase is mainly due to the increase in pre-tax book income for the year. The effective tax rate was 53% for the nine months ended September 30, 2000 as compared to 55% for the nine months ended September 30, 1999. Decrease in effective tax rate is primarily due to the Company projecting a higher annualized pre-tax book income for 2000 as of the current quarter than what was projected for prior year as of the third quarter of 1999. Greater annualized pre-tax book income results in lower effective tax rate when permanently nondeductible items such as goodwill remain relatively constant from year to year. EBITDA was $88.8 million for the nine months ended September 30, 2000, as compared to $71.7 million for the nine months ended September 30, 1999. 16 CB RICHARD ELLIS SERVICES, INC. (continued) Segment Operations In July 1999, the Company announced that it changed its segment reporting from four segments to three segments. Prior periods were restated to conform to the new segmentation. The three segments are Transaction Management, Financial Services and Management Services. The factors for determining the reportable segments were based on the type of service and client and on the way the chief operating decision makers organize segments within the Company for making operating decisions and assessing performance. Each business segment requires and is responsible for executing a unique marketing and business strategy. Transaction Management consists of commercial property sales and leasing services, transaction management and advisory services and investment property services (acquisitions and sales on behalf of investors). Financial Services consists of mortgage loan origination and servicing through L.J. Melody & Company, investment management and advisory services through CB Richard Ellis Investors, L.L.C., capital markets activities, valuation and appraisal services and real estate market research. The current year results of Financial Services include a $4.4 million pre-tax gain from the sale of loan servicing rights. Management Services consists of facilities and property management and related services. The current year results of Management Services include a nonrecurring pre-tax gain of $4.7 million from the sale of certain non-strategic assets of the Company. The following unaudited table summarizes the revenue, cost and expenses, and operating income (loss) by operating segment for the periods ended September 30, 2000 and 1999 (dollars in thousands):
Three Months Ended September 30 Nine Months Ended September 30 -------------------------------------- ------------------------------------- 2000 1999 2000 1999 ----------------- ------------------ ----------------- ----------------- Transaction Management Revenue: Leases.................................... $123,303 53.0% $105,893 47.0% $350,528 54.6% $280,855 48.2% Sales..................................... 94,771 40.7 103,890 46.2 249,472 38.9 261,510 44.9 Other consulting and referral fees (1).... 14,621 6.3 15,316 6.8 41,376 6.5 40,040 6.9 -------- ----- -------- ----- -------- ----- -------- ----- Total revenue............................ 232,695 100.0% 225,099 100.0% 641,376 100.0% $582,405 100.0% Costs and expenses: Commissions, fees and other incentives.... 134,341 57.7 121,676 54.1 360,775 56.3 311,335 53.5 Operating, administrative and other....... 75,141 32.3 76,830 34.1 224,425 35.0 218,385 37.5 Depreciation and amortization............. 5,952 2.6 5,769 2.6 15,940 2.5 15,746 2.7 -------- ----- -------- ----- -------- ----- -------- ----- Operating income........................... $ 17,261 7.4% $ 20,824 9.3% $ 40,236 6.3% $ 36,939 6.3% ======== ===== ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 23,213 10.0% $ 26,593 11.8% $ 56,176 8.8% $ 52,685 9.0% ======== ===== ======== ===== ======== ===== ======== ===== Financial Services Revenue: Appraisal fees............................ $ 18,174 32.4% $ 16,412 38.2% $ 54,192 36.4% $ 51,085 41.6% Loan origination and servicing fees....... 14,369 25.6 11,593 27.0 37,406 25.1 30,384 24.8 Investment management fees................ 13,571 24.2 7,338 17.1 29,329 19.7 19,765 16.1 Other (1)................................. 10,025 17.9 7,579 17.7 27,984 18.8 21,436 17.5 -------- ----- -------- ----- -------- ----- -------- ----- Total revenue............................ 56,139 100.0% 42,922 100.0% 148,911 100.0% 122,670 100.0% Costs and expenses: Commissions, fees and other incentives.... 15,955 28.4 15,348 35.8 44,078 29.6 40,047 32.6 Operating, administrative and other....... 30,671 54.6 25,809 60.1 83,912 56.4 70,361 57.4 Depreciation and amortization............. 2,923 5.2 2,110 4.9 8,948 6.0 7,898 6.4 -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss).................... $ 6,590 11.7% $ (345) (0.8)% $ 11,973 8.0% $ 4,364 3.6% ======== ===== ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 9,513 16.9% $ 1,765 4.1% $ 20,921 14.0% $ 12,262 10.0% ======== ===== ======== ===== ======== ===== ======== ===== Management Services Revenue: Property management fees.................. $ 21,338 56.6% $ 19,412 49.8% $ 60,961 53.0% $ 59,269 52.8% Facilities management fees................ 5,501 14.6 6,209 15.9 15,330 13.3 18,168 16.2 Other (1)................................. 10,848 28.8 13,376 34.3 38,746 33.7 34,874 31.0 -------- ----- -------- ----- -------- ----- -------- ----- Total revenue............................ 37,687 100.0% 38,997 100.0% 115,037 100.0% 112,311 100.0% Costs and expenses: Commissions, fees and other incentives.... 6,052 16.1 5,895 15.1 19,641 17.1 17,625 15.7 Operating, administrative and other....... 28,643 76.0 31,413 80.6 83,691 72.8 87,968 78.3 Depreciation and amortization............. 1,959 5.2 2,122 5.4 7,246 6.3 6,319 5.6 -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss).................... $ 1,033 2.7% $ (433) (1.1)% $ 4,459 3.9% $ 399 0.4% ======== ===== ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 2,992 7.9% $ 1,689 4.3% $ 11,705 10.2% $ 6,718 6.0% ======== ===== ======== ===== ======== ===== ======== ===== Total operating income...................... $ 24,884 $ 20,046 $ 56,668 $ 41,702 ======== ======== ======== ======== Total EBITDA................................ $ 35,718 $ 30,047 $ 88,802 $ 71,665 ======== ======== ======== ======== ------------
(1) Revenue is allocated by material line of business specific to each segment. "Other" includes types of revenue that have not been broken out separately due to their immaterial balances and/or nonrecurring nature within each segment. Certain revenue types disclosed on the consolidated statements of operations may not be derived directly from amounts shown in this table. 17 CB RICHARD ELLIS SERVICES, INC. (continued) Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Transaction Management Revenue increased by $7.6 million or 3.4% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999, due primarily to an increase in lease revenue of $17.4 million. This is mainly due to a higher average dollar amount per deal, slightly offset by a lower number of completed transactions. This was offset by a decline in sales revenue of $9.1 million. Sales revenue decreased in North America due to a decline in the number of completed transactions, as well as a lower average revenue per deal. In addition, sales revenue decreased in Asia Pacific due to a weaker economy attributable to a rise in interest rates and a weakened currency in Australia. This was offset in Europe by strong investment property sales, particularly in Spain and France. Commissions, fees and other incentives increased by $12.7 million or 10.4% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. This is mainly attributable to higher lease commissions slightly offset by a decline in sales commissions. In addition, the overall revenue growth resulted in higher variable commissions. As producers reach higher commission volume, their compensation for the entire year is increased retroactively to that higher level. Due to an increase in revenue, many producers reached a higher revenue plateau earlier this year than last year. As a result, commissions as a percentage of revenue increased from 54.1% to 57.7% in the current quarter. This also caused a decrease in operating income of $3.6 million as compared to prior year quarter. Operating, administrative, and other decreased by $1.7 million or 2.2% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. This decrease is a result of lower personnel requirements in North America and Asia, as well as higher equity income from unconsolidated subsidiaries. This is slightly offset by higher bonus incentives and profit share due to the more favorable quarterly results. Financial Services Revenue increased by $13.2 million or 30.8% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. Loan origination and servicing fees increased by $2.8 million, of which $0.9 million was due to the acquisition of Eberhardt late in 1999. In addition, excluding any acquisitions, loan production fees increased by $1.0 million or 12.0% over the same period last year while loan servicing fees increased by 7.0%. Additionally, average fees per loan transaction increased by approximately 30.0% from the same period in 1999. Investment management fees increased by 84.9% due to higher managed account assets as well as incentive fees from several properties in North America and Asia. Other revenue increased due to the acquisition of several small consulting companies in late 1999 and early 2000. Commissions, fees and other incentives increased by $0.6 million or 4.0% from prior quarter due to higher loan commission. Operating, administrative, and other increased by $4.9 million or 18.8% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. This is primarily due to higher bonus incentives and profit share attributable to the better quarterly performance as well as higher personnel requirements in North America and Asia. Management Services Revenue decreased by $1.3 million or 3.4% for the three months ended September 30, 2000, compared to the three months ended September 30, 1999, due to the spin-off of Building Technology Engineers, an engineering services group, into a joint venture, as well as a decline in facilities management revenue. This was slightly offset by higher property management fees primarily due to increased square footage managed in Asia Pacific, as well as increased lease and sales revenues. Commissions, fees and other incentives increased by $0.2 million or 2.7% for the three months ended September 30, 2000 compared to the three months ended September 30, 1999, primarily due to increased sales and lease revenues. Operating, administrative and other decreased by $2.8 million or 8.8% for the quarter due to lower personnel requirements, mainly in North America. As a percentage of revenue, operating, administrative and other decreased from 80.6% to 76.0% in the current quarter. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 Transaction Management Revenue increased by $59.0 million or 10.1% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999. The increase was primarily due to higher lease revenues of $69.7 million. In North America, the increase was mainly due to a higher number of completed transactions, as well as a larger dollar average per deal. Europe reported increased lease revenues due to strong performance in the Netherlands, France and 18 CB RICHARD ELLIS SERVICES, INC. (continued) Spain. Increased lease revenue in Asia Pacific is due to a better overall economy in China. This was offset by a $12.0 million decrease in sales revenue. In North America, sales revenue declined due to a lower number of investment property sales. Sales revenue in Asia Pacific also decreased due to a weaker economy attributable to higher interest rates and a weak currency in Australia. This was offset by strong investment property sales in Europe, particularly in France and the UK. Commissions, fees and other incentives increased by $49.4 million or 15.9% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999, primarily due to higher lease commissions. In addition, variable commission expense grew due to the higher overall revenue, resulting in commissions as a percentage of revenues to increase from 53.5% to 56.3% for the current year. Variable commissions increase as a percentage of revenue as certain earnings levels are met. Operating, administrative, and other increased by $6.0 million or 2.8% as a result of higher bonus incentives and profit share due to the more favorable year-to-date results. This is offset by higher equity income from unconsolidated subsidiaries in the current year. Financial Services Revenue increased by $26.2 million or 21.4% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999. The increase in revenue is primarily due to increased investment management fees resulting from higher managed assets, as well as increased incentive fees from several properties in North America and Asia. Loan origination and servicing fees increased by $7.0 million, of which $2.5 million is attributable to the acquisition of Eberhardt Company late in 1999. In addition, excluding any acquisitions, loan production fees increased by $2.8 million or 13.0% over the same period last year while loan servicing fees increased by 5.0%. Additionally, average fees per loan transaction increased by over 20.0% from the same period in 1999. Other revenue increased due to the acquisition of several small consulting companies in late 1999 and early 2000. In Europe, appraisal fees increased due mainly to significant additional business in the UK. Commissions, fees and other incentives increased by $4.0 million or 10.1% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999. This increase is mainly due to higher loan commissions. Operating, administrative, and other increased by $13.6 million or 19.3% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999, due to increased personnel requirements in North America and Asia, higher bonus incentives and profit share attributable to the more favorable current year results, as well as lower earnings from unconsolidated subsidiaries. Management Services Revenue increased by $2.7 million or 2.4% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999, due to higher lease and sales revenues. Property management fees increased due primarily to higher managed square footage in Asia Pacific. These increases were offset by lower facilities management revenue due primarily to a loss of a large client in 2000. Commissions, fees and other incentives increased by $2.0 million or 11.4% for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999, attributable mainly to the increase in lease and sales commissions. Operating, administrative, and other decreased by $4.3 million or 4.9% for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999. The decrease is primarily due to lower personnel requirements, mainly in North America. As a percentage of revenue, operating, administrative and other decreased from 78.3% to 72.8% for the current year. Liquidity and Capital Resources The Company has historically financed its operations and non-acquisition related capital expenditures primarily with internally generated funds and borrowings under a revolving credit facility. The Company had additional net borrowings of $36.0 million under the revolving credit facility during the nine months ended September 30, 2000 in order to fund higher working capital requirements, as well as the purchase of various investments acquired as part of the Company's e-business strategy. The Company's EBITDA was $88.8 million and $71.7 million for the nine months ended September 30, 2000 and 1999, respectively. The increase in EBITDA reflects the general overall period to period revenue increase as discussed in the Results of Operations. Net cash used in operating activities was $2.5 million for the nine months ended September 30, 2000, compared to $2.8 million provided by operating activities for the nine months ended September 30, 1999. The decrease in cash from operations is due to higher incentive payments made during the first quarter, as well as increased premium payments invested in the cash surrender value of insurance products used to fund the DCP plan (see Note 6). This decrease was offset by increased receivable collections and higher net income adjusted for noncash operating activities. Net cash used in investing activities was $28.4 million for the nine months ended September 30, 2000, compared 19 CB RICHARD ELLIS SERVICES, INC. (continued) to $21.4 million for the nine months ended September 30, 1999. The change is primarily due to the purchase of investments acquired as part of the Company's overall e-business strategy. In July 2000, the Company invested a total of $10.0 million in SiteStuff.com, Inc., a premier e-marketplace for owners and operators of commercial and multi-family real estate properties in order to further its internet alliances. Through SiteStuff.com, Inc., the Company expects to purchase property management maintenance, repair and operations products and services for the benefit of clients in the US. During the third quarter 2000, as part of its e-business initiative, the Company invested $1.1 million in Constellation Real Technologies LLC, as well as approximately $0.6 million in several international e-businesses. In addition, in May 2000, the Company purchased a total of approximately $9.0 million of stocks in two companies, Eureka Broadband Corporation and Eziaz, Inc. The Company's e-investment strategy is to improve internal business operations with resulting cost savings through paperwork reduction, to improve service delivery to clients and to create value in growth business that will flow to the Company. These purchases are offset by the cash received from the sale of Telecommunications, the sale of loan servicing rights and receipt of proceeds from the 1999 sale of a risk management operation, as compared to cash received from the sale of inventoried property in prior year. Net cash provided by financing activities was $26.5 million for the nine months ended September 30, 2000, compared to $24.6 million for the nine months ended September 30, 1999, as net proceeds from debt were comparable between periods. In October 1999, the Company executed an amendment to the revolving credit facility, reducing the facility to $350.0 million, eliminating the mandatory reduction of the facility on December 31, 1999, and revising some of the restrictive covenants. The new amendment is also subject to mandatory reductions of the facility by $80.0 million and $70.0 million on December 31, 2000 and 2001, respectively. The amount outstanding under this facility was $196.0 million at September 30, 2000 which is included in the accompanying consolidated balance sheets. Interest rate alternatives include Bank of America's reference rate plus 1.00% and LIBOR plus 2.50%. The weighted average rate on amounts outstanding at September 30, 2000 was 9.34%. The revolving credit facility contains numerous restrictive covenants that, among other things, limit the Company's ability to incur or repay other indebtedness, make advances or loans to subsidiaries and other entities, make capital expenditures, incur liens, enter into mergers or effect other fundamental corporate transactions, sell its assets, or declare dividends. In addition, the Company is required to meet certain ratios relating to its adjusted net worth, level of indebtedness, fixed charges and interest coverage. The Company expects to have capital expenditures ranging from $20 million to $25 million in 2000. The Company expects to use net cash provided by operating activities for the next several years primarily to fund capital expenditures for computer related purchases, acquisitions, including earnout payments, and to make required principal payments under the Company's outstanding indebtedness. The Company believes that it can satisfy its non-acquisition obligations as well as working capital requirements from internally generated cash flow, borrowings under the amended revolving credit facility or any replacement credit facilities. Material future acquisitions, if any, that require cash will require new sources of capital such as an expansion of the amended revolving credit facility and raising money by issuing additional debt or equity. The Company anticipates that its existing sources of liquidity, including cash flow from operations, will be sufficient to meet the Company's anticipated non-acquisition cash requirements for the foreseeable future and in any event for at least the next twelve months. The Company completed the 1999 stock repurchase program on January 5, 2000. A total of 397,450 shares of common stock were purchased for a total of $5.0 million. In addition, the Company began repurchasing stock from the open market in May 2000 in order to fund the stock portion of DCP. As of September 30, 2000, the Company has repurchased in 2000 185,800 shares of common stock for $2.0 million under this program. Euro Conversion Disclosure A majority of the European Union member countries converted to a common currency, the "Euro," on January 1, 1999. The existing legacy currencies of the participating countries will continue to be acceptable until January 1, 2002. The Company does not expect the introduction of the Euro to have a significant impact on its market or the manner in which it conducts business, and believes the related impact on the Company's financials is not material. The Company is currently using both the Euro and legacy currencies to conduct business in these member countries. The Company is in the process of replacing or upgrading the various items of hardware and software to allow for dual-currency reporting during the transition period, and issues related but not limited to converting amounts and 20 CB RICHARD ELLIS SERVICES, INC. (continued) rounding. The Company anticipates these system upgrades will be fully functional prior to the end of the transition period. Litigation In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against Prudential Realty Group (Prudential) and the Company in the Superior Court of Pennsylvania, Franklin County, alleging various contractual and tort claims against Prudential, the seller of a large office complex, and the Company, its agent in the sale, contending that Prudential breached its agreement to sell the property to GMH, breached its duty to negotiate in good faith, conspired with the Company to conceal from GMH that Prudential was negotiating to sell the property to another purchaser and that Prudential and the Company misrepresented that there were no other negotiations for the sale of the property. Following a non-jury trial, the court rendered a decision in favor of GMH and against Prudential and the Company, awarding GMH $20.3 million in compensatory damages, against Prudential and the Company jointly and severally, and $10.0 million in punitive damages, allocating the punitive damage award $7.0 million as against Prudential and $3.0 million as against the Company. Following the denial of motions by Prudential and the Company for a new trial, a judgment was entered on December 3, 1998. Prudential and the Company filed an appeal of the judgment. On March 3, 2000, the appellate court in Pennsylvania reversed all of the trial courts' decisions finding that liability was not supported on any theory claimed by GMH and directed that a judgement be entered in favor of the defendants including the Company. The plaintiff has filed an appeal with the Pennsylvania Supreme Court. The Supreme Court of Pennsylvania has denied the petition of GMH for review by the Supreme Court. In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $1.5 million in general damages and $5.0 million in punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages. On March 9, 1999, the appellate court ruled in the Company's favor, reversed the trial court decision and ordered a new trial. On February 16, 2000, the Supreme Court of New Jersey reversed the decision of the appellate court, concluded that the general damage award in the trial court should be sustained and returned the case to the appellate court for a determination as to whether a new trial should be ordered on the issue of punitive damages. In April 2000, the Company settled the compensatory damages claim (including interest) and all claims to date with respect to attorneys fees by paying to the plaintiff the sum of $2.75 million leaving only the punitive damage claim for resolution (the plaintiff also agreed, with very limited exceptions, that no matter what the outcome of the punitive damage claim the Company would not be responsible for more than 50% of the plaintiff's future attorney fees). Based on available reserves, cash and anticipated cash flows, the Company believes that the ultimate outcome of this case will not have an impact on the Company's ability to carry on its operations. The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of these lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. Net Operating Losses The Company had US federal income tax NOLs of approximately $57.4 million at December 31, 1999, corresponding to $20.1 million of the Company's $60.3 million in net deferred tax assets before valuation allowances, which expire in the years 2004 to 2008. The ability of the Company to utilize NOLs was limited in 1999 and will be in subsequent years as a result of the Company's 1996 public offering, the 1997 Koll acquisition and the 1998 repurchase of preferred stock which cumulatively caused a more than 50.0% change of ownership within a three year period. As a result of the limitation, the Company will be able to use approximately $26 million of its NOL in 2000 and in each subsequent year. The amount of NOLs is, in any event, subject to some uncertainty until the statute of limitation lapses. 21 CB RICHARD ELLIS SERVICES, LLC (continued) New Accounting Pronouncements In June 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Hedging Activities - an Amendment of FASB Statement No. 133. SFAS No. 138 amends the accounting and reporting for certain derivative instruments and hedging activities and is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 138 is not expected to have a material impact on earnings or other components of comprehensive income of the Company. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date of SFAS No. 133 for one year. SFAS No. 137 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 137 is not expected to have a material impact on earnings or other components of comprehensive income as the Company had no derivatives outstanding at September 30, 2000. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is not expected to have a material impact on earnings or other components of comprehensive income as the Company had no derivatives outstanding at September 30, 2000. 22 CB RICHARD ELLIS SERVICES, INC. (continued) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk consists of foreign currency exchange rate fluctuations related to international operations and changes in interest rates on debt obligations. Approximately 23% of the Company's business is transacted in local currencies of foreign countries. The Company attempts to manage its exposure primarily by balancing monetary assets and liabilities, and maintaining cash positions only at levels necessary for operating purposes. While the Company's international results of operations as measured in dollars are subject to foreign exchange rate fluctuations, the related risk is not considered material. The Company routinely monitors its transaction exposure to currency rate changes, and enters into currency forward and option contracts to limit such exposure, as appropriate. Such contracts are usually short term in nature ranging from ten days to two months. Gains and losses on contracts are deferred until the transaction being hedged is finalized. At September 30, 2000, the Company had no outstanding contracts. The Company does not engage in any speculative activities. The Company manages its interest expense by using a combination of fixed and variable rate debt. The Company utilizes sensitivity analyses to assess the potential effect of its variable rate debt. If interest rates were to increase by 90 basis points (approximately 9.0% of the Company's weighted-average variable rate at September 30, 2000) the net impact would not result in a material change in the Company's interest expense or the fair value of the Company's debt obligation. REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA Portions of the Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: commercial real estate vacancy levels; employment conditions and their effect on vacancy rates; property values; rental rates; any general economic recession domestically or internationally; and general conditions of financial liquidity for real estate transactions. 23 CB RICHARD ELLIS SERVICES, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (filed only with the SEC). (b) Reports on Form 8-K No reports on Form 8-K were filed for the third quarter ended September 30, 2000. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CB RICHARD ELLIS SERVICES, INC. Date: November 14, 2000 /s/ Ronald J. Platisha _________________________________ Ronald J. Platisha Executive Vice President, Financial Operations 25 EXHIBIT INDEX Exhibit Number Description of Exhibit ------ ------------------------------------------------------ 27 Financial Data Schedule (filed only with the SEC) 26