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SECURITIES AND EXCHANGE COMMISSION
SCHEDULE 14A/A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X]Preliminary Proxy Statement
[ ]Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ]Definitive Proxy Statement
[ ]Definitive Additional Materials
[ ]Soliciting Material Pursuant to Rule 14a-12
INSIGNIA FINANCIAL GROUP, INC.
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(Name of registrant as specified in its charter)
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(Name of person(s) filing proxy statement, if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[ ]No fee required
[ ]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
series A convertible preferred stock, par value $.01 per share, series
B convertible preferred stock, par value $.01 per share, and common
stock, par value $.01 per share, of Insignia Financial Group, Inc.
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(2) Aggregate number of securities to which transaction applies:
250,000 shares of series A convertible preferred stock, 125,000 shares
` of series B convertible preferred stock, 23,385,764 shares of common
stock (including 80,528 shares of common stock subject to restricted
stock awards) and 3,147,232 shares of common stock issuable upon the
exercise of outstanding options and warrants.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was determined based upon the sum of: (a) the product
of 250,000 shares of series A convertible preferred stock and the
merger consideration therefor of $100.00 per share; (b) the product of
125,000 shares of series B convertible preferred stock and the merger
consideration therefor of $100.00 per share; (c) the product of
23,385,764 shares of common stock (including 80,528 shares of common
stock subject to the restricted stock awards) and the highest
potential merger consideration therefor of $12.00 per share; and (d)
the difference between the highest potential merger consideration per
share of common stock of $12.00 and the exercise price per share of
each of 3,147,232 shares of common stock issuable upon the exercise of
outstanding options and warrants with an exercise price below $12.00
per share. In accordance with Section 14(g) of the Securities Exchange
Act of 1934, as amended, and Rule 0-11 of the rules and regulations
promulgated by the Securities and Exchange Commission pursuant to that
Act, the filing fee was determined by multiplying the aggregate amount
calculated pursuant to the preceding sentence by 0.00809 percent.
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(4) Proposed maximum aggregate value of transaction: $331,320,706
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(5) Total fee paid: $26,803.85
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[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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INSIGNIA FINANCIAL GROUP, INC.
200 PARK AVENUE
NEW YORK, NEW YORK 10166
, 2003
Dear Fellow Stockholder:
You are cordially invited to attend a special meeting of the stockholders
of Insignia Financial Group, Inc. to be held at on
, 2003 at , local time. You may vote your shares at the special
meeting only if you are present in person or represented by proxy.
At the special meeting, you will be asked to consider and vote upon a
proposal to adopt a merger agreement providing for the merger of a wholly-owned
subsidiary of CBRE Holding, Inc. into Insignia, with Insignia continuing as the
surviving corporation and as a wholly-owned subsidiary of CBRE Holding. If the
proposal is approved then, at the effective time of the merger, each
outstanding share of our common stock generally will be converted into the
right to receive $11.00 in cash, subject to increase of up to $1.00 per share
if we sell certain of our real estate assets and receive net cash proceeds at
or prior to the time of the merger in excess of a specified amount (generally
$45 million, subject to increase), other than shares held by stockholders who
perfect their appraisal rights under Delaware law and do not effectively
withdraw or lose their right to appraisal. As of the date of this proxy
statement, we have not entered into any definitive agreement regarding the sale
of the specified real estate assets and we may be unable to complete any sales
at or prior to the time of the merger. As a result, at the time you vote on the
merger you may not know whether or not the merger consideration will be greater
than $11.00 per share. Accordingly, you should not expect the merger
consideration to be greater than $11.00 per share. A copy of the merger
agreement is attached as Appendix A to this proxy statement and we urge you to
read it in its entirety.
BOTH OUR BOARD OF DIRECTORS AND A SPECIAL COMMITTEE OF OUR BOARD OF
DIRECTORS HAVE UNANIMOUSLY DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE
BEST INTERESTS OF OUR STOCKHOLDERS. Accordingly, our board of directors has
approved the merger agreement and the merger and our board of directors and the
special committee recommend that you vote "FOR" adoption of the merger
agreement and approval of the merger. The affirmative vote of a majority of our
outstanding shares of common stock is required for adoption and approval.
In considering the recommendation of the special committee and our board
of directors, you should be aware that many of our directors and executive
officers have interests in the merger that are in addition to, or different
from, yours. See "The Merger--Interests of Executive Officers and Directors in
the Merger."
Your vote is important. Whether or not you plan to attend the special
meeting, please complete, sign and date the accompanying proxy card and return
it in the enclosed prepaid envelope. Failure to return a properly executed
proxy card or to vote at the special meeting will have the same effect as a
vote "AGAINST" the adoption of the merger agreement and the approval of the
merger. If you attend the special meeting, you may revoke your proxy and vote
in person if you wish, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ Andrew L. Farkas
Andrew L. Farkas
Chairman of the Board and Chief Executive
Officer
This proxy statement is dated , 2003 and is first being mailed
to stockholders on or about , 2003.
THE TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE MEETING ................................... 1
SUMMARY TERM SHEET ....................................................................... 5
The Companies ......................................................................... 5
The Special Meeting ................................................................... 6
The Merger ............................................................................ 6
Recommendations of the Special Committee and our Board of Directors ................... 7
Opinion of Bear, Stearns & Co. Inc .................................................... 8
Interests of our Directors and Executive Officers in the Merger ....................... 8
Material U.S. Federal Income Tax Consequences ......................................... 9
The Merger Agreement .................................................................. 10
Appraisal Rights ...................................................................... 11
Regulatory Approvals .................................................................. 11
Financing of the Merger ............................................................... 12
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE .......................................... 13
INTRODUCTION ............................................................................. 15
Proposal to be Considered at the Special Meeting ...................................... 15
Record Date; Voting Rights; Vote Required for Approval ................................ 16
Voting and Revocation of Proxies ...................................................... 16
Solicitation of Proxies; Expenses of Solicitation ..................................... 17
Market Price Data ..................................................................... 17
Dividends ............................................................................. 18
Recent Developments ................................................................... 18
THE MERGER ............................................................................... 19
Background of the Merger .............................................................. 19
Recommendations of the Special Committee and Our Board of Directors ................... 26
Our Reasons for the Merger and the Recommendations of the Special Committee and our
Board of Directors ................................................................... 26
Reasons of CBRE Holding for Engaging in the Merger .................................... 28
Opinion of Bear, Stearns & Co. Inc .................................................... 29
Other Related Agreements .............................................................. 36
Interests of Executive Officers and Directors in the Merger ........................... 37
Material U.S. Federal Income Tax Consequences of the Merger to our Stockholders ....... 44
Effective Time of Merger .............................................................. 45
Payment of Merger Consideration and Surrender of Stock Certificates ................... 45
Financing of the Merger; Fees and Expenses of the Merger .............................. 46
Appraisal Rights ...................................................................... 48
Regulatory Approvals .................................................................. 51
THE MERGER AGREEMENT ..................................................................... 52
General ............................................................................... 52
Certificate of Incorporation; Bylaws; Directors and Officers of the Surviving
Corporation .......................................................................... 52
Consideration to be Received by Our Stockholders ...................................... 52
Potential Adjustments to the Common Stock Merger Consideration ........................ 52
Stock Options, Warrants, Restricted Stock Awards and Participation Interests .......... 54
Our Representations and Warranties .................................................... 55
Our Covenants ......................................................................... 55
i
Representations, Warranties and Covenants of CBRE Holding, CB Richard Ellis Services
and Apple Acquisition ................................................................ 58
Stockholder Meeting ................................................................... 59
No Solicitation ....................................................................... 59
Conditions to the Merger .............................................................. 61
Termination of the Merger Agreement ................................................... 62
Termination Fee; Indemnification; Amendment of No Raid Agreement ...................... 63
Amendments to the Merger Agreement .................................................... 64
CBRE HOLDING, INC. ....................................................................... 65
Overview .............................................................................. 65
History ............................................................................... 65
Business Segments ..................................................................... 65
Competitive Strengths ................................................................. 68
Risk Factors .......................................................................... 69
Employees ............................................................................. 74
Properties ............................................................................ 75
Legal Proceedings ..................................................................... 75
CBRE Holding's Selected Historical Financial Data ..................................... 76
Management's Discussion and Analysis of Financial Condition and Results of Operations . 79
Quantitative and Qualitative Disclosures about Market Risk ............................ 94
Change in Accountants ................................................................. 95
Financial Statements .................................................................. 95
OTHER MATTERS ............................................................................ 96
Security Ownership of Certain Beneficial Owners and Management ........................ 96
Other Matters for Action at the Special Meeting ....................................... 98
Stockholder Proposals ................................................................. 98
Available Information ................................................................. 98
APPENDIX A AGREEMENT AND PLAN OF MERGER ................................................. A-1
APPENDIX B OPINION OF BEAR, STEARNS & CO. INC. .......................................... B-1
APPENDIX C SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW .............................................................. C-1
APPENDIX D CBRE HOLDING'S FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA ........................................................... D-1
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE MEETING
THE SPECIAL MEETING
Q: What is the date, time, place and purpose of the special meeting?
A: The special meeting of stockholders of Insignia Financial Group, Inc. will
be held on , 2003 at , local time, at , to consider and
vote upon the proposal to adopt the merger agreement and approve the
merger.
THE PROPOSED MERGER
Q: What is the proposed merger?
A: CBRE Holding, Inc. will acquire Insignia by means of a merger. After the
merger, Insignia will be the surviving corporation and a wholly-owned
subsidiary of CBRE Holding.
Q: What will holders of common stock be entitled to receive in the merger?
A: If the merger is completed,
o common stockholders will receive $11.00 in cash per share;
o common stockholders may receive up to an additional $1.00 in cash per
share under the circumstances described below; and
o common stockholders who properly exercise their appraisal rights will
instead receive the fair value of their shares determined by a court
under Delaware law.
You will not have any interest in Insignia after the merger is completed.
Q: How did you determine the merger consideration to be paid to holders of
Insignia's securities?
A: The merger consideration was determined as a result of arm's length
negotiations between the management of CBRE Holding and its advisors, on
the one hand, and the management of Insignia, its board of directors, a
special committee of the board of directors and their respective advisors,
on the other hand.
Q: Under what circumstances will the merger consideration be increased?
A: The merger agreement provides that, if we sell some of our real
estate-related assets and receive net cash proceeds of more than
approximately $45 million at or prior to the completion of the merger,
common stockholders and holders of restricted stock, options and warrants
will receive a portion of those excess proceeds as additional merger
consideration. The maximum amount of additional merger consideration that
may be received is $1.00 per share, regardless of the amount of the excess
net cash proceeds we receive.
Q: Why is the potential increased merger consideration generally based on
Insignia having received net cash proceeds in excess of $45 million for the
real estate-related assets?
A: In the negotiation of the merger agreement, CBRE Holding had proposed a
price of $12.00 per share of our common stock, which assumed the real
estate-related assets could be sold for approximately $67.2 million in a
transaction that would close on or prior to the closing date of the merger.
The only offer for the real estate-related assets at that time was for $45
million. CBRE Holding then reduced the proposed price per common share to
$11.00 but agreed with us to pay to our common stockholders as additional
merger consideration any net cash proceeds received by us at or prior to
the merger from the sale of these assets in excess of approximately $45
million, up to a maximum of $1.00 per share of our common stock.
Q: Why is the increased merger consideration limited to a maximum of $1.00 per
common share?
A: In the negotiation of the merger agreement, CBRE Holding was not willing to
pay more than $12.00 per share of common stock, regardless of the amount
that might be received for the real estate-related assets. As a result,
CBRE Holding would not agree to a potential increase of the merger
consideration of more than $1.00 per share of our common stock.
1
Q: Has Insignia entered into any agreement to sell its real estate-related
assets at or prior to the effective time of the merger?
A: No. Insignia has been negotiating with a number of potential purchasers of
some or all of our real estate-related assets, However, there can be no
assurance that any purchase agreement will be entered into or that any sale
will be consummated on or prior to the completion of the merger. One of
these potential purchasers is Island Fund I LLC. Island Fund is a newly
formed limited liability company, the equity interests of which are, or are
expected to be, owned by Andrew L. Farkas, chairman of the board and chief
executive officer of Insignia, James A. Aston, chief financial officer of
Insignia, and Ronald Uretta, chief operating officer of Insignia, and other
investors. Mr. Farkas also owns the managing member of Island Fund and
Messrs. Farkas, Aston and Uretta and Jeffrey P. Cohen, executive vice
president of Insignia, are expected to be officers of Island Fund.
Q: When will I know if the merger consideration has been increased?
A: If we enter in to any agreement to sell our real estate-related assets that
could result in an increase in the merger consideration, we will promptly
publicly announce that transaction and the amount by which the merger
consideration would potentially be increased if the transaction is
completed at or prior to the merger. However, there is no assurance that
any such transaction will be entered into by us. In addition, we anticipate
that any agreement to sell all or a portion of the real estate-related
assets would be subject to conditions that may not be satisfied prior to
the completion of the merger. As a result, at the time you vote on the
merger you may not know whether or not the merger consideration will be
greater than $11.00 per share. Accordingly, you should not expect the
merger consideration to be greater than $11.00 per share. We will publicly
announce the closing of the merger and the amount of additional merger
consideration, if any, no later than 9:00 a.m., New York City time, on the
day immediately following the closing date of the merger.
Q: Will the cash proceeds received from the sale of Insignia Residential Group
and Insignia Douglas Elliman LLC have any effect on the merger
consideration?
A: No. On March 14, 2003, we sold Insignia Residential Group, our formerly
wholly-owned subsidiary and the sole member of Insignia Douglas Elliman, to
Montauk Battery Realty, LLC, for a purchase price of up to $71.75 million.
Insignia Douglas Elliman and Insignia Residential Group are not included in
the specified real estate-related assets we are permitted to sell under the
merger agreement that may result in an increase in the merger consideration
and the cash proceeds of this sale will not affect the consideration to be
paid to you in the merger. We used $65.0 million of the net cash proceeds
from this sale to repay some of our outstanding indebtedness under our
senior revolving credit facility.
Q: Under what circumstances will the merger consideration otherwise be
adjusted?
A: If, prior to the merger, proposed changes to U.S. tax laws are enacted that
would reduce or eliminate the taxes that stockholders currently must pay on
dividends received from Insignia, then Insignia and CB Richard Ellis
Services may decide to have Insignia pay a dividend so that stockholders
may take advantage of those tax savings. In that event, the per share cash
payment that common stockholders would have otherwise received in the
merger will be reduced by the amount per share of common stock of that
dividend. However, we do not currently expect to pay a dividend to our
stockholders prior to the time of the merger.
Q: What do our board of directors and the special committee of our board of
directors recommend?
A: BOTH OUR BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE OF OUR BOARD OF
DIRECTORS RECOMMEND THAT YOU VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT
AND APPROVAL OF THE MERGER. Our board of directors and the special
committee of our board of directors unanimously determined that the merger
is advisable and in the best interests of our stockholders. To review the
background of, and reasons for, the merger, see "The Merger--Background of
the Merger" and "--Our Reasons for the Merger and the Recommendations of
the Special Committee and our Board of Directors."
In considering the recommendations of the special committee and of our
board of directors, you
2
should be aware that many of our directors and executive officers have
interests in the merger that are different from, and in addition to, yours.
See "The Merger--Interests of Executive Officers and Directors in the
Merger."
Q: What function did the special committee serve with respect to the merger and
who are its members?
A: The principal function of the special committee of independent directors
with respect to the merger was to protect your interests from potential
conflicts of interest of our executive officers and management directors in
evaluating and negotiating the merger agreement. The special committee is
composed of Robert J. Denison, Stephen M. Ross and H. Strauss Zelnick, none
of whom is an employee of Insignia or an employee or director of CBRE
Holding, CB Richard Ellis Services or Apple Acquisition. The special
committee independently selected and retained legal and financial advisors
to assist it. For more information regarding the special committee and its
evaluation and negotiation of the merger, see "The Merger--Background of
the Merger."
Q: What are the reasons for, and benefits of, engaging in the proposed merger?
A: o The merger consideration represents a substantial premium to the closing
price per share of our common stock on February 6, 2003, the last full
trading day prior to the public announcement of our discussions with CBRE
Holding concerning the proposed merger and exceeds the market prices of
our common stock for approximately 10 months prior to that date;
o stockholders will be able to obtain liquidity for their shares without
the usual transaction costs associated with open market sales; and
o the merger will eliminate the risks to stockholders of a possible future
decline in our business or the market price of our common stock.
Q: What are the detriments of engaging in the proposed merger?
A: o Stockholders will cease to participate in any potential future growth in
our business or increase in the value of our common stock;
o stockholders may incur taxable gain as a result of the receipt of cash
for their common stock in the merger; and
o substantial payments will be made to members of our management under
their existing employment agreements and employee benefits in connection
with the merger.
Q: When do you expect to complete the merger?
A: We are working to complete the merger as soon as possible and expect that it
will be completed promptly after the special meeting.
Q: Is the merger subject to the fulfillment of any conditions?
A: The merger is subject to CB Richard Ellis Services obtaining at least $610
million in debt financing on specified terms, the adoption of the merger
agreement and the approval of the merger by the holders of our common
stock, the receipt of governmental approvals and other customary
conditions. We expect to complete the merger as soon as practicable after
these conditions have been met or, when permitted under the merger
agreement, waived. See "The Merger--Regulatory Approvals" and "The Merger
Agreement--Conditions to the Merger."
3
VOTING AND RELATED MATTERS
Q: How do I vote?
A: After you read and consider carefully the information contained in this
proxy statement, please fill out, sign and date your proxy card and mail
your signed proxy card in the enclosed return envelope as soon as possible
so that your shares may be represented at the special meeting. Failure to
return your proxy or vote in person at the meeting will have the same
effect as a vote against the adoption of the merger agreement and approval
of the merger. See "Introduction--Voting and Revocation of Proxies."
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Yes, but only if you provide instructions to your broker on how to vote. You
should fill out, sign, date and return the proxy card and otherwise follow
the directions provided by your broker regarding how to instruct your
broker to vote your shares. See "Introduction--Voting and Revocation of
Proxies."
Q: Can I change my vote or revoke my proxy after I have mailed my signed proxy
card?
A: Yes, you can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send
a written notice to our corporate secretary stating that you would like to
revoke your proxy. Second, you can complete and submit a new, later dated
proxy card. If you choose either of these methods, you must submit your
notice of revocation or your new proxy card to us so that we receive it by
, 2003. Third, you can attend the special meeting and vote in
person. Simply attending the meeting, however, will not revoke your proxy;
you must vote at the meeting. If you have instructed a broker to vote your
shares, you must follow directions received from your broker to change your
vote. See "Introduction--Voting and Revocation of Proxies."
Q: Should I send in my stock certificates now?
A: No. If the merger is completed, shortly thereafter you will receive a letter
of transmittal with instructions informing you how to send in your stock
certificates to the exchange agent. You should use the letter of
transmittal to exchange stock certificates for the merger consideration to
which you are entitled as a result of the merger. YOU SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH YOUR PROXY CARD. You should follow the procedures
described in "The Merger--Payment of Merger Consideration and Surrender of
Stock Certificates."
Q: Who can help answer my other questions?
A: If you have more questions about the merger, you should contact our proxy
solicitation agent:
D.F. King & Co., Inc.
48 Wall Street
New York, New York 10005
Call Toll-Free: 888-887-1266
4
SUMMARY TERM SHEET
This summary term sheet highlights material information from this proxy
statement relating to the proposed merger and the meeting and does not contain
all of the information that is important to you. To understand fully the merger
and the other matters to be considered at the special meeting, you should read
carefully this entire proxy statement, including the information incorporated
by reference, the appendices and the additional documents referred to in this
proxy statement.
THE COMPANIES
Insignia Financial Group, Inc.
200 Park Avenue
New York, New York 10166
(212) 984-8033
Insignia Financial Group, Inc. is an international real estate services
company with operations in the United States, the United Kingdom and France, as
well as other operations in continental Europe, Asia and Latin America.
Insignia's real estate service businesses specialize in commercial leasing,
sales brokerage, corporate real estate consulting, property management,
property development and re-development, apartment brokerage and leasing,
condominium and cooperative apartment management, real estate oriented
financial services, equity co-investment and other services. In addition to
traditional real estate services, Insignia has previously invested its own
capital, together with the capital of third party investors, in principal real
estate oriented ventures, including co-investment in existing property assets,
real estate development and managed private investment funds. Currently,
Insignia does not intend to invest in new principal real estate oriented
ventures even if the merger is not consummated. In addition to venture related
investment returns, Insignia generates revenues from fee-based services
provided to minority owned real estate investment entities.
CBRE Holding, Inc.
CB Richard Ellis Services, Inc.
355 South Grand Avenue
Suite 3100
Los Angeles, California 90071
(213) 613-3226
CBRE Holding is a holding company that owns all of the outstanding capital
stock of CB Richard Ellis Services, which is also a holding company that
conducts its operations primarily through its direct and indirect subsidiaries.
CBRE Holding is one of the world's largest global commercial real estate
services firms in terms of revenue, offering a full range of services to
commercial real estate occupiers, owners, lenders and investors. Its operations
are conducted through 206 offices located in 47 countries with approximately
9,500 employees. CBRE Holding 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 commercial loan
servicing, provide research and consulting services, help institutional
investors manage commercial real estate portfolios, 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. For additional information regarding CBRE Holding and CB Richard
Ellis Services, see "CBRE Holding, Inc." and Appendix D to this proxy
statement.
Apple Acquisition Corp.
355 South Grand Avenue
Suite 3100
Los Angeles, California 90071
(213) 613-3226
Apple Acquisition Corp., a Delaware corporation, is an indirect wholly
owned subsidiary of CBRE Holding and a direct wholly owned subsidiary of CB
Richard Ellis Services and has not engaged in any business except in
furtherance of effecting the merger.
5
We sometimes refer to CBRE Holding, CB Richard Ellis Services and Apple
Acquisition collectively in this proxy statement as the "CBRE Companies."
THE SPECIAL MEETING
DATE, TIME, PLACE AND PROPOSALS TO BE CONSIDERED (SEE P. )
The special meeting of stockholders of Insignia will be held on
, 2003 at , local time, at . At the special
meeting, stockholders will consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated as of February 17, 2003, by and among
Insignia, CB Richard Ellis Services, CBRE Holding and Apple Acquisition and to
approve the merger of Apple Acquisition with and into Insignia. A copy of the
merger agreement is attached as Appendix A to this proxy statement. For
additional information regarding the proposal to be considered at the special
meeting, see "Introduction--Record Date; Proposal to be Considered at the
Special Meeting."
RECORD DATE FOR VOTING (SEE PP. )
Only holders of record of our common stock at the close of business on
, 2003 are entitled to notice of and to vote at the special meeting. On
that date, there were holders of record of our common stock and
shares of our common stock outstanding. For additional information
regarding the record date for voting, see "Introduction--Voting Rights; Vote
Required for Approval."
VOTE REQUIRED FOR APPROVAL (SEE PP. )
Adoption of the merger agreement and approval of the merger require the
affirmative vote of the holders of a majority of the shares of our common stock
outstanding on the record date. A failure to return a properly executed proxy
card or to vote at the special meeting, including abstentions and broker
non-votes will have the effect of a vote "AGAINST" the adoption of the merger
agreement and approval of the merger. Some of our officers who collectively
owned on the record date approximately % of our outstanding common stock
entitled to vote at the special meeting have entered into voting agreements in
which they have agreed to vote their shares in favor of adoption of the merger
agreement and approval of the merger. Holders of shares of our series A
convertible preferred stock and series B convertible preferred stock are not
entitled to vote with respect to the merger.
THE MERGER
MERGER CONSIDERATION (SEE PP. )
In the merger:
o each outstanding share of our common stock will be converted into the
right to receive $11.00 in cash, subject to decrease if we pay a dividend
under specified circumstances prior to the time of the merger and subject
to increase of up to $1.00 per share if we sell certain specified assets
and receive net cash proceeds prior to the time of the merger in excess
of a specified amount (generally $45 million, subject to increase);
o each outstanding share of our series A convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share; and
o each outstanding share of our series B convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share;
in each case, without interest and less any applicable withholding taxes and
other than shares held by us as treasury stock or owned by CBRE Holding, CB
Richard Ellis Services or Apple Acquisition or their
6
respective subsidiaries, or held by stockholders who perfect their appraisal
rights under Delaware law and do not effectively withdraw their right to
appraisal. Although the consideration payable for outstanding shares of our
common stock may be decreased or increased as generally described above, we do
not expect to pay a dividend on the common stock prior to the time of the
merger and, as a result, it is unlikely that the merger consideration will be
less than $11.00 per share. Although we have been negotiating with a number of
potential purchasers of some or all of the specified real estate assets, we
have not entered into any definitive agreement at this time regarding a sale
and may be unable to complete any sales of the real estate assets at or prior
to the closing of the merger. As a result, at the time you are asked to vote on
the merger you may not know whether or not the merger consideration will be
greater than $11.00 per share. Accordingly, you should not expect the merger
consideration will be greater than $11.00 per share.
TREATMENT OF OTHER SECURITIES (SEE PP. )
STOCK OPTIONS AND WARRANTS. In the merger, all outstanding options and
warrants, whether vested or unvested, to purchase our common stock will be
canceled and will represent the right to receive a cash payment, without
interest, equal to the excess, if any, of the merger consideration over the per
share exercise price of the option or warrant, multiplied by the number of
shares of common stock subject to the option or warrant, less any applicable
withholding taxes.
RESTRICTED STOCK AWARDS. In the merger, all outstanding restricted stock
awards will be canceled and will represent the right to receive an amount in
cash, without interest, equal to the merger consideration multiplied by the
number of shares of common stock subject to such awards, less any applicable
withholding taxes.
POTENTIAL SALE OF OUR REAL ESTATE-RELATED ASSETS IN CONNECTION WITH THE MERGER
(SEE PP. )
We are currently discussing the sale of some or all of our real
estate-related assets with a number of potential purchasers, including Island
Fund I LLC. Island Fund is a newly formed limited liability company, the equity
interests of which are, or are expected to be, owned by Andrew L. Farkas,
chairman of the board and chief executive officer of Insignia, James A. Aston,
chief financial officer of Insignia, and Ronald Uretta, chief operating officer
of Insignia, and other investors. Mr. Farkas also owns the managing member of
Island Fund and Messrs. Farkas, Aston and Uretta and Jeffrey P. Cohen,
executive vice president of Insignia, are expected to be officers of Island
Fund.
OUR REASONS FOR ENGAGING IN THE MERGER (SEE PP. )
The principal purpose of the merger is to enable holders of our common
stock to receive cash for their shares at a significant premium over (a) the
$8.37 closing price per share of our common stock on February 6, 2003, the last
full trading day before the public announcement of our discussions with CBRE
Holding concerning the proposed merger and (b) the average price per share of
$9.21 during the 360-day period immediately preceding February 6, 2003. A
special committee of our board of directors and our board of directors believe
that the merger is advisable and in the best interests of our stockholders. See
"The Merger--Our Reasons for the Merger and the Recommendation of the Special
Committee and our Board of Directors."
CBRE HOLDING'S REASONS FOR ENGAGING IN THE MERGER (SEE PP. )
CBRE Holding has indicated to us that its reasons for engaging in the
merger generally are to (1) broaden the strength of its business in key
commercial centers around the world, including New York, London and Paris, (2)
enhance the service offerings available to its clients around the world, (3)
benefit from our additional client relationships, (4) combine the most talented
commercial real estate services personnel from the two businesses in order to
provide the best possible service to its clients, and (5) obtain significant
costs savings from the elimination of overlapping business resources and
functions.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS (SEE PP.
)
Each of the members of the special committee voted in favor of the
adoption of the merger agreement and the approval of the merger. Our board of
directors also has unanimously determined that
7
the merger is advisable and in the best interests of our stockholders and
approved the merger agreement and the merger. Accordingly, our board of
directors and the special committee recommend that you vote "FOR" the proposal
to adopt the merger agreement and approve the merger. For a discussion of the
material factors considered by the special committee and our board of directors
in reaching their recommendations, see "The Merger--Our Reasons for the Merger
and the Recommendations of the Special Committee and our Board of Directors."
OPINION OF BEAR, STEARNS & CO. INC. (SEE PP. )
In connection with the merger, the special committee and our board of
directors considered the opinion of Bear, Stearns & Co. Inc. as to the fairness
of the merger consideration, from a financial point of view, to the holders of
our common stock. Bear Stearns rendered its oral opinion on February 17, 2003,
subsequently confirmed in writing as of that date, to the special committee and
our board of directors to the effect that, based upon the assumptions made,
matters considered and limitations on the review described in the written
opinion, the merger consideration was fair from a financial point of view to
the holders of our common stock. Bear Stearns's opinion was provided for the
information of the special committee and our board of directors and does not
constitute a recommendation to any stockholder with respect to any matter
relating to the proposed merger. See "The Merger--Opinion of Bear, Stearns &
Co. Inc."
The full text of Bear Stearns' written opinion is attached as Appendix B
to this proxy statement. We encourage you to read Bear Stearns' opinion in its
entirety for a description of the assumptions made, matters considered and
limitations on the review undertaken.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (SEE PP. )
In considering the recommendation of the special committee and our board
of directors with respect to the merger agreement and the merger, you should be
aware that many of our executive officers and members of our board of directors
have interests in the merger that are in addition to, or different from, the
interests of our stockholders generally and include the following payments,
each of which is included in the summary table below.
o Alan C. Froggatt and Frank M. Garrison, executive officers of Insignia,
have unvested options to purchase our common stock or restricted stock
awards. The merger agreement provides that all outstanding options,
warrants and restricted stock awards will become fully vested at the time
of the merger, including options, warrants and restricted stock awards
held by our executive officers and directors.
o Andrew L. Farkas, Frank M. Garrison, James A. Aston, Adam B. Gilbert,
Ronald Uretta and Jeffrey P. Cohen, executive officers of Insignia, are
entitled to receive substantial payments and benefits in connection with
the merger.
o Messrs. Denison, Ross and Zelnick, the members of the special committee,
have each received $35,000 for serving on that committee and will receive
an additional $35,000 upon consummation of the merger.
The following table summarizes the aggregate payments to be received by
each of our executive officers and director, and by all of our executive
officers and directors as a group, as a result of the payment for their
options, warrants and restricted stock awards, payments under their existing
employment agreements with us and the other payments and benefits to be
received by them in connection with the merger, assuming that the merger
consideration payable per share of our common stock is $11.00 and the merger
occurs on June 30, 2003:
8
NAME OF EXECUTIVE OFFICER OR AGGREGATE PAYMENTS
DIRECTOR TO BE RECEIVED
------------------------------------------------------------ --------------------
James A. Aston(1) ....................................... $
Jeffrey P. Cohen(1) ..................................... $
Robert J. Denison(2) .................................... $147,560
Andrew L. Farkas(1)(2) .................................. $
Robin L. Farkas(2) ...................................... $ 77,560
Alan C. Froggatt(1)(2) .................................. $
Frank M. Garrison(1) .................................... $
Adam B. Gilbert(1) ...................................... $
Robert G. Koen(2) ....................................... $ 77,560
Stephen M. Ross(2) ...................................... $ 72,560
Stephen B. Siegel(1)(2) ................................. $
Ronald Uretta(1) ........................................ $
H. Strauss Zelnick(2) ................................... $147,560
All executive officers and directors as a group ......... $
----------
(1) Executive officer of Insignia
(2) Director of Insignia
In addition to the payments summarized above, our executive officers and
directors will receive the following benefits in connection with the merger:
o Stephen B. Siegel, one of our executive officers, who is also a
director, has entered into a new employment agreement with CB Richard
Ellis, Inc. that will become effective and supersede his existing
employment agreement with us upon the completion of the merger. Alan C.
Froggatt, another of our executive officers, who is also a director,
currently is negotiating with CB Richard Ellis, Inc. regarding the terms
of potential amendments to his employment agreement with us that would
become effective upon the completion of the merger.
o The profit participation interests of the executive officers named above
in respect of our real estate co-investment and development real estate
assets, in our real estate security investment funds and certain other
real estate investment assets will remain in place following the merger.
o Subject to specified limitations, CBRE Holding and CB Richard Ellis
Services will continue the indemnification arrangements and directors'
and officers' liability insurance for our past and present directors and
officers following the merger.
o As described above, Island Fund, a current or potential affiliate of
Andrew L. Farkas, our chairman of the board and chief executive officer,
James A. Aston, our chief financial officer, Ronald Uretta, our chief
operating officer, and Jeffrey P. Cohen, our executive vice president, is
one of a number of parties that is negotiating with us regarding the
potential purchase of our real estate-related assets in connection with
the merger.
See "The Merger--Interests of Executive Officers and Directors in the Merger."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PP. )
The receipt of cash in exchange for stock surrendered in the merger will
be a taxable transaction for U.S. federal income tax purposes. For U.S. federal
income tax purposes, a stockholder generally will realize taxable gain or loss
as a result of the merger measured by the difference, if any, between the
merger consideration received for such shares and the stockholder's adjusted
tax basis of such shares. For additional information regarding material U.S.
federal income tax consequences of the merger to our stockholders, see "The
Merger--Material U.S. Federal Income Tax Consequences of the Merger to our
Stockholders."
9
THE MERGER AGREEMENT (SEE PP. )
The full text of the merger agreement between Insignia and the CBRE
Companies is attached as Appendix A to this proxy statement. We encourage you
to read the merger agreement in its entirety.
CONDITIONS TO THE MERGER
The obligations of Insignia, CBRE Holding, CB Richard Ellis Services and
Apple Acquisition to effect the merger are subject to the satisfaction of the
following conditions, among others:
o the merger agreement must be adopted and the merger must be approved by
holders of our common stock;
o CBRE Holding or CB Richard Ellis Services must have received at least
$610 million in debt financing on specified terms, which financing is
itself subject to a number of important conditions (for additional
information, see "The Merger--Financing of the Merger; Fees and Expenses
of the Merger");
o the applicable waiting period or required approval under U.S. antitrust
laws and other similar non-U.S. laws must expire or be earlier terminated
and other regulatory approvals must be obtained; (early termination of
the waiting period under U.S. antitrust laws was granted on April 2, 2003
and approval was granted under French antitrust laws as of April 17,
2003);
o no law, injunction or order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of the merger may be in
effect;
o the parties' respective representations and warranties in the merger
agreement must be materially true and correct; and
o the parties must have materially complied with their respective
covenants in the merger agreement.
For additional information regarding the conditions of each party's
obligation to effect the merger, see "The Merger Agreement--Conditions to the
Merger."
NO SOLICITATION
The merger agreement contains detailed provisions prohibiting us from
seeking an alternative transaction to the merger. These "no solicitation"
provisions prohibit us from taking any action to solicit or knowingly encourage
an acquisition proposal from a third party. The merger agreement does not,
however, prohibit us, the special committee or our board of directors from
considering and potentially approving and recommending an unsolicited superior
proposal from a third party, if we, the special committee and our board of
directors comply with the appropriate provisions of the merger agreement. For
additional information regarding these "no solicitation" provisions, see "The
Merger Agreement--No Solicitation."
TERMINATION OF MERGER AGREEMENT
The merger agreement may be terminated, and the merger may be abandoned,
at any time prior to the effective time of the merger, whether before or after
adoption of the merger agreement and approval of the merger by our
stockholders:
o by mutual written agreement of CBRE Holding, CB Richard Ellis Services,
Apple Acquisition and us;
o by either Apple Acquisition or us, if the merger is not completed on or
before July 14, 2003, so long as the failure of the merger to occur is
not the result of the breach by the terminating party of a provision of
the merger agreement;
o by either Apple Acquisition or us, if any final government action makes
illegal or prohibits completion of the merger;
o by either Apple Acquisition or us, if our stockholders do not adopt the
merger agreement and approve the merger at the special meeting or any
adjournment of the special meeting;
10
o by either Apple Acquisition or us, if the other party materially
breaches or fails to perform any of its representations, warranties or
covenants in the merger agreement and fails to cure the breach;
o by us, concurrently with the execution of an acquisition agreement
permitted under the merger agreement in connection with a superior
proposal and the payment to Apple Acquisition of the termination fee
described below;
o by Apple Acquisition, if our board of directors or the special committee
of our board of directors withdraws, changes or modifies their approval
or recommendation of the merger or the merger agreement or approve or
recommend an alternative transaction; or
o by Apple Acquisition if any other person or entity acquires beneficial
ownership of a majority of our outstanding common stock.
For additional information regarding the ability of the parties to
terminate the merger agreement, see "The Merger Agreement--Termination of the
Merger Agreement."
TERMINATION FEES; INDEMNIFICATION
The merger agreement provides that, in specified circumstances in which
the merger agreement is terminated, we must pay to Apple Acquisition a
termination fee of $7 million. One effect of the termination fee provisions is
to make an acquisition of us more expensive for any other potential acquiror of
us, which might discourage a potential acquiror from making an offer to acquire
us. The merger agreement also includes an agreement of the CBRE Companies to
indemnify us for up to $50 million of specified damages in the event the merger
agreement is terminated under limited circumstances. For additional information
regarding the termination fee and the circumstances under which it is payable,
as well as the indemnification obligation of the CBRE Companies, see "The
Merger Agreement--Termination Fee; Indemnification; Amendment of No Raid
Agreement."
APPRAISAL RIGHTS (SEE PP. )
Holders of our common stock who object to the merger may elect to pursue
their appraisal rights to receive the judicially determined "fair value" of
their shares, which could be more or less than the per share merger
consideration for the common stock, but only if they comply with the procedures
required under Delaware law. In order to qualify for these rights, you must (1)
not vote in favor of the adoption of the merger agreement or the approval of
the merger, (2) make a written demand for appraisal prior to the taking of the
vote on the adoption of the merger agreement and the approval of the merger at
the special meeting and (3) otherwise comply with the Delaware law procedures
for exercising appraisal rights. For a summary of these Delaware law
procedures, see "The Merger--Appraisal Rights." An executed proxy that is not
marked "AGAINST" or "ABSTAIN" will be voted for adoption of the merger
agreement and approval of the merger and will disqualify the stockholder
submitting that proxy from demanding appraisal rights.
REGULATORY APPROVALS (SEE PP. )
CBRE Holding and we are required to make filings with or obtain approvals
from United States regulatory authorities in connection with the merger,
including a filing under the Hart-Scott-Rodino Antitrust Improvements Act of
1976. CBRE Holding and we each filed a notification form under the
Hart-Scott-Rodino Act with the Federal Trade Commission and the Department of
Justice on March 14, 2003. In addition, CBRE Holding and some of its
stockholders are required to make a filing under the Hart-Scott-Rodino Act in
connection with the equity financing to be provided to CBRE Holding in
connection with the merger, which filing was made with the Federal Trade
Commission and the Department of Justice on March 20, 2003. On April 2, 2003,
the Federal Trade Commission granted early termination of the waiting period
under the Hart-Scott-Rodino Act with respect to each filing. CBRE Holding has
also made a filing with the French antitrust authority, which approved the
merger as of April 17, 2003. CBRE Holding, CB Richard Ellis Services, some of
CBRE Holding's stockholders and their affiliates and we are required to make
filings with a regulatory authority in the United Kingdom in
11
connection with the proposed merger. These filings were made on March 28, 2003,
April 14, 2003 and April 22, 2003. For additional information regarding
regulatory approvals, see "The Merger--Regulatory Approvals."
FINANCING OF THE MERGER (SEE PP. )
Based upon our total outstanding shares of common stock as of the record
date for the special meeting, and the outstanding indebtedness of us and CB
Richard Ellis Services as of , 2003, the total amount of funds required
to consummate the merger, repay some of our and CB Richard Ellis Services'
indebtedness and to pay our and the CBRE Companies' related fees and expenses
is estimated to be approximately $ million. The CBRE Companies plan to
fund the purchase price with the following sources of cash:
o not less than $100 million, and up to $145 million, of equity financing
pursuant to a subscription agreement and a commitment letter delivered to
CBRE Holding by Blum Strategic Partners, L.P., Blum Strategic Partners
II, L.P. and Blum Strategic Partners II GmbH & Co. KG, which together
currently own a majority of CBRE Holding's capital stock;
o a portion of the net proceeds of at least $ million of debt financing
pursuant to a commitment letter delivered to CB Richard Ellis Services by
Credit Suisse First Boston; and
o the general working capital of CB Richard Ellis Services and Insignia.
For additional information regarding the financing of the merger, see "The
Merger--Financing of the Merger; Fees and Expenses of the Merger."
12
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements contained in this proxy statement are forward-looking
statements. The words and phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimates," "projects," "believes," "plans"
or similar expressions, are intended to identify "forward-looking statements"
and include, without limitation, our expectations regarding revenues, earnings
or other future financial performance and liquidity, and general statements
about future operations and operating results. Although we believe that our
expectations are based on reasonable assumptions within the bounds of our
knowledge of our business and operations, there can be no assurance that actual
results will not differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
o our real estate investments carry inherent risk, including the potential
loss of our entire investment in any single asset;
o covenants in our revolving credit facility restrict our ability to incur
indebtedness and to raise additional capital in many respects, which may
restrict our ability to acquire additional investments and thereby
adversely affect our realization of investment gains in future periods;
o since we are a minority owner in some of our investments, we have
limited control over the timing of the disposition of these investments
and the realization of any gain or the limitation of any loss;
o our operations are concentrated in the world's largest financial
centers, including New York, London and Paris; in addition to risks
related to the local real estate markets and economies of these cities,
there is the risk that unusual and unforeseen events, including events
such as those of September 11, 2001 in one or more of these cities could
have a material adverse effect on our business and financial performance;
o the increased international scope of our operations may lead to more
volatile financial results and difficulties in managing our businesses
for a number of reasons, including: unexpected changes in regulatory
requirements; the burden of complying with multiple and potentially
conflicting laws in different jurisdictions; the impact of regional or
country-specific business cycles and economic instability; currency
restrictions and exchange rate fluctuations; limited familiarity with
local business customers and operating environments; difficulties and
costs of staffing and managing international operations; potentially
adverse tax and tariff consequences; the geographic, time zone, language
and cultural differences between personnel in different areas; and war,
civil disturbances and terrorist acts;
o each of the businesses in which we compete is highly competitive on an
international, national, regional and local level and we face competition
from other real estate service providers, institutional lenders,
insurance companies, investment banking firms, investment managers and
accounting firms;
o the failure to comply with governmental regulations, including licensing
procedures, prescribed fiduciary responsibilities, anti-fraud
prohibitions, advertising, trade, environmental, housing and real estate
settlement laws and regulations could adversely affect us;
o many of our property management agreements are cancelable by the client
on as little as 30 to 60 days' notice;
o the failure to secure renewals of our existing property management
contracts or the necessity of entering into new contracts on less
favorable terms;
o we may not be able to obtain, at a reasonable price or at all, certain
types of insurance, such as insurance for acts of terrorism, or the
insurance that we do maintain may contain restrictions, deductibles or
limitations, in either case, with the result that our insurance coverage
would be insufficient to pay the full value of some types of damages
suffered by us;
o we may be unable to attract and retain qualified personnel;
13
o the loans under our senior revolving credit facility bear interest at
LIBOR plus a margin that varies according to the ratio of debt to
consolidated net income before interest expense, taxes, depreciation,
amortization and specified other costs, and, therefore, we are vulnerable
to increases in interest rates as a result of either increases in the
base rate or the variable LIBOR margin;
o our senior revolving credit agreement contains covenants that could
materially and adversely affect our ability to finance our future
operations or capital needs or to engage in other business activities
that may be in our best interest, and our ability to comply with these
covenants may be affected by events beyond our control;
o our revenue from property management services is generally based upon
percentages of the revenue generated by the properties that we manage
and, therefore, our revenue would be adversely affected by decreases in
the performance of the properties we manage; many of the factors
affecting property performance are partially or completely outside of our
control;
o we plan our capital and operating expenditures based on our expectations
of future revenues; if revenues are below expectations in any given
quarter, we may be unable to adjust expenditures to compensate for any
unexpected revenue shortfall; and
o we may become subject to environmental liabilities with respect to
properties owned or controlled by us, including properties formerly owned
or controlled by us, even if the original actions giving rise to such
liabilities were legal and we did not know of, or were not responsible
for, the presence of hazardous or toxic substances relating to such
properties.
We undertake no obligation to publicly update or revise any forward-looking
statements made in this proxy statement or elsewhere whether as a result of new
information, future events or otherwise.
14
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies by our board of directors for a special meeting of our stockholders to
be held on , 2003 at , local time, at
, or at any adjournment or postponement of the
special meeting. Shares of our common stock represented by properly executed
proxies received by us will be voted at the special meeting or any adjournment
or postponement of the special meeting in accordance with the terms of those
proxies, unless revoked.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, you will consider and vote upon a proposal to
adopt the Agreement and Plan of Merger, dated as of February 17, 2003, by and
among Insignia, CBRE Holding, CB Richard Ellis Services and Apple Acquisition
and to approve the merger of Apple Acquisition with and into Insignia.
At the effective time of the merger, the separate corporate existence of
Apple Acquisition will cease, and Insignia will be the surviving corporation
and a direct wholly-owned subsidiary of CB Richard Ellis Services and an
indirect subsidiary of CBRE Holding. In the merger:
o each outstanding share of our common stock will be converted into the
right to receive $11.00 in cash, subject to decrease if we pay a dividend
under specified circumstances prior to the time of the merger and subject
to increase of up to $1.00 per share if we sell certain specified assets
and receive net cash proceeds prior to the time of the merger in excess
of a specified amount (generally $45 million, subject to increase);
o each outstanding share of our series A convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share;
o each outstanding share of our series B convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share;
in each case, without interest and less any applicable withholding taxes and
other than shares held in our treasury, held by CBRE Holding, CB Richard Ellis
Services or Apple Acquisition or their respective subsidiaries or held by
stockholders who perfect their appraisal rights under Delaware law and to not
effectively withdraw or lose their right to appraisal. Although the
consideration payable for outstanding shares of our common stock may be
decreased or increased as generally described above, we do not expect to pay a
dividend on our common stock. Although we are negotiating with a number of
potential purchasers of some or all of the specified assets, we may not be able
to enter into or complete any agreement with respect to such sale or sales
prior to the closing of the merger. As a result, at the time you are asked to
vote on the merger you may not know whether or not the common stock merger
consideration will be greater than $11.00 per share. Accordingly, you should
not expect the common stock merger consideration to be greater than $11.00 per
share.
Also under the merger agreement:
o all outstanding options and warrants to purchase our common stock,
whether vested or unvested, will be canceled and will represent the right
to receive a cash payment, without interest, less any applicable
withholding taxes, equal to the excess, if any, of (a) the common stock
merger consideration described above over (b) the per share exercise
price of the option or warrant, multiplied by the number of shares of
common stock subject to the option or warrant;
o all outstanding restricted stock awards will be canceled and will
represent the right to receive a cash payment, without interest, less any
applicable withholding taxes, equal to the common stock merger
consideration described above multiplied by the number of shares of
common stock subject to such awards; and
o each outstanding share of common stock of Apple Acquisition will be
converted into one share of common stock of the surviving corporation.
15
Stockholders who perfect their appraisal rights under Delaware law will be
entitled to receive from the surviving corporation, instead of the common stock
merger consideration described above, a cash payment in the amount of the "fair
value" of their shares, determined in accordance with Delaware law. After the
merger, these shares will not represent any interest in the surviving
corporation other than the right to receive this cash payment. See "The
Merger--Appraisal Rights."
RECORD DATE; VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
Only holders of record of our common stock at the close of business on
, 2003, the record date for the special meeting, are entitled to
notice of, and to vote at, the special meeting. On that date there were
holders of record of our common stock and shares of our common stock
outstanding, of which shares, or approximately % of our outstanding
common stock on that date, were held by our directors and executive officers.
Any stockholder entitled to vote may vote either in person or by properly
executed proxy. The presence, in person or by proxy, of the holders of a
majority of the shares of our common stock outstanding on the record date is
necessary to constitute a quorum at the special meeting. Abstentions and broker
non-votes are counted for the purpose of establishing a quorum at the special
meeting. In the event that a quorum is not present at the special meeting, we
expect to adjourn or postpone the meeting to solicit additional proxies.
Holders of record on the record date are entitled to one vote per share at the
special meeting on the proposal to adopt the merger agreement and approve the
merger.
The merger agreement must be adopted and the merger must be approved by
the holders of at least a majority of the outstanding shares of our common
stock. Failure to return a properly executed proxy card or to vote at the
special meeting, including abstention and broker non-votes will have the effect
of a vote "AGAINST" the adoption of the merger agreement and approval of the
merger.
If the special meeting is adjourned for any reason, the adoption of the
merger agreement may be considered and voted upon by our stockholders at a
subsequent reconvened meeting. All proxies will be voted in the same manner as
they would have been voted at the original meeting, except for any proxies that
have been properly withdrawn or revoked.
Executive officers of Insignia who collectively owned on the record date
approximately % of our outstanding common stock entitled to vote at the
special meeting have entered into voting agreements in which they have agreed
to vote their shares in favor of the adoption of the merger agreement and
approval of the merger. In addition, each of our directors and executive
officers who has not entered into a voting agreement has indicated that he
intends to vote his shares in favor of the adoption of the merger agreement and
approval of the merger. See "The Merger--Interests of Executive Officers and
Directors in the Merger."
If the special committee or our board of directors withdraws or changes
its recommendation with respect to the merger agreement and the merger, and the
merger agreement has not been terminated by us or Apple Acquisition, the merger
agreement provides that we will still hold the special meeting for stockholders
to vote on the adoption of the merger agreement and the approval of the merger.
VOTING AND REVOCATION OF PROXIES
All shares of our common stock represented by properly executed proxies
received prior to or at the special meeting and not revoked will be voted in
accordance with the instructions indicated in those proxies. If no instructions
are indicated, the proxies will be voted "FOR" the proposal to adopt the merger
agreement and approve the merger.
A stockholder giving the proxy may revoke it by:
o delivering to our corporate secretary at our corporate offices at 200
Park Avenue, New York, New York 10166, on or before the business day
prior to the special meeting, a written revocation of the proxy or a
later dated, signed proxy card;
o delivering a written revocation or a later dated, signed proxy card to
us at the special meeting prior to the taking of the vote on the matters
to be considered at the special meeting;
16
o attending the special meeting and voting in person; or
o if you have instructed a broker to vote your shares, following the
directions received from your broker to change those instructions.
Revocation of the proxy will not affect any vote previously taken.
Attendance at the special meeting will not in itself constitute the revocation
of a proxy; you must vote in person at the special meeting to revoke a
previously delivered proxy.
Our board of directors is not currently aware of any business to be
brought before the special meeting other than that described in this proxy
statement. However, if other matters are properly presented, the persons named
as proxies will vote in accordance with their judgment with respect to those
matters.
SOLICITATION OF PROXIES; EXPENSES OF SOLICITATION
We will bear the expenses in connection with the solicitation of proxies.
Upon request, we will reimburse brokers, dealers and banks, or their nominees,
for reasonable expenses incurred in forwarding copies of the proxy material to
the beneficial owners of shares which those persons hold of record.
Solicitation of proxies will be made principally by mail. Proxies also may be
solicited in person or by telephone, facsimile or other permitted means by our
directors, officers and regular employees. These individuals will receive no
additional compensation for these services, but will be reimbursed for any
expenses incurred by them in connection with these services.
We have retained D.F. King & Co., Inc. for a fee of $5,000, plus expenses,
to assist in the solicitation of proxies from stockholders, including brokerage
houses and other custodians, nominees and fiduciaries. D.F. King may solicit
proxies by mail, telephone, facsimile or other permitted means.
We are mailing this proxy statement to stockholders on or about
, 2003.
MARKET PRICE DATA
Our common stock trades on the New York Stock Exchange under the symbol
"IFS." The following table sets forth the high and low sales prices per share
of our common stock, as reported by the New York Stock Exchange, for the
quarters indicated:
YEAR ENDING DECEMBER 31, 2003: HIGH LOW
------- -------
First quarter .................................... $ 11.40 $ 7.20
Second quarter (through April 28, 2003) .......... $ 11.12 $ 10.89
YEAR ENDED DECEMBER 31, 2002:
Fourth quarter ................................... $ 8.00 $ 5.45
Third quarter .................................... $ 9.54 $ 7.45
Second quarter ................................... $ 11.31 $ 9.35
First quarter .................................... $ 11.65 $ 10.08
YEAR ENDED DECEMBER 31, 2001:
Fourth quarter ................................... $ 13.24 $ 11.30
Third quarter .................................... $ 12.82 $ 10.45
Second quarter ................................... $ 12.80 $ 9.50
First quarter .................................... $ 10.95 $ 9.15
On February 6, 2003, the last full trading day before the public
announcement of our discussions with CBRE Holding concerning the proposed
merger, the closing sale price per share of our common stock was $8.37. On
February 14, 2003, the last full trading day before the public announcement of
the execution of the merger agreement, the closing sales price per share was
$10.63. On , 2003, the most recent practicable trading day prior to the
date of this proxy statement, the closing sales price per share was $ .
You should obtain current market price quotations for the common stock in
connection with voting your shares.
17
DIVIDENDS
We have never declared a dividend on our common stock. Under the merger
agreement, we have agreed not to declare or pay any dividends on our common
stock prior to the closing of the merger or the earlier termination of the
merger agreement except with the consent of CB Richard Ellis Services.
RECENT DEVELOPMENTS
On February 6, 2003, we entered into a non-binding letter of intent with
Montauk Battery Realty, LLC regarding the sale of our then wholly-owned
subsidiary, Insignia Residential Group, which is the sole member of Insignia
Douglas Elliman LLC, for a purchase price of up to $73.5 million. On March 14,
2003, we sold Insignia Residential Group to Montauk Battery Realty for a
purchase price of up to $71.75 million paid or payable as follows:
o $66.75 million was paid in cash at the closing of the transaction;
o $500,000 in cash held in escrow on the closing date of the transaction
and up to another $500,000 held in escrow upon receipt of specified
pending commissions; and
o the assumption by the buyer of up to $4.0 million in existing earn-out
payment obligations of Insignia Douglas Elliman.
The escrowed amounts are available to secure our indemnity obligations
under our agreement with Montauk Battery Realty. Any amounts remaining in
escrow on March 14, 2004 and not securing previously made indemnity claims will
be released to us.
Insignia Douglas Elliman, founded in 1911 and acquired by Insignia in June
1999, provides sales and rental services in the New York City residential
cooperative, condominium and rental apartment market. Insignia Douglas Elliman
also operates in upscale suburban markets in Long Island (Manhasset, Locust
Valley and Port Washington/Sands Point). Insignia Douglas Elliman has
approximately 830 brokers, supported by approximately 120 corporate employees
in 12 offices in the New York City area. In 2002, Insignia Douglas Elliman
generated service revenues of approximately $133.7 million, or 19% of our total
service revenues for the year. Insignia Residential Group provides property
management services. It operates the largest manager of cooperative,
condominium and rental apartments in the New York metropolitan area, providing
full service third-party fee management for more than 250 properties,
comprising approximately 60,000 residential units. Among the notable properties
currently managed by Insignia Residential Group in the New York metropolitan
area are the Worldwide Plaza, London Terrace and Peter Cooper
Village/Stuyvesant Town, an 11,000-unit residential community owned by
Metropolitan Life. Insignia Residential Group generated total service revenues
of $26.5 million in 2002.
Insignia Douglas Elliman and Insignia Residential Group are not included
in the specified real estate-related assets we are permitted to sell under the
merger agreement that may result in an increase in the common stock merger
consideration and the cash proceeds received by us from this sale will not
affect the consideration to be paid to you in the merger. We used $65.0 million
of the net cash proceeds from this sale to repay some of our outstanding
indebtedness under our senior revolving credit facility.
The employment agreements of Messrs. Farkas, Garrison, Aston and Uretta
provide for the payment of certain incentives to each of them upon the
occurrence of a "material asset disposition," as defined in their respective
employment agreements, subject to the terms and conditions of these employment
agreements. Incentives payable to these individuals as a result of the sale of
Insignia Douglas Elliman and Insignia Residential Group are expected to
aggregate approximately $1,669,000 and will only be paid if the merger is not
consummated. If the merger is consummated, these individuals will instead be
entitled to the material asset disposition payments with respect to the merger.
See "The Merger--Interests of Executive Officers and Directors in the Merger."
18
THE MERGER
BACKGROUND OF THE MERGER
Our senior management and board of directors regularly discuss and
evaluate our long-term strategy. Our senior management is generally of the view
that the real estate services business in the United States, while remaining
significantly fragmented, has been in recent years characterized by
consolidation, which has been driven in large measure by the economies of scale
available to larger entities in the industry, as well as the geographic
expansion of entities. In order to take advantage of these trends to benefit
our stockholders, our senior management and our board have consistently
remained receptive to opportunities to acquire other businesses or to be
acquired by another entity.
In late 1998 and early 1999, we negotiated the terms of a stock-for-stock
merger with CB Richard Ellis Services and a definitive merger agreement was
presented to the board of directors of each company for their consideration.
This merger agreement was approved by our board of directors. The board of
directors of CB Richard Ellis Services failed to approve the merger agreement
that had been negotiated, and discussions between the parties were terminated.
During the summer of 1999, Raymond Wirta, then the chief operating officer of
CB Richard Ellis Services, and Andrew L. Farkas, the chairman and chief
executive officer of Insignia, had discussions to explore whether there was any
continuing interest in a combination of the two entities, but no proposals
resulted from the discussions. In early 2000, Mr. Wirta, who at that time was
chief executive officer of CB Richard Ellis Services, and Mr. Farkas again
explored whether there was any continuing interest in a combination of the two
entities, but again no proposals resulted from the discussions. In July 2001,
CBRE Holding acquired CB Richard Ellis Services.
During the summer of 2002, Raymond Wirta, the chief executive officer of
CBRE Holding, and Andrew L. Farkas again began to discuss a possible
combination of the two companies. Messrs. Wirta and Farkas discussed
developments in the real estate services industry, including declining profit
margins, the increased importance of reducing fixed costs, and the benefits of
increasing the size of the business to take advantage of economies of scale.
They concluded that the business environment made a resumption of discussions
regarding a combination of the two entities desireable. In September 2002, Mr.
Wirta and Frank M. Garrison, office of the chairman of Insignia, began
negotiating the terms of a proposed confidentiality agreement, and on October
14, 2002, we entered into a confidentiality agreement with CBRE Holding. After
the signing of this agreement, we immediately established a data room and CBRE
Holding began a limited due diligence process. The confidentiality agreement
that was agreed upon did not contain a provision restricting or prohibiting
either party's ability to hire the other party's employees, although such a
provision was discussed in connection with the negotiation of that agreement.
Also on October 14, 2002, our board of directors formed a special
committee to evaluate the merits of any proposed transaction with CBRE Holding,
including the fairness to our stockholders, and to consider any alternative
transactions that may be available. The special committee retained Dechert LLP
as its legal counsel.
On October 17, 2002, representatives of CBRE Holding and Insignia,
including Messrs. Wirta and Farkas, met in New York City to discuss the
feasibility of a transaction between the two companies. Also on that day in New
York City, the chairman of the special committee and the special committee's
legal counsel interviewed representatives of Bear, Stearns & Co. Inc. regarding
the possibility of Bear Stearns acting as the financial advisor to the special
committee. On October 18, 2002, the chairman of the special committee and the
special committee's legal counsel held similar meetings in New York City with
representatives of two other prominent investment banks.
In a meeting held by telephone conference call on October 20, 2002, after
considering each of the three investment banks that were interviewed, the
special committee authorized its legal counsel to negotiate an engagement
letter with Bear Stearns. On October 25, 2002, the special committee retained
Bear Stearns as financial advisor to the special committee and, in the event of
a transaction, to render an opinion to the special committee and our board of
directors as to the fairness of the transaction, from a financial point of
view, to the holders of our common stock. On October 28, 2002, a meeting of the
special committee was held by telephone conference call in which the special
committee considered initiating a stock repurchase program, but determined not
to do so until after receiving and considering an initial
19
proposal from CBRE Holding. During the last two weeks of October, CBRE Holding
and its advisors conducted a due diligence review of the materials in the data
room.
On November 1, 2002, CBRE Holding sent a letter to us and the special
committee proposing an acquisition of us by merger at $10.15 in cash per share
of our common stock. CBRE Holding's proposal assumed that Insignia Nautica, one
of our development properties that is in St. Thomas, U.S. Virgin Islands, would
be sold prior to the completion of the acquisition for net cash proceeds of $20
million, and provided that the $10.15 per share price would be adjusted upward
or downward to reflect the actual net cash proceeds from such a sale. The
letter specifically stated that the disposition of our other real estate assets
was not a condition to CBRE Holding's offer, although CBRE Holding anticipated
that these assets would be sold simultaneously with the completion of the
proposed acquisition.
On November 5 and November 6, 2002, legal counsel for CBRE Holding, our
outside legal counsel, legal counsel for the special committee and our general
counsel discussed the details of the proposal, alternative structures for the
transaction and sources of financing. A significant portion of the issues
covered in these discussions related to the conditions to the closing of any
such proposed transaction after the parties had entered into a definitive
agreement. Also on November 6, 2002, by telephone conference call Bear Stearns
made a presentation to the special committee of their preliminary analysis of
CBRE Holding's offer. Based upon that presentation, the special committee
authorized our board of directors and management and Bear Stearns to continue
discussions with CBRE Holding in an attempt to improve their offer. On November
12, 2002, the special committee and its legal and financial advisors held a
meeting by telephone conference call in which Bear Stearns reported to the
special committee that it had communicated with Credit Suisse First Boston,
CBRE Holding's financial advisor, to review the proposed financing for CBRE's
offer.
In November 2002, we were approached by another industry participant
regarding a possible transaction in which we would be acquired, and discussed
entering into a confidentiality agreement.
On December 2, 2002, Carl C. Icahn, High River Limited Partnership and
Barberry Corp. filed a Schedule 13D with the SEC reporting that they
beneficially owned an aggregate of 1,603,700 shares of our common stock, having
acquired 611,200 shares between November 13, 2002 and November 29, 2002.
On December 5, 2002, the special committee held a meeting in New York City
with its legal and financial advisors to discuss the status of the discussions
with CBRE Holding and the other industry participant. The special committee and
its advisors first met with Mr. Farkas, our chairman of the board and chief
executive officer, to understand his perspective on a proposed transaction with
CBRE Holding. Based on this meeting, the special committee then instructed Mr.
Farkas and Bear Stearns to continue to pursue a transaction with CBRE Holding.
The special committee also met with other members of our management, our
general counsel and our outside legal counsel to discuss these matters and
inform them of the special committee's instructions.
During the week of December 16, 2002, Mr. Farkas and Mr. Wirta
participated in general discussions regarding our real estate assets, the
development of these assets and the potential value of these assets to CBRE
Holding or a third party.
On December 17, 2002, our board of directors met to discuss, among other
things, the status of the discussions with both CBRE Holding and another
industry participant. The board was advised that no formal offer had been made
by the other industry participant, and the board discussed some of the possible
advantages and disadvantages of a potential transaction with the other industry
participant. The board determined that, before being given access to any
information about Insignia, the other industry participant should sign a
confidentiality agreement similar to the one signed by CBRE Holding.
On December 24, 2002, Mr. Wirta sent a letter to Mr. Farkas, with copies
to the chairman of the special committee and to its financial advisor,
outlining the status of open items in the discussions between CBRE Holding and
Insignia. Among other things, Mr. Wirta proposed the payment of merger
consideration of $11.00 in cash per share of common stock. With respect to the
real estate assets, Mr. Wirta proposed two alternatives. The first was that
CBRE Holding would acquire these assets as a result of the acquisition of
Insignia and attempt to sell them to a third party simultaneously with the
completion of the acquisition. The second alternative, which he indicated CBRE
Holding preferred, subject to the
20
approval of our special committee, was to sell certain of the assets to a third
party and the remaining assets to a joint venture composed of CBRE Holding
(25%), Mr. Farkas (25%) and two or three third party investors. He proposed
that Mr. Farkas find the third party investors and manage the joint venture. He
also indicated that if the latter alternative were chosen, CBRE Holding would
increase the merger consideration per share of common stock to $11.25 in cash.
On December 27, 2002, the other industry participant entered into a
confidentiality agreement with Insignia, but declined to enter into an
agreement restricting or prohibiting each party's ability to hire the other
party's employees.
On January 9, 2003, there was a meeting in New York City, which was
attended by Mr. Farkas, Adam Gilbert, our executive vice president and general
counsel, Mr. Wirta, Richard Blum and Claus Moller of Blum Capital Partners,
L.P., whose affiliates are the majority stockholders of CBRE Holding, and
representatives of the financial advisor and the legal advisor to the special
committee, our legal advisor and CBRE Holding's financial and legal advisors.
In that meeting, we and CBRE Holding negotiated the terms of CBRE Holding's
most recent proposal and CBRE Holding increased the proposed price to $11.50 in
cash per share of common stock. Mr. Farkas then met separately with CBRE
Holding and after further negotiation CBRE Holding agreed to increase the
proposed merger consideration to $12.00 per share and reaffirmed that the
closing of the merger would not be contingent upon the disposition of the real
estate assets.
On January 10, 2003, Mr. Wirta sent a letter to Mr. Farkas regarding the
disposition of the real estate assets. He proposed that certain of the assets
be sold to a potential third party buyer identified by CBRE Holding and that
the remaining assets be sold to a joint venture to be owned by CBRE Holding,
Mr. Farkas and other investors that he wanted Mr. Farkas to find. Mr. Wirta
indicated in this letter that although CBRE Holding had previously indicated
that it would be interested in owning a 25% interest in such a joint venture,
they now wanted to reduce their investment to a smaller amount in order to
simplify their financing process for the proposed merger. Mr. Wirta explained
that he was pursuing a possible joint venture with Mr. Farkas because Mr.
Farkas and some of his employees were "quite knowledgeable on each of the
assets and [were] likely best positioned to maximize their future value." Mr.
Wirta wrote that while CBRE Holding's merger proposal was not conditioned on
the disposition of our real estate assets, CBRE Holding's objective was to
enter into an agreement providing for such disposition with no uncertainty of
closing. Mr. Wirta sought Mr. Farkas' views on how to structure and finance the
joint venture and requested that Mr. Farkas make a proposal to CBRE Holding
regarding the joint venture.
On January 13, 2003, Mr. Wirta and other members of CBRE Holding's senior
management, CBRE Holding's legal counsel, and its financial advisor and Claus
Moller of Blum Capital Partners met with members of our management, including
Messrs. Farkas, Aston, Uretta and Gilbert, and our outside legal counsel and
the legal and financial advisors to the special committee to discuss and
coordinate the due diligence process. On January 14, 2003, legal counsel for
CBRE Holding began reviewing the materials in the data room.
On January 17, 2003, legal counsel for CBRE Holding distributed a first
draft of the merger agreement.
On January 18-19, 2003, the financial advisor to the other industry
participant reviewed the material in the data room and requested additional
information during the following week.
On January 19, 2003, CBRE Holding and we executed a no-raid agreement, in
which each agreed, with specified exceptions, not to solicit or hire the
employees or independent contractors of the other party. We thereafter expanded
the scope of the information made available to CBRE Holding. From January 20 to
January 31, 2003, CBRE Holding and its accountants met in New York City with
our financial and accounting managers and our independent auditors as part of
their due diligence review of our company. During this period, representatives
of CBRE Holding, its accountants and legal counsel also reviewed materials we
made available in the data room.
On January 27, 2003, our legal counsel distributed to CBRE Holding a
revised draft of the merger agreement that reflected the initial comments of
our counsel as well as counsel to the special committee. On January 31, 2003,
legal counsel to CBRE Holding, our counsel, legal counsel to the special
committee
21
and our general counsel participated in a telephone conference call to discuss
the revised draft of the merger agreement which had been distributed on January
27, 2003.
On February 1, 2003, legal counsel to CBRE Holding distributed a draft
financing commitment letter it had received from Credit Suisse First Boston. On
February 2, 2003, legal counsel to CBRE Holding distributed a further revised
draft of the merger agreement.
From February 3 through February 14, 2003, legal counsel for the other
industry participant was given access to the materials in the data room to
which CBRE Holding had access before it had signed the no-raid agreement.
During a portion of this period, legal counsel for CBRE Holding separately
continued its review of the material in the data room. The other industry
participant never made a definitive offer relating to any transaction to
acquire us or any part of our business.
On February 3, 2003, Mr. Farkas formulated a written proposal regarding
our real estate assets and delivered that proposal to the special committee for
its review, requesting that the special committee authorize the delivery of the
proposal to CBRE Holding. The next day the special committee authorized Mr.
Farkas' sending the proposal to CBRE Holding. The proposal contemplated the
creation of two joint ventures that would purchase all of the real estate
assets from CBRE Holding upon the closing of the merger. With respect to the
first joint venture, Mr. Farkas proposed that he would contribute approximately
$12.15 million in value to the joint venture and undertake to raise an
additional $24.3 million from third party investors between signing a
definitive agreement and the closing of the transaction and that CBRE Holding
generally would retain a 25% interest in the joint venture, subject to the
payment of certain promotes by the joint venture entity. With respect to the
second joint venture, Mr. Farkas proposed that he would contribute
approximately $4.0 million in value to the joint venture and undertake to raise
an additional $11.25 million from third party investors between signing a
definitive agreement and the closing of the transaction and that CBRE Holding
generally would retain a 50% interest in the joint venture. Mr. Farkas'
proposal stated that it was his understanding that while CBRE Holding's $12.00
per share offer to us was not contingent upon a closing of the sale of our real
estate assets at a value acceptable to CBRE Holding, CBRE Holding's offer was
predicated on CBRE Holding reaching a satisfactory level of comfort prior to
execution of a merger agreement that such a sale would occur. Mr. Farkas
retained legal counsel to represent him in connection with this proposal
regarding our real estate assets and began to speak to prospective investors
regarding the investment and the due diligence review that would be required by
the investors.
On February 5, 2003, our legal counsel distributed a further revised draft
of the merger agreement.
On February 6, 2003, a conference call was held among CBRE Holding, Blum
Capital Partners, legal counsel to CBRE Holding, members of our management,
including Messrs. Farkas, Aston and Gilbert, our legal counsel and the legal
and financial advisors to the special committee to discuss outstanding issues
in CBRE Holding's due diligence review. Also on February 6, Mr. Farkas
delivered his proposal regarding our real estate assets to a representative of
Blum Capital Partners, as was previously authorized by the special committee.
On February 7, 2003, a meeting was held in New York City among members of
our management, including Messrs. Farkas, Garrison, Aston and Gilbert, CBRE
Holding, our respective advisors and the advisors to the special committee to
negotiate the latest draft of the merger agreement and the draft financing
commitment letter from Credit Suisse First Boston. At this meeting, we and our
advisors, as well as counsel to the special committee, discussed a number of
significant open issues with CBRE Holding and its representatives, many of
which dealt with the conditions to the receipt of debt financing under the
commitment letter and the conditions to the closing of the merger agreement.
Late in the day on February 7, 2003, in response to a call from the New
York Stock Exchange regarding rumors of a potential transaction between us and
CBRE Holding and a large trading volume and price increase in our common stock,
we issued a press release stating that we were in discussions with CBRE Holding
with respect to a proposed combination of the two organizations. Because of the
uncertainty that this announcement created for our employees and business, we
and CBRE Holding agreed that we would seek to conclude or terminate our
negotiations regarding a potential transaction by February 12, 2003.
22
On February 8, 2003, the special committee met by telephone conference
call with its legal and financial advisors and authorized us to enter into a
confidentiality agreement with High River Limited Partnership, an entity
affiliated with Carl C. Icahn, in order to discuss Insignia and its assets. On
February 9, 2003 we entered into that agreement, and on February 10, 2003, Mr.
Icahn and his affiliates amended their Schedule 13D to disclose the execution
of the confidentiality agreement. On February 11, 2003, representatives of CBRE
Holding and Blum Capital Partners met with representatives of Mr. Icahn to
discuss potential future commercial opportunities between a company controlled
by affiliates of Mr. Icahn and the combined company of Insignia and CBRE
Holding after the proposed merger. At this meeting the parties also discussed
the possibility of High River Limited Partnership or other affiliates of Mr.
Icahn participating in the anticipated debt financing for CBRE Holding's
proposed merger with us. No agreement was reached between the representatives
of Mr. Icahn and CBRE Holding regarding a commercial arrangement, but both
parties indicated that they may explore these opportunities in the future. The
parties did not reach any agreement regarding the participation of affiliates
of Mr. Icahn in the debt financing for the proposed merger. Neither High River
Limited Partnership nor Mr. Icahn ever made a definitive offer relating to any
transaction to acquire us or any part of our business.
During the same period in which we engaged in discussions with Mr. Icahn,
we were contacted by another party who expressed interest in considering a
transaction to acquire all or a portion of our business. We began negotiating a
confidentiality agreement with that party but during the negotiation that party
informed us that it did not intend to pursue any transaction to acquire our
business and discussions with that party were terminated.
On February 8, 2003, the special committee agreed that we would reimburse
Mr. Farkas for up to $375,000 of his expenses incurred in connection with his
developing and negotiating a proposal to acquire our real estate assets if his
proposal was rejected or failed to close for any reason. The special committee
agreed to reimburse Mr. Farkas' expenses because CBRE Holding had requested
that Mr. Farkas make a proposal to acquire all or a portion of our real estate
assets and because the special committee believed that such a proposal from Mr.
Farkas could facilitate reaching a final agreement with CBRE Holding on the
best available terms for us and our stockholders.
On February 9, 2003, Mr. Wirta and Mr. Farkas discussed Mr. Farkas'
proposal relating to our real estate assets. Mr. Wirta informed Mr. Farkas that
CBRE Holding did not wish to invest in the joint venutures proposed by Mr.
Farkas and that CBRE Holding would require a higher level of comfort that the
real estate closing would take place in order to satisfy CBRE Holdings'
financing objectives. Mr. Wirta stated that, in light of CBRE Holding's
financing requirements, CBRE Holding's strong preference would be to sell all
of Insignia's interest in the real estate assets and not retain any joint
venture interest. Mr. Wirta also stated that CBRE Holding would not enter into
the proposed merger agreement unless CBRE Holding had in place a fully financed
and unconditional commitment to purchase Insignia's real estate assets
simultaneously with the completion of the merger so that there would be
certainty that the cash proceeds from the sale of those assets could be used to
help finance the transaction. Mr. Wirta requested Mr. Farkas to endeavor to
make a fully-financed and unconditional offer to acquire all of Insignia's real
estate assets on an "as is, where is" basis. Later that day Mr. Farkas informed
our counsel and counsel to the special committee of the substance of his
conversation with Mr. Wirta.
Also on February 9, 2003, the meetings among members of our management,
including Messrs. Garrison, Gilbert, Jeffrey P. Cohen and Marc W. Levy, our
senior managing director, CBRE Holding, our respective advisors and the
advisors to the special committee continued. Between February 9, 2003 and the
execution of the merger agreement before the opening of business on February
18, 2003, meetings were held every day among members of our management, CBRE
Holding, our respective advisors and the advisors to the special committee in
which the merger agreement, the related documents and the proposed financing
for the merger were discussed. Our management participants in these meetings
included at various times Messrs. Farkas, Aston, Garrison, Gilbert, Uretta,
Cohen and Levy. During these meetings, we and our advisors, as well as the
advisors to the special committee, continued to negotiate with CBRE Holding and
its advisors regarding a number of open issues, including limiting the extent
of the conditions to the merger and the related financing in order to increase
the certainty that the proposed merger would be completed. Among the provisions
that we and our advisors negotiated in an attempt to mitigate the risk that the
proposed merger would not be completed after it was announced was a provision
23
for indemnification for damages that we may incur as a result of a termination
of the merger agreement under certain circumstances, as well as an amendment to
the existing no hire agreement under certain circumstances that would prevent
CBRE Holding from hiring any of our employees for a significant period of time
while we would be permitted during that period to attempt to hire any of its
employees.
On February 10, 2003, the special committee met by telephone conference
call with its legal and financial advisors and received an update on the open
issues that remained on the merger agreement, CBRE Holding's debt financing and
the proposed financing of the real estate assets by a group to be formed by Mr.
Farkas.
On the evening of February 12, 2003, meetings of our board of directors
and the special committee were held in New York City and by telephone
conference call with their respective advisors to discuss the status of
negotiations with CBRE Holding, as well as Mr. Farkas' proposed response to
CBRE Holding's request for a fully-financed and unconditional offer to acquire
all of our real estate assets that did not involve an investment by CBRE
Holding. Mr. Farkas' personal legal counsel for the proposal attended the board
of directors meeting. Mr. Farkas explained that given the approximately 72
hours that CBRE Holding had allotted for him to develop a proposal and deliver
irrevocable financing commitments before the parties' mutually agreed February
12 target date for either concluding or terminating negotiations, and the
inability of prospective investors to do any due diligence on the proposed
investment within that time period, the maximum that he could deliver on an
underwritten, firmly committed basis was $45 million for the real estate
assets, which had a net book value at December 31, 2002 of approximately $67.2
million. He explained that, in addition to the $45 million cash purchase price,
the proposal contemplated that Insignia or its successor would retain certain
management contracts for the real estate assets which provided a stream of
revenues to Insignia that Mr. Farkas believed to have a value of $10 million,
which belief Mr. Farkas stated was based, in part, on the EBITDA multiple at
which CBRE Holding had proposed to acquire us and which he indicated
effectively gave the proposal a $55 million value. Mr. Farkas informed the
board that three institutional investors, each of which, in his view, was
intimately familiar with Insignia, its real estate assets and its management,
declined to participate in the proposal due to the short time period required
by CBRE Holding, which precluded their ability to conduct a due diligence
investigation and to issue underwritten commitments as required by CBRE
Holding. The special committee then informed Mr. Farkas that they approved of
his conveying his proposal to CBRE Holding, but requested that Mr. Farkas
reiterate to CBRE Holding that any asset sale would have to be independent of
the merger transaction and that the proposed terms of the merger transaction
should remain unchanged.
Later that evening, Mr. Farkas and his legal counsel met with
representatives of CBRE Holding and presented the new proposal. Mr. Farkas did
not discuss the merger with CBRE Holding, other than to inform them that he was
not there to negotiate the terms of the merger and to emphasize that his
proposal was independent of the merger, and could not be a condition to the
merger.
On February 13, 2003, CBRE Holding advised Bear Stearns that it had
rejected Mr. Farkas' newest proposal and had determined to retain all of the
real estate assets, again stating that the closing of the merger would not be
contingent upon the disposition of the real estate assets. CBRE Holding also
advised Bear Stearns that CBRE Holding was revising its merger proposal to
reduce the proposed merger consideration to $11.00 in cash per share of common
stock. Bear Stearns reported CBRE Holding's revised proposal to counsel to the
special committee. After discussions among us and our advisors, CBRE Holding
and its advisors, the chairman of the special committee, counsel to the special
committee and representatives of Blum Capital Partners, the parties negotiated
an arrangement pursuant to which we would be permitted to market and sell the
real estate assets on or prior to the completion of the merger and, if the net
cash proceeds received by us for the real estate assets exceeded a specified
amount (generally $45 million, net of expenses, plus any amounts contributed or
transferred to the entities holding these assets prior to completion of the
merger), the excess net cash proceeds would be paid to holders of our common
stock, options and warrants as additional merger consideration up to a maximum
of an additional $1.00 per share of common stock. Thereafter, the special
committee informed Mr. Farkas of the arrangement with CBRE Holding to market
and sell the real estate assets prior to the closing of the merger, and also
advised him that the special committee would request Mr. Farkas to agree that
he and
24
his affiliates would not engage in certain sale or other transactions involving
our real estate assets for a period of five years following the closing of the
merger. Mr. Farkas agreed to do so.
Also on February 13, 2003, the boards of directors of CBRE Holding and CB
Richard Ellis Services met and approved a merger with us in which we would not
be required to dispose of our real estate assets prior to the merger and our
common stockholders would receive $11.00 per share in cash. Also at this
meeting, the boards of directors of CBRE Holding and CB Richard Ellis Services
generally approved the terms of the proposed merger agreement, including a
provision pursuant to which CBRE Holding and CB Richard Ellis Services would
agree to indemnify us with respect to up to $50 million in specified damages
incurred by us if the merger agreement was terminated under certain
circumstances prior to closing.
On February 14, 2003, meetings of our board of directors and the special
committee were held in New York City and by telephone conference call with
their respective advisors. Our board of directors was advised of the rejection
by CBRE Holding of Mr. Farkas' proposal to buy the real estate assets and the
reduction of the proposed merger consideration to $11.00 per share of our
common stock, subject to possible increase. Also at these meetings, the special
committee, after consulting with its advisors, informed our board of directors
that if we were to proceed with any transaction below $12.00 per share of our
common stock, the special committee would require agreements from Mr. Farkas
and CBRE Holding and their affiliates that they would not engage in certain
sale or other transactions involving our real estate assets for a period of
five years following the closing of the merger. The legal advisors to us and
the special committee then described certain provisions of the merger agreement
for the board of directors. Messrs. Farkas, Siegel and Froggatt discussed for
our board of directors the status of their discussions with CBRE Holding
regarding their financial interest in the proposed merger, and in the case of
Messrs. Siegel and Froggatt, their proposed continuing employment following the
merger. Bear Stearns made an initial presentation to our board with respect to
the financial aspects of the proposed transaction. Bear Stearns also discussed
with our board the terms of the financing commitment letter and suggested
changes that could be made. Our board and the special committee indicated that
they wanted our management to continue to negotiate with CBRE Holding in an
effort to resolve open issues so that a final proposal could be presented to
them on Monday, February 17, 2003.
From February 14, 2003 through February 17, 2003, representatives of CBRE
Holding, Blum Capital Partners, Credit Suisse First Boston, us, the special
committee and our respective advisors continued to negotiate the terms of the
merger agreement and the Credit Suisse First Boston financing commitment
letter. In connection with these negotiations and in order to facilitate the
financing of the proposed transaction structure in which we would not be
required to sell our real estate assets at or prior to the closing of the
merger, affiliates of Blum Capital Partners agreed to increase their previously
proposed $100 million capital contribution to CBRE Holding or its subsidiaries
by the amount, if any, by which the net cash proceeds received by us from sales
of real estate assets on or before completion of the merger were less than $45
million.
On February 17, 2003, meetings of our board of directors and special
committee were held in New York City and by telephone conference call with
their respective advisors. The terms of the draft merger agreement, status of
the negotiations and remaining open issues were described for our board.
Representatives of Bear Stearns made a presentation with respect to the terms
of the proposed transaction and delivered Bear Stearns' oral opinion, which was
subsequently confirmed in writing as of February 17, 2003, as to the fairness,
from a financial point of view, of the merger consideration to be offered to
holders of our common stock in the proposed merger. Following a discussion, the
special committee and our board of directors each unanimously determined that
the merger is advisable and in the best interest of our stockholders and
approved the merger, subject to resolving the remaining open points and
completion of satisfactory documentation. Our board adjourned until later in
the day, when it continued its discussion of the proposed transaction. During
the interim period, we, CBRE Holding, our respective advisors and counsel to
the special committee continued to negotiate the remaining open points in the
transaction documents. When our board reconvened, our senior management
reported that the remaining open points had been favorably resolved and the
view was expressed that satisfactory documentation could be executed that
evening. The special committee and our board, with Mr. Froggatt not in
attendance, reaffirmed their earlier approvals of the transaction. Also as of
February 17, 2003, the
25
boards of directors of each of CBRE Holding and CB Richard Ellis Services
unanimously consented to the merger and the terms of the merger agreement and
the related transaction documents.
The merger agreement and related documentation, including voting
agreements by Mr. Farkas and four other members of our management, were
executed before the opening of business on February 18, 2003, and shortly
thereafter, we and CBRE Holding issued a joint press release on February 18,
2003 announcing the merger agreement.
On February 27, 2003, counsel to the special committee informed Mr. Farkas
that, in furtherance of the special committee's objective to maximize the
amount that our stockholders would receive as additional consideration as
contemplated by the merger agreement, he should focus his efforts on developing
a third proposal to acquire the real estate assets, especially given that Mr.
Farkas may be in the best position to pay more for the assets than any other
bidder. In addition to soliciting a proposal from Mr. Farkas, we also began to
solicit proposals from other parties to purchase the real estate assets.
During March and April 2003, we had a series of meetings with a number of
potential purchasers of certain of our real estate-related assets. One of these
potential purchasers was Island Fund I LLC, a newly formed Delaware limited
liability company, the equity interests of which are owned, or are expected to
be owned, by Andrew L. Farkas, James A. Aston, Ronald Uretta and other
investors. Mr. Farkas also owns the managing member of Island Fund and Messrs.
Farkas, Aston and Uretta and Jeffrey P. Cohen are expected to be officers of
Island Fund. We have also had discussions with CBRE Holding concerning these
proposals, and the special committee and their advisors have reviewed and
commented on these proposals. Insignia is continuing to negotiate with Island
Fund and the other proposed purchasers of the real estate-related assets, but
we may not be able to enter into any definitive agreement with respect to a
sale of these assets. Even if we do enter into an agreement, we cannot assure
you that any such agreement will be completed or that such an agreement will
lead to an increase in the per share merger consideration to be received by our
stockholders.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS.
After careful consideration, including discussions with and questioning of
our senior management and their legal and financial advisors, our board of
directors has approved and declared the merger, the merger agreement and the
transactions contemplated by the merger agreement advisable, has declared that
it is in the best interests of our stockholders that we enter into the merger
agreement and complete the merger on the terms and subject to the conditions
described in the merger agreement. Each of the members of the special committee
has voted in favor of the adoption of the merger agreement and the approval of
the merger. Each of the special committee and the board of directors recommend
that our stockholders vote "FOR" the adoption of the merger agreement and the
approval of the merger.
OUR REASONS FOR THE MERGER AND THE RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND
OUR BOARD OF DIRECTORS
In reaching their recommendations, the special committee and our board of
directors considered the following factors, each of which the special committee
and our board of directors believed supported their recommendations of the
merger, which are not listed in any order of importance:
o The common stock merger consideration, not taking into account any
additional consideration that may result from any potential sale of the
real estate-related assets, represents a 31% premium over the $8.37
closing price per share of our common stock on February 6, 2003, the last
full trading day before the public announcement of our discussions with
CBRE Holding concerning the proposed merger, and exceeds the market
prices of our common stock for approximately 10 months prior to that
date. According to the analysis performed by Bear Stearns, the common
stock merger consideration of $11.00 per share also represents a 38%
premium to the average price per share of $7.95 during the 30-day period
preceding February 6, 2003, a 54% premium to the average price per share
of $7.13 during the 90-day period preceding February 6, 2003, a 38%
premium to the average price per share of $7.95 during the 180-day period
preceding February 6, 2003 and a 19.4% premium to the average price per
share of $9.21 during the 360-day period preceding February 6, 2003.
26
o The presentations made by Bear Stearns to the special committee and our
board of directors on February 14, 2002 and February 17, 2003 and Bear
Stearns's oral opinion on February 17, 2003, subsequently confirmed in
writing, to the effect that, based upon the assumptions made, matters
considered and limitations on the review described in the written
opinion, the merger consideration was fair, from a financial point of
view, to the holders of our common stock. The full text of Bear Stearns's
written opinion is attached as Appendix B to this proxy statement. We
encourage you to read Bear Stearns's opinion in its entirety for a
description of the assumptions made, matters considered and limitations
on the review undertaken.
o The fact that our board of directors delegated broad powers to the
special committee in conducting its evaluation of CBRE Holding's
acquisition proposal and considering and pursuing other strategic
alternatives to a transaction with CBRE Holding and that, to advise it in
connection with these matters, the special committee engaged Bear Stearns
as its independent financial advisor and Dechert LLP as its independent
legal advisor. The special committee and its advisors took an active
role, together with our board of directors and management, in negotiating
the terms and conditions of the merger agreement.
o The merger consideration and the other terms and conditions of the
merger agreement were the result of arm's-length negotiations with CBRE
Holding and its advisors, on the one hand, and our board of directors,
the special committee and the special committee's advisors, on the other
hand.
o The special committee's and our board of directors' belief that, after
extensive negotiations with CBRE Holding and its representatives, we have
obtained the highest price per share that CBRE Holding is willing to pay.
o The likelihood that a third party would not be willing to offer a higher
price than CBRE Holding in light of:
(1) the fact that, between February 7, 2003, when we publicly
announced that we were having discussions with CBRE Holding
concerning the proposed merger, and February 17, when we executed
the merger agreement, only three parties, in addition to CBRE
Holding, approached us regarding a strategic alliance or a
possible sale of all or part of our business, of which we had
substantive discussions with only one company and that company did
not make a definitive offer relating to any such transaction; and
(2) the fact that, between the February 18, 2003 public announcement
of the execution of the merger agreement and the date of this
proxy statement, we did not receive any unsolicited bona fide
offers from any third party regarding a potential acquisition
transaction.
o The terms of the merger agreement and related agreements, including
o our ability to provide information to, and negotiate with, third
parties regarding alternative transactions under specified
circumstances and our ability to terminate this agreement if we
accept a superior proposal upon the terms described in the merger
agreement,
o the potential for the holders of our common stock to receive up to an
additional $1.00 per share if we are able to sell certain of our real
estate-related assets and realize from these sales more than a
specified amount of net cash proceeds at or prior to the time of the
merger (generally $45 million subject to increase for additional
investments made by us in these assets),
o the obligation of CB Richard Ellis Services to seek alternative
financing under specified circumstances,
o the agreement of the CBRE Companies to indemnify us against specified
losses and to not solicit or hire any of our employees for 18 months,
in either case if the merger agreement is terminated under specified
circumstances related to the failure to obtain regulatory consents or
financing in connection with the merger, and
27
o The special committee's and our board of directors' knowledge of our
business, assets, financial condition and results of operations and
prospects and of the real estate services industry in which we
operate. In particular, the special committee and our board of
directors concluded in voting for the merger that the certainty of
the cash consideration to be received by our stockholders in the
merger was preferable to continuing to own shares of our common
stock. They made this determination after taking into account the
significant adverse effect that the general slowdown in economic
activity since early 2001 has had on the performance of our business
because of reduced commercial real estate leasing and sales, the
stock market's reaction to the general economic slowdown and our
performance, the uncertainty as to the length of the current
slowdown, the potential for similar future slowdowns, and the
resultant overall near-term and long-term prospects for our business
and the industry in which we operate.
In the course of the deliberations of the special committee and our board
of directors, they also considered a number of negative factors related to the
merger, including the following, which are not listed in any order of
importance:
o The special committee was aware of the interests that many of our
executive officers and directors have in the merger in addition to their
interests as holders of our common stock, which interests are generally
described in "--Interests of Executive Officers and Directors in the
Merger." The special committee considered these interests in its
evaluation of the merger and took into account the possibility that the
merger consideration might have been lower as a result of them.
o The fact that the merger is subject to a financing condition and the
belief of the special committee and our board of directors that the
financing contingency decreases the likelihood that the merger will be
consummated.
o The likelihood that although some stockholders may prefer to receive
cash for their shares, others may prefer to continue as stockholders of
Insignia. If the merger is consummated, our stockholders will receive
cash for their shares, and thus it will no longer be possible for our
stockholders to maintain an equity ownership interest in Insignia.
o The fact that the receipt of cash in the merger will be a taxable
transaction to our stockholders.
o The fact that the merger agreement restricts our ability to seek an
alternative transaction and would under certain circumstances require us
to pay CB Richard Ellis Services a fee of $7 million if we were to
terminate the merger agreement in order to accept an alternative
transaction, although the special committee and our board believe that
the merger agreement provides us with sufficient ability to negotiate
such a transaction and that the fee is not so great as to discourage
third parties from proposing alternative transactions that may be more
beneficial to our stockholders.
The preceding information regarding the information and positive and
negative factors considered by the special committee and our board of directors
is not, and is not intended to be, exhaustive. Moreover, in view of the wide
variety of factors considered in connection with the evaluation of the merger,
the special committee and our board of directors did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to
the specific factors they considered in reaching their determinations.
REASONS OF CBRE HOLDING FOR ENGAGING IN THE MERGER
CBRE Holding has indicated to us that its reasons for engaging in the
merger are the following:
o CBRE Holding will benefit from our strength in a number of key
commercial centers where we currently have a stronger presence than CBRE
Holding, including New York, London and Paris.
o The combined business will be able to provide a broader range of
services to its clients in regions around the world.
28
o CBRE Holding expects to expand its base of clients to include many of
the major investors and corporations with which we historically have had
relationships.
o The combined business will be able to combine the most talented
commercial real estate services personnel from CBRE Holding and Insignia,
which will allow the combined business to better serve its clients.
o CBRE Holding expects to obtain significant costs savings in connection
with the combination of the two businesses. During 2002, we incurred
costs related to (1) the compensation of our senior management personnel
that CBRE Holding has indicated to us will not be joining CBRE Holding
after the merger, (2) administrative and support costs associated with
those management personnel and (3) human resources, legal, accounting and
other administrative functions that CBRE Holding has indicated to us
overlap with similar functions at CBRE Holding. CBRE Holding has
indicated to us that it expects to eliminate these costs as part of the
integration plan it is developing in connection with the combination of
the two businesses.
OPINION OF BEAR, STEARNS & CO. INC.
Under a letter agreement dated as of October 22, 2002, the special
committee of our board of directors engaged Bear Stearns to act as its
financial advisor in connection with a possible transaction with the CBRE
Companies. The special committee engaged Bear Stearns as its financial advisor
based on Bear Stearns' experience and expertise in similar transactions. Bear
Stearns, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with transactions and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
At the February 14, 2003 meeting of our board of directors and the special
committee of our board of directors, Bear Stearns made an initial presentation
for our board with respect to the financial aspects of the proposed
transaction. At the February 17, 2003 meeting of our board of directors and the
special committee, Bear Stearns delivered its oral opinion, subsequently
confirmed in writing, that, as of February 17, 2003, and based upon and subject
to the assumptions, qualifications and limitations set forth in its opinion,
$11.00 in cash per share of our common stock is fair, from a financial point of
view, to our stockholders.
We have attached as Appendix B to this proxy statement the full text of
Bear Stearns' written opinion and urge you to read the opinion in its entirety.
The opinion sets forth the assumptions made, some of the matters considered and
qualifications and limitations on the review undertaken by Bear Stearns and is
incorporated into this proxy statement by reference. The summary of Bear
Stearns' opinion set forth below is qualified in its entirety by reference to
the full text of the opinion. In reading the discussion of the fairness opinion
set forth below, you should be aware that Bear Stearns' opinion:
o was provided to our board of directors and the special committee of our
board of directors for their benefit and use;
o did not constitute a recommendation to our board of directors or the
special committee in connection with the merger;
o does not constitute a recommendation to any of our stockholders as to
how to vote in connection with the merger;
o did not address our underlying business decision to pursue the merger;
and
o did not express any opinion as to the price or range of prices at which
the shares of our common stock would trade subsequent to the announcement
of the merger.
Although Bear Stearns evaluated the fairness, from a financial point of
view, of $11.00 in cash per share of our common stock to our stockholders, the
common stock merger consideration itself was determined by us and the CBRE
Companies through arms-length negotiations. Bear Stearns provided advice to us
during the course of such negotiations. We did not provide specific
instructions to, or place any limitations on, Bear Stearns with respect to the
procedures to be followed or factors to be considered by it in performing its
analyses or providing its opinion.
29
Bear Stearns Opinion
In connection with rendering its opinion, Bear Stearns, among other
things:
o reviewed the merger agreement;
o reviewed our annual reports to shareholders and annual reports on Form
10-K for the years ended December 31, 2000 through 2001, our quarterly
reports on Form 10-Q for the periods ended March 31, June 30 and
September 30, 2002, and our reports on Form 8-K for the two years ended
February 17, 2003;
o reviewed certain operating and financial information relating to our
business and prospects, including estimates for the year ending December
31, 2002 and the budget for the year ending December 31, 2003, provided
to Bear Stearns by our management;
o reviewed asset sales projections prepared by our management for certain
of our real estate development and co-investment projects;
o reviewed projections prepared by our management for a minority-owned but
consolidated apartment complex, as it is currently operated, assuming a
variety of scenarios under which existing rent regulation would cease to
apply;
o reviewed assets held by our two private equity funds that invest
primarily in real estate debt securities, and reviewed estimated market
values for these funds as provided by our management dated as of December
31, 2002 and December 5, 2002, and by a third party investment bank as of
January 31, 2003;
o reviewed an appraisal received in connection with our acquisition of St.
Thomas, United States Virgin Islands dock front and submerged property,
which we refer to in this section of the proxy statement as "Nautica," in
July 2002, which appraisal we refer to as the "Nautica Appraisal";
o met with certain members of our senior management to discuss our
business, operations, historical and projected financial results, future
prospects and the development plans for certain real estate assets;
o reviewed the historical prices, trading multiples and trading volume of
our common stock;
o reviewed publicly available financial data, stock market performance
data and trading multiples of companies which Bear Stearns deemed
generally comparable to us;
o reviewed the terms of recent mergers and acquisitions of companies which
Bear Stearns deemed generally comparable to us and the merger;
o discussed with our management the letter of intent dated February 6,
2003 between us and Prudential Long Island Realty regarding the purchase
of our wholly-owned subsidiary, Insignia Residential Group, which is also
the sole owner of Insignia Douglas Elliman LLC;
o performed discounted cash flow analyses based on the real estate
investment projections furnished to Bear Stearns by us; and
o conducted such other studies, analyses, inquiries and investigations as
Bear Stearns deemed appropriate.
In arriving at its fairness opinion, Bear Stearns did not perform or
obtain any independent appraisal of our assets or liabilities, nor was Bear
Stearns furnished with any such appraisals, other than the Nautica Appraisal.
Bear Stearns was informed that we do not have current appraisals for any of our
investments or interests in real estate or real estate owning entities, other
than the Nautica Appraisal. Bear Stearns does not appraise real estate and,
accordingly, the fairness opinion is necessarily limited in that respect. Bear
Stearns assumed that the merger will be consummated in a timely manner and in
accordance with the terms of the merger agreement without any limitations,
restrictions, conditions, amendments or modifications, regulatory or otherwise,
that collectively would have a material effect on us.
30
Bear Stearns relied upon and assumed, without independent verification,
the accuracy and completeness of the financial and other information, including
without limitation the projections, provided to it by us. With respect to our
projected financial results, Bear Stearns relied on representations that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of our senior management as to our expected future
performance. With respect to the estimates of market value for our two private
equity funds that invest primarily in real estate debt securities, Bear Stearns
assumed that they have been reasonably prepared on bases reflecting the best
then available estimates and judgments of the investment banker from which
inquiry was made or our senior management, as the case may be, as to the then
current market value of these funds. With respect to the projections for our
real estate-related assets, which we expect to attempt to sell prior to the
closing of the merger, Bear Stearns relied on our management's representations
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of our senior management as to the expected
future proceeds from, and timing of, such sales. With respect to projections
related to a minority-owned but consolidated apartment complex, at our
management's direction and because of the speculative nature of the plan for
terminating existing rent regulations and achieving the forecasted projections,
Bear Stearns reviewed a variety of scenarios for such termination and did not
assign any particular weighting to the likelihood of any particular set of
projections. With respect to the Nautica Appraisal, Bear Stearns assumed that
the appraisal was reasonably prepared on bases reflecting the best then
available estimates and judgments of the appraiser as to the value of Nautica.
Bear Stearns has not assumed any responsibility for the independent
verification of any of this information or of the projections provided to it,
and Bear Stearns further relied upon the assurances of our senior management
that they are unaware of any facts that would make the information, projections
or appraisal provided to it incomplete or misleading.
Summary of Analyses
The following is a brief summary of the material analyses performed by
Bear Stearns and presented to our board of directors and the special committee
of our board of directors in connection with rendering its fairness opinion.
Some of the summaries of financial analyses include summary data including
ranges of implied equity value per share of our common stock. In order to fully
understand the financial analyses used by Bear Stearns, the summary data must
be read together with the full text of the analyses. The summary data do not
represent a complete description of the financial analyses.
In performing its analysis, Bear Stearns made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Bear Stearns, us and the CBRE Companies. Any estimates contained in the
analysis performed by Bear Stearns are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable
than suggested by Bear Stearns' analysis. Additionally, estimates of the value
of businesses or securities do not purport to be appraisals or to reflect the
prices at which these businesses or securities might actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial
uncertainty. In addition, as described above in "--Reasons for the Merger and
the Recommendations of the Special Committee and Our Board of Directors," Bear
Stearns' opinion was among many factors taken into consideration by our board
of directors and the special committee in making their determination to approve
the merger and the merger agreement.
Comparison of Unadjusted Common Stock Merger Consideration to Unaffected
and Historical Stock Price
Bear Stearns compared the unadjusted common stock merger consideration of
$11.00 per share of our common stock to the closing market price of our common
stock as of February 6, 2003, which was the day before we and the CBRE
Companies disclosed we were in merger discussions, and average closing market
prices for the 30 days, 90 days, 180 days and 360 days preceding February 6,
2003. The unadjusted merger consideration represents approximately a 31%
premium to the February 6, 2003 closing price of $8.37, a 38% premium to the
30-day average of $7.95, and a 54% premium to the 90-day average of $7.13. The
table below summarizes the analysis.
31
AVERAGE PREMIUM TO AVERAGE HIGH LOW
--------- -------------------- ---------- ----------
Price at 2/6/03 .......... $ 8.37 31.4% $ 8.37 $ 8.37
30 Days .................. 7.95 38.4% 8.46 7.25
90 Days .................. 7.13 54.3% 8.46 5.45
180 Days ................. 7.95 38.4% 10.25 5.45
360 Days ................. 9.21 19.4% 11.65 5.45
Commercial Real Estate Services, or "CRES," Valuation
Calculation of Insignia CRES Enterprise Value at Common Stock Merger
Consideration. Bear Stearns calculated the enterprise value for Insignia at the
common stock merger consideration of $11.00 in cash per share, which we refer
to in this section as the "Enterprise Value," by adding the net equity value of
our common stock and our total debt, the liquidation value of our preferred
stock and certain of our other liabilities estimated to be outstanding as of
December 31, 2002 and subtracting our cash estimated to be outstanding as of
December 31, 2002. The cash balance includes restricted cash that secures loan
notes related to our acquisitions of Richard Ellis Group Limited and St.
Quintin Limited and restricted cash held on certain of our real estate assets
and was adjusted to include cash proceeds from a January 2003 sale of one of
our real estate assets. Bear Stearns calculated the Enterprise Value
attributable to our Commercial Real Estate Services by (1) subtracting the
proposed value of our residential real estate services business based on the
terms of the February 6, 2003 letter of intent between us and Prudential Long
Island Realty regarding the purchase of our wholly-owned subsidiary, Insignia
Residential Group, which is also the sole owner of Insignia Douglas Elliman
LLC, and (2) subtracting the gross book value of our real estate principal
investment activities, which we refer to in this section of the proxy statement
as the "Insignia Real Estate," estimated by our management as of December 31,
2002. The gross book value of the Insignia Real Estate was adjusted to exclude
the book value attributable to a real estate asset sold in January 2003.
Calculation of Commercial Real Estate Services Earnings Before Interest,
Taxes, Depreciation, and Amortization, or "EBITDA." Bear Stearns calculated our
CRES EBITDA by excluding earnings from our residential real estate services
business, which we sold in March 2003, and our financial services business,
which is directly related to Insignia Real Estate, from our total service
EBITDA.
Bear Stearns calculated multiples of our Enterprise Value attributable to
our CRES to our actual CRES EBITDA for the year ending December 31, 2000 and
2001 and our estimated CRES EBITDA for the fiscal years ending December 31,
2002 and 2003. Bear Stearns then compared these multiples to multiples observed
in the Comparable Company Analysis and Comparable Transaction Analysis
described below.
Comparable Company Analysis. Bear Stearns analyzed selected historical and
budgeted operating information provided by our management, stock price
performance data and valuation multiples for our CRES and compared this data to
that of certain publicly traded companies deemed by Bear Stearns to be
generally comparable to us. Bear Stearns utilized the earnings forecasts for
these companies from publicly available data, First Call and select Wall Street
equity research reports.
Bear Stearns reviewed, among other things, the comparable companies' (1)
enterprise value/2001 actual EBITDA, and (2) enterprise value/2002 estimated
EBITDA. The multiples were based on closing stock prices for the comparable
companies on February 6, 2003. Based on the range of values for the Insignia
Real Estate, the implied range of 2001 actual EBITDA multiples and 2002
estimated EBITDA multiples for CRES at the common stock merger consideration of
$11.00 in cash per share were consistent with the range of multiples observed
for the comparable companies.
32
COMPARABLE TRADING MULTIPLES
ENTERPRISE ENTERPRISE VALUE/2002E
VALUE/2001A EBITDA EBITDA
-------------------- -----------------------
Trammell Crow Co. ..................... 4.9x 6.9x
Jone Lang LaSalle Inc. ................ 4.1 5.1
--- ---
Average ............................... 4.5x 5.8x
Insignia @ Purchase Price(1) .......... 4.9x 5.5x
----------
(1) Enterprise Value and EBITDA are for CRES only. See "Calculation of
Insignia CRES Enterprise Value at Common Stock Merger Consideration" and
"Calculation of Commercial Real Estate Services Earnings Before Interest,
Taxes, Depreciation and Amortization, or "EBITDA."
Bear Stearns noted that private companies predominate in the real estate
services industry, and comparable public companies are limited: the two
comparable companies reviewed, Trammell Crow Co. and Jones Lang LaSalle Inc.,
do have commercial leasing and property sales segments, but also provide other
real estate services not offered by us and operate in other business segments
in which we do not operate.
Comparable M&A Transaction Analysis. Bear Stearns analyzed a number of
merger and acquisition transactions involving publicly traded, real estate
services companies. Bear Stearns reviewed, among other things, the comparable
companies' Enterprise Value at Purchase Price/Last Twelve Months
(pre-acquisition) EBITDA, or "LTM EBITDA." In the past three years, the number
of transactions has been limited. The most recent transaction was completed in
mid-2001 at 4.3x EV/LTM EBITDA. The second most recent transaction, which was
the leveraged buyout of CB Richard Ellis Services, was completed in July 2001
at 5.1x EV/LTM EBITDA at the announcement date and at 5.8x EV/LTM EBITDA at the
closing date. Based on the range of values for the Insignia Real Estate, the
implied range of 2001 actual EBITDA multiples and 2002 estimated EBITDA
multiples for CRES at the common stock merger consideration of $11.00 in cash
per share were consistent with the range of multiples observed for the
comparable M&A transactions.
COMPARABLE M&A TRANSACTION
PURCHASE
DATE ANNOUNCED TARGET/ACQUIROR PRICE/LTM EBITDA
-------------------------- ------------------------------------------------------- -----------------
08/28/01 Groupe Bourdais / Insignia Financial Group, Inc. 4.3x
11/13/00 CB Richard Ellis Services, Inc. / BLUM CB Corp. 5.8(1)
5.1(2)
05/28/99 Douglas Elliman / Insignia Financial Group, Inc. 5.0(3)
10/22/98 Jones Lang Wootton / LaSalle Partners, Inc. 7.8(4)
03/05/99 St. Quintin Holdings / Insignia Financial Group, Inc. 6.0
08/31/98 The Compass Group / LaSalle Partners, Inc. NA
10/20/97 Richard Ellis / Insignia Financial Group, Inc. 10.0(5)
06/17/96 Edward S. Gordon / Insignia Financial Group, Inc. 5.3
------------------------------------------------------------------------------------------------
Average: 1999 - Present 5.8x
Average: 2001 - Present 4.9
------------------------------------------------------------------------------------------------
Insignia CRES @ Purchase Price 5.5x
------------------------------------------------------------------------------------------------
(1) Based on twelve months ended 6/30/01 EBITDA.
(2) Based on fiscal year 2000 EBITDA.
(3) Acquisition multiple was 5.8x after taking into account $10 million
earn-out, which was expected to be paid.
(4) Based on EBITDA for the 9 months 9/30/98 annualized.
(5) Acquisition multiple was 8.0x after considering expected increased EBITDA
from incremental business in New York from Richard Ellis clients.
33
Review of Insignia Real Estate
REVIEW OF INSIGNIA REAL ESTATE
ET BOOK VALUE
(IN MILLIONS)
---------------
@
12/31/02 LOW VALUATION HIGH VALUATION
(1) ESTIMATES ESTIMATES
--------------- --------------- ---------------
Consolidated Properties .................... $ 21.7 $ 2.4 $ 54.9
Co-Investment Projects ..................... 21.0 21.0 25.7
Development Projects ....................... 11.7 11.4 13.3
Private Equity Funds ....................... 16.1 15.3 17.3
Less: Consolidated Other Assets(1) ......... ( 3.3)
------- ------ -------
INSIGNIA REAL ESTATE ....................... $ 67.2 $ 50.0 $ 111.2
----------
(1) Includes other net assets of consolidated properties of $3.3 million,
which are included in consolidated Insignia assets.
Bear Stearns reviewed the Insignia Real Estate based on a variety of
methodologies including discounting our management's estimated timing and
projected sales prices for the anticipated asset sales at a range of discount
rates, third party appraisals, if available, and estimated current market
values for liquid securities. Insignia Real Estate is comprised of Consolidated
Properties, Co-investment Projects, Development Projects, and Securities Funds,
as detailed below.
The Consolidated Properties include Nautica, a minority-owned but
consolidated apartment complex, and a retail property in Norman, Oklahoma. The
reference range for Nautica considered scenarios including assumption of
ownership by the mortgage holder, as well as continued ownership of the
unimproved property by an equity holder. For the referenced apartment complex,
Bear Stearns reviewed a number of scenarios including no change in current
rents and assuming conversion of existing regulated rents to market rents. For
the retail property reference range, Bear Stearns discounted at a range of
discount rates the projected sales price for the retail property.
The Co-investment Projects consist primarily of our minority equity
investments in 28 properties. For the reference range, Bear Stearns discounted
at a range of discount rates the cash flows to us resulting from the projected
sales, capital calls and operating cash flows of the properties.
The Development Projects comprise four minority equity positions in
projects either completed or under construction and one wholly-owned land
parcel. For the reference range, Bear Stearns discounted at a range of discount
rates the cash flows to Insignia resulting from the projected sales, capital
calls and operating cash flows of the properties, as well as book value for the
wholly owned land parcel.
The Securities Funds represent equity interests owned by Insignia in two
private equity funds that own real estate debt securities. The reference range
was constructed after reviewing the net equity value to us based on a
mark-to-market estimate from a third party investment bank and the net equity
value to us based on a mark-to-market estimate from us, calculated after
accounting for incentive equity allocations.
Bear Stearns' valuation of the Insignia Real Estate assumed an orderly
negotiated sale process and did not attempt to assign values that could be
achieved in a limited time sale process such as the one we are permitted to
conduct prior to the closing of the merger under the terms of the merger
agreement. As a result, values actually obtained for Insignia Real Estate may
be lower than Bear Stearns' valuation.
34
Summary Reference Range for Insignia
Bear Stearns reviewed a theoretical value range for Insignia by applying
to applicable EBITDA a range of trading and transaction multiples from 5.0x to
6.5x Enterprise Value attributable for CRES/CRES EBITDA, adding a value of
our residential real estate services business based on discussions with our
management regarding a letter of intent dated February 6, 2003 between the
Company and Prudential Long Island Realty regarding the purchase of our wholly
owned subsidiary, Insignia Residential Group, which is also the sole owner of
Insignia Douglas Elliman LLC, and adjusting the resulting sums for a reference
range for the Insignia Real Estate from $50.0 million to $111.2 million. Bear
Stearns then adjusted these sums for our cash, certain liabilities, debt and
preferred stock to arrive at a reference range for our common equity. The
reference range for the Insignia Real Estate represents net equity values after
property level non-recourse debt. The December 31, 2002 net book equity value
was adjusted to exclude the net book value attributable to one of our real
estate assets sold in January 2003. The budgeted CRES financial results for us
for the period from December 31, 2002 to December 31, 2003 were provided to
Bear Stearns by our management and represent revenue growth and operating
margins believed to be achievable by our management at the time the Bear
Stearns fairness opinion was rendered, assuming the merger agreement was not
entered into and no other comparable transaction was entered into by us.
Based upon the calculations described above, our theoretical value range
was $9.49 to $14.20 per share of our common stock.
Other Analyses and Considerations. Bear Stearns conducted other analyses
as it deemed appropriate, including reviewing our historical and estimated
financial and operating performance, reviewing the pro forma balance sheet data
for the combined company, analyzing selected Wall Street equity research
reports on, and earnings and other estimates for real estate services
companies, reviewing and comparing certain financial data and valuation
parameters for us and reviewing available information regarding the
institutional holdings of our common stock. In addition, Bear Stearns examined
publicly available information relating to trends in the real estate services
industry.
While Bear Stearns has performed discounted cash flow analysis on certain
real estate investment projections and projected sales proceeds associated with
them, Bear Stearns did not perform a discounted cash flow analysis on our
entire company as the inherent unpredictability of the industry's earnings
causes our management to not forecast real estate services earnings beyond
2003.
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analyses and the application of those methods to the
particular circumstances involved. Such an opinion is therefore not readily
susceptible to partial analysis or summary description, and taking portions of
the analyses set out above, without considering the analysis as a whole, would,
in the view of Bear Stearns, create an incomplete and misleading picture of the
processes underlying the analyses considered in rendering the Bear Stearns
opinion. Bear Stearns did not form an opinion as to whether any individual
analysis or factor, whether positive or negative, considered in isolation,
supported or failed to support the Bear Stearns opinion. In arriving at its
opinion, Bear Stearns considered the results of all of its analyses and did not
attribute particular weight to any one analysis or factor. The analyses
performed by Bear Stearns, particularly those based on estimates and
projections, are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. These analyses were prepared solely as part of Bear Stearns'
analyses of the fairness, from a financial point of view, of $11.00 in cash per
share of our common stock to our stockholders.
Pursuant to the terms of our engagement letter with Bear Stearns, we have
agreed to pay Bear Stearns a total fee of 0.625% of the aggregate value of the
consideration paid in the merger to holders of our common stock, preferred
stock and options and warrants to purchase our common stock and the amount of
our debt or preferred stock assumed or acquired in the merger, $100,000 of
which became payable on signing the engagement letter, $500,000 of which became
payable upon the delivery of the Bear Stearns opinion and the balance of which
will become payable upon consummation of the merger. In addition, we have
agreed to reimburse Bear Stearns for all reasonable out-of-pocket expenses
incurred by Bear Stearns in connection with its engagement and the merger,
including reasonable fees and
35
disbursements of its legal counsel. We have also agreed to indemnify Bear
Stearns against certain liabilities in connection with its engagement,
including certain liabilities under the federal securities laws.
The compensation proposed by Bear Stearns was negotiated at arms-length
between the special committee and its counsel and Bear Stearns after the
special committee received proposals from two other prominent investment banks.
Bear Stearns agreed that a portion of the compensation would be contingent upon
completion of the merger, which is customary in transactions of this nature. In
evaluating Bear Stearns' analysis and conclusions with respect to the fairness
of the merger consideration, the special committee considered the contingent
nature of Bear Stearns' compensation, but concluded that it was standard
practice in acquisition transactions of this nature and did not impair Bear
Stearns' independence or objectivity.
Bear Stearns may actively trade our equity and debt securities for its own
account and for the account of its customers and, accordingly, may at any time
hold a long or short position in these securities.
OTHER RELATED AGREEMENTS
VOTING AGREEMENTS. Each of Andrew L. Farkas, who is our chief executive
officer and one of our directors, and Frank M. Garrison, Adam B. Gilbert, James
A. Aston and Ronald Uretta, each of whom is one of our executive officers,
entered into a voting agreement, dated February 17, 2003, with CB Richard Ellis
Services and Insignia. The voting agreements bind these individuals in their
capacity as stockholders of Insignia and do not prohibit them from acting in
accordance with their fiduciary duties as our officers or directors. Under the
voting agreements, each of these individuals has agreed to vote, or take all
actions necessary to cause to be voted, at the special meeting or any other
meeting called with respect to the merger, all the shares of Insignia held by
him of record or beneficially (a) in favor of approval of the merger, the
merger agreement, the other transactions contemplated thereby and any other
matter which would reasonably be expected to facilitate the merger and (b)
against any other acquisition proposal. Each of these individuals, in his
capacity as a stockholder, has also agreed not to solicit or cause the
solicitation of other stockholders of Insignia against the merger and the
merger agreement or in favor of any other acquisition proposal. Each voting
agreement further provides that these individuals may not transfer their shares
until the expiration of each such voting agreement, except for a specified
amount that may be transferred as a bona fide gift. Each voting agreement will
expire as of the earliest to occur of the valid termination of the merger
agreement, the withdrawal by our board of directors or the special committee of
its recommendation of the merger or the consummation of the merger. The
aggregate amount of outstanding shares of our common stock subject to the
voting agreements represented on the record date approximately % of the
outstanding shares of our common stock entitled to vote at the special meeting.
NO-RAID AGREEMENT. In connection with the negotiation of the merger
agreement, we entered into a "no raid agreement" dated January 19, 2003, with
CBRE Holding, which was amended on February 10, 2003. The no raid agreement, as
amended, prohibits the parties from hiring or engaging as employees or
independent contractors or from soliciting for employment or engagement as an
independent contractor, any employee or independent contractor of the other
party for a period of six months, or from soliciting for employment or
engagement as an independent contractor of the other party for a period of 12
months, in each case, commencing on the date one party first notifies the other
party that it is terminating the merger agreement in accordance with its terms.
CBRE Holding, however, may hire an employee or engage as an independent
contractor employees or independent contractors who provide consulting services
for Insignia in the New Jersey market. If the merger agreement is terminated
under limited circumstances, many of the terms of the no raid agreement
automatically will be amended. See "The Merger Agreement--Termination Fee;
Indemnification; Amendment of No Raid Agreement."
AGREEMENT WITH PREFERRED STOCKHOLDER. In connection with the merger
agreement, we entered into a consent agreement, dated February 14, 2003, with
Madeleine L.L.C., the record holder of our series A convertible preferred stock
and series B convertible preferred stock, in which Madeleine agreed to the
conversion of each share of series A convertible preferred stock and each share
of series B convertible preferred stock held by it of record or beneficially,
upon the consummation of the merger, into the right to receive the stated value
of $100.00 per share plus a sum equal to all compound dividends accrued and
36
unpaid with respect to the preferred stock until the date of the merger, if
any. Madeleine also agreed not to convert the preferred stock into shares of
our common stock unless prior to such conversion the price per share of our
common stock on the New York Stock Exchange after February 14, 2003 and prior
to such conversion equals or exceeds the applicable conversion price of the
series A convertible preferred stock, which was $14.00 per share as of the
record date, or the series B convertible preferred stock, which was $15.40 per
share as of the record date. Madeleine further agreed not to transfer the
preferred stock until the expiration of the consent agreement. The consent
agreement will expire upon termination of the merger agreement or, at the
election of the holders of our preferred stock, on or after July 15, 2003, if
the merger has not been consummated by that date. According to a Schedule 13D/A
filed with the Securities and Exchange Commission by Stephen Feinberg on June
28, 2002, Madeleine holds the preferred stock on behalf of Cerberus Partners,
L.P., Cerberus Institutional Partners, L.P. and Cerberus International, Ltd.,
private investment funds which are managed by Mr. Feinberg. Mr. Feinberg has
sole voting and investment authority over such shares.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of our board of directors with respect
to the merger agreement and the merger, you should be aware that some of our
executive officers and the members of our board of directors have interests in
the merger that are in addition to, or different from, the interests of our
stockholders generally and that create potential conflicts of interest. These
interests are described below.
STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK AWARDS. The merger agreement
provides that, immediately prior to the effective time of the merger, (a) all
outstanding options and warrants, whether vested or unvested, will be canceled
and will represent the right to receive a cash payment, without interest, less
any applicable withholding taxes, equal to the excess, if any, of the common
stock merger consideration over the per share exercise price of the option or
warrant, multiplied by the number of shares of common stock subject to the
option or warrant, and (b) all outstanding restricted stock awards will be
canceled and will represent the right to receive a cash payment, without
interest, less any applicable withholding taxes, equal to the common stock
merger consideration multiplied by the number of shares of common stock subject
to such awards,
The following table summarizes the number of shares of our common stock
subject to vested and unvested options, warrants and restricted stock awards
that are currently held by each executive officer and director, as well as the
aggregate amount of cash to which each executive officer and director would be
entitled as of the date of this proxy statement, assuming that the merger
consideration payable per share of our common stock is $11.00:
SHARES OF COMMON SHARES OF COMMON SHARES OF COMMON
STOCK SUBJECT TO STOCK SUBJECT TO STOCK SUBJECT TO
VESTED OPTIONS, UNVESTED OPTIONS, ALL OPTIONS,
WARRANTS AND WARRANTS AND WARRANTS AND AGGREGATE
NAME OF EXECUTIVE OFFICER OR RESTRICTED STOCK RESTRICTED STOCK RESTRICTED STOCK CONSIDERATION TO BE
DIRECTOR AWARDS AWARDS (1) AWARDS RECEIVED
------------------------------ ------------------ ------------------- ------------------ --------------------
James A. Aston ............... 200,000 -- 200,000 $ 600,000
Jeffrey P. Cohen ............. -- -- -- --
Robert J. Denison ............ 27,000 -- 27,000 $ 77,560
Andrew L. Farkas ............. 1,000,000 -- 1,000,000 $3,000,000
Robin L. Farkas .............. 27,000 -- 27,000 $ 77,560
Alan C. Froggatt ............. 11,794 2,000 13,794 $ 45,358
Frank M. Garrison ............ 200,000 100,000 300,000 $ 631,000
Adam B. Gilbert .............. -- -- -- --
Robert G. Koen ............... 27,000 -- 27,000 $ 77,560
Stephen M. Ross .............. 2,000 -- 2,000 $ 2,560
Stephen B. Siegel ............ -- -- -- --
Ronald Uretta ................ 200,000 -- 200,000 $ 600,000
H. Strauss Zelnick ........... 27,000 -- 27,000 $ 77,560
----------
(1) The merger agreement provides that all unvested options, warrants and
restricted stock awards will vest immediately prior to the effective time
of the merger.
37
If the sale of any of our real estate-related assets results in an increase in
the merger consideration per share, the aggregate consideration to be received
by the individuals identified in the foregoing table would be increased by the
product of (a) the increase in merger consideration per share multiplied by (b)
the aggregate number of shares of common stock subject to all options, warrants
and restricted stock awards held by these individuals at the effective time of
the merger.
INCENTIVE PARTICIPATION, OR "PROMOTIONAL" INTERESTS. The merger agreement
provides that the profit participation, or "promotional" interests granted to
our employees and executive officers, some of whom are directors, in respect of
some of our real estate investment assets under our investment program
described below will continue to exist following the merger. In the merger
agreement the CBRE Companies acknowledge the validity and existence of these
interests and agree to use all commercially reasonable efforts to provide for
the holders of these interests to receive compensation, if any is due, only
when the underlying real estate assets are sold, rather than if we sell an
interest in the entity that owns the assets.
As an integral part of our employee incentive compensation and retention
arrangements, we have in the past awarded certain of our key employees,
including our executive officers, profit participation interests tied to the
success of certain of our equity investments in real estate and real estate
related assets. An award is made in the form of either (1) a letter agreement
pursuant to which we agree to pay to the recipient a specified percentage of a
portion of the proceeds as and when received by us in respect of the applicable
investment asset, subject to vesting and other eligibility criteria, or (2) a
direct or indirect assignment by us of a portion of our equity interest in the
applicable investment asset, subject to forfeiture by the recipient of all or a
portion of that interest back to us under certain circumstances. These
incentive awards were granted subject to performance and vesting provisions
established on an investment-by-investment basis. Generally, however, they
entitle the holders to receive approximately 50%, in the aggregate, of the cash
proceeds otherwise receivable by us in respect of our equity investments in the
related investment assets, but only after we have received a return of our
invested capital plus a 10% annual return on our invested capital, which is
determined on an investment-by-investment basis. In certain cases, future
grants ranging from 5% to 10% of these proceeds may be made to our employees
based on a number of factors, including the degree of success of a particular
investment. In the case of the awards relating to our equity investments in the
two private investment funds sponsored and managed by us, Insignia Opportunity
Partners and Insignia Opportunity Partners II, L.P., the holders are entitled
to receive, respectively, 60% and 55%, in the aggregate, of the cash proceeds
we are entitled to receive under the fund partnership agreements in respect of
our "promotional" or "over-ride" equity interests in those funds, which are the
incentive equity interests we receive for serving as the general partner of
those funds. However, the recipients of the awards relating to these two funds
are not entitled to receive any portion of our capital invested in those funds
or any profits on those capital investments. The incentive awards granted to
our executive officers with respect to each investment asset generally
approximate 25% in the aggregate, except that the incentive awards granted to
our executive officers in respect of our "promotional" equity interests in
Insignia Opportunity Partners is 55% in the aggregate, and in Insignia
Opportunity Partners II is 46.75%, in the aggregate. For additional information
regarding the compensation of our directors and executive officers, please
refer to our Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission on April 30, 2003.
ARRANGEMENTS FOR CERTAIN OF OUR EXECUTIVE OFFICERS UNDER EMPLOYMENT AND
OTHER AGREEMENTS. The employment agreements of each of Andrew L. Farkas, Frank
M. Garrison, James A. Aston, Jeffrey P. Cohen, Adam B. Gilbert and Ronald
Uretta provide that each of them may, upon a change in control of us, continue
to provide consulting services to the surviving entity following the change in
control. At the request of CB Richard Ellis Services, these individuals, except
Messrs. Cohen and Gilbert, will not be required to provide any consulting
services or work for us if the merger is completed.
The existing employment agreements with each of Messrs. Farkas, Garrison,
Aston, Cohen, Gilbert and Uretta also provide that they will be entitled to
certain payments and other benefits as a result of their employment being
terminated and/or substituted by consulting relationships in connection with
the merger. All of the incentive participation, or "promotional," interests
granted to these persons, which are described in greater detail above, will
effectively become fully vested under the terms of their employment agreements
or the grant of such interests as a result of their employment being terminated
38
and/or substituted by consulting relationships in connection with the merger.
In connection with the negotiation of the merger agreement, CB Richard Ellis
Services entered into agreements with each of these individuals that confirm
the payments and other benefits due to each of them under these employment
agreements, as well as the following benefits in connection with the merger:
o Each of these persons may (1) keep certain of his current office
equipment and (2) elect to receive a fixed cash payment from Insignia for
the duration of his employment agreement in lieu of the office space and
support staff that Insignia would otherwise be obligated to provide him
under his employment agreement.
o If Mr. Garrison, Aston or Uretta becomes subject to federal excise tax
imposed on payments or benefits received from them pursuant to their
employment agreements which are required to be included in the
calculation of "parachute payments" for purposes of Section 280G of the
Internal Revenue Code, they will be entitled to receive an additional
lump sum cash payment in an amount that results in no reduction to any of
these persons in the amount or value of the payments payable to any of
them under the agreement as a result of the application of applicable
provisions of the Internal Revenue Code. We and CBRE Holding do not
believe that any of these persons will be subject to federal excise tax
as a result of the calculation of "parachute payments" and, therefore, we
and CBRE Holding do not believe that they will be entitled to receive any
such additional lump sum cash payment.
The following is a summary of the severance and other benefits that each
of these executive officers will receive under the terms of the employment and
other agreements described above as a result of their employment being
terminated and/or substituted by consulting relationships in connection with
the merger. No monetary value has been ascribed to the promotional interests in
our real estate investment assets, because the promotional interests only have
value if and when a real estate investment is disposed of at a price which
results in a return to us of our invested capital plus a 10% annual return on
our invested capital.
Andrew L. Farkas. Mr. Farkas will be entitled to receive the following
payments and benefits:
o A cash payment of $83,333 per month from the closing date of the merger
through December 31, 2005, which represents the amount of Mr. Farkas'
current monthly salary;
o A cash payment of $1,000,000 for each of 2003, 2004 and 2005 payable in
four quarterly installments during each year, pro rated for any partial
year in which the closing of the merger occurs, which represents the
estimate amount of Mr. Farkas' annual bonus under his current employment
arrangements;
o A bonus payment of $1,820,000, payable to Mr. Farkas under the terms of
his employment agreement upon the closing date of the merger;
o A lump sum "material asset disposition" payment payable upon the closing
date of the merger that is currently estimated to be approximately
$3,387,000 but that is subject to adjustment as described below and will
ultimately depend upon the amount of the common stock merger
consideration and the total number of outstanding shares of our common
stock, options and warrants to purchase our common stock and restricted
stock awards as of the closing date of the merger;
o A $1,500,000 loan from us to Mr. Farkas will be forgiven pro rata over
the three-year period immediately following the closing date of the
merger;
o A payment of $30,833 per month through December 31, 2005, pro rated for
the month in which the closing of the merger occurs, which represents
amounts for support staff, office rent and car and driver expenses;
o A distribution to Mr. Farkas under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date; and
39
o Specified other health insurance benefits, disability protection and
other perquisites set forth in Mr. Farkas' employment agreement through
December 31, 2005.
Frank M. Garrison. Mr. Garrison will be entitled to receive the following
severance payments and benefits:
o A cash payment of $41,667 per month from the closing date of the merger
through December 31, 2005, which represents the amount of Mr. Garrison's
current monthly salary;
o A lump sum "material asset disposition" payment payable upon the closing
date of the merger that is currently estimated to be approximately
$1,469,183 but that is subject to adjustment as described below and will
ultimately depend upon the amount of the common stock merger
consideration and the total number of outstanding shares of our common
stock, options and warrants to purchase our common stock and restricted
stock awards as of the closing date of the merger;
o A distribution to Mr. Garrison under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date;
o A payment of $9,500 per month or provision of office space and a
secretary through December 31, 2005; and
o A payment of $3,415 per month in lieu of reimbursement of expenses and
receipt of other perquisites set forth in Mr. Garrison's employment
agreement through December 31, 2005.
James A. Aston. Mr. Aston will be entitled to receive the following
payments and benefits:
o A cash payment of $45,883 per month from the closing date of the merger
through December 31, 2004, which represents the amount of Mr. Aston's
current monthly salary;
o A lump sum "material asset disposition payment" payable upon the closing
date of the merger that is currently estimated to be approximately
$1,469,183 but that is subject to adjustment as described below and will
ultimately depend upon the amount of the common stock merger
consideration and the total number of outstanding shares of our common
stock, options and warrants to purchase our common stock and restricted
stock awards as of the closing date of the merger;
o A distribution to Mr. Aston under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date;
o A payment of $8,400 per month or provision of office space and a
secretary through December 31, 2004; and
o A payment of $715 per month in lieu of reimbursement of expenses and
receipt of other perquisites set forth in Mr. Aston's employment
agreement through December 31, 2004.
Adam B. Gilbert. Mr. Gilbert will be entitled to receive the following
payments and benefits:
o A cash payment of $36,667 per month from the closing date of the merger
through December 31, 2005, which represents the amount of Mr. Gilbert's
current monthly salary;
o A lump sum change in control payment of approximately $484,000 payable
upon the closing date of the merger;
o A cash payment of the pro rated portion of Mr. Gilbert's 2003 bonus of
$327,372 through the closing of the merger;
o A distribution to Mr. Gilbert under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date;
40
o A payment of $11,500 per month or provision of office space and a
secretary through December 31, 2005; and
o A payment of $1,082 per month in lieu of reimbursement of expenses and
receipt of other perquisites set forth in Mr. Gilbert's employment
agreement through December 31, 2005.
Ronald Uretta. Mr. Uretta will be entitled to receive the following
payments and benefits:
o A cash payment of $50,000 per month from the closing date of the merger
through December 31, 2004, which represents the amount of Mr. Uretta's
current monthly salary;
o A lump sum "material asset disposition" payment payable upon the closing
date of the merger that is currently estimated to be approximately
$1,469,183 but that is subject to adjustment as described below and will
ultimately depend upon the amount of the common stock merger
consideration and the total number of outstanding shares of our common
stock, options and warrants to purchase our common stock and restricted
stock awards as of the closing date of the merger;
o A payment of $12,500 per month or provision of office space and a
secretary through December 31, 2004;
o A one-time club initiation fee of $50,000;
o A distribution to Mr. Uretta under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date;
o A payment of $7,700 per month for car and driver expenses through
December 31, 2004; and
o A payment of $2,007 per month in lieu of reimbursement of expenses and
receipt of other perquisites set forth in Mr. Uretta's employment
agreement through December 31, 2004.
Jeffrey P. Cohen. Mr. Cohen will be entitled to receive the following
payments and benefits:
o A cash payment of $25,000 per month from the closing date of the merger
through December 31, 2005, which represents the amount of Mr. Cohen's
current monthly salary;
o A lump sum change in control payment of approximately $450,000 payable
upon the closing date of the merger;
o A cash payment of the pro rated portion of Mr. Cohen's 2003 bonus of
$245,000 through the closing of the merger;
o A distribution to Mr. Cohen under our 401(k) Restoration Plan of the
amount owing to him under that plan in accordance with the terms of the
plan, which was $ as of the record date;
o A payment of $11,500 per month or provision of office space and a
secretary through December 31, 2005; and
o A payment of $1,907 per month in lieu of reimbursement of expenses and
receipt of other perquisites set forth in Mr. Cohen's employment
agreement through December 31, 2005.
If the sale of any of our real estate-related assets results in an
increase in the merger consideration, the "material asset disposition" payments
to Messrs. Farkas, Garrison, Aston and Uretta would be increased by 1%, 1/2%,
1/2% and 1/2%, respectively, of the aggregate increase in the merger
consideration received by holders of our common stock, options, warrants and
restricted stock awards in the merger.
The employment agreements of Messrs. Farkas, Garrison, Aston and Uretta
provide for the payment of certain incentives to each of them upon the
occurrence of a "material asset disposition," as defined in their respective
employment agreements, subject to the terms and conditions of these employment
agreements. Incentives payable to these individuals as a result of the sale of
Insignia Douglas Elliman and Insignia Residential Group are expected to
aggregate approximately $1,669,000 and will only be paid if
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the merger is not consummated. If the merger is consummated, these individuals
will instead be entitled to the material asset disposition payments with
respect to the merger.
STEPHEN B. SIEGEL EMPLOYMENT AGREEMENT. Mr. Siegel is currently a director
and president of Insignia and the chairman and chief executive officer of our
subsidiary, Insignia/ESG. Mr. Siegel and CB Richard Ellis, Inc. have entered
into an employment agreement, which will become effective upon the date of the
closing of the merger and will supersede Mr. Siegel's existing employment
agreement with us and Insignia/ESG. As a result of this agreement, following
the merger, Mr. Siegel will be employed by CB Richard Ellis, Inc. as Chairman,
Global Brokerage of CB Richard Ellis, Inc. Mr. Siegel's employment with CB
Richard Ellis will be at-will and the employment agreement may be terminated by
either party at any time, with or without cause, for any reason or no reason,
upon at least 30 days' prior written notice.
This employment agreement provides that Mr. Siegel will receive upon the
closing date of the merger (a) a cash signing bonus of $1.6 million, and (b) a
cash retention bonus of $5.4 million. Mr. Siegel will also be entitled to
receive a $200,000 annual bonus at the end of each of the next five calendar
years. In addition, the employment agreement provides that Mr. Siegel will be
entitled to receive a brokerage commission equal to the highest percentage
agreed to by CB Richard Ellis with any of its real estate brokers of the
commissions earned, received or retained by CB Richard Ellis, upon transactions
as to which Mr. Siegel has provided services recognized by CB Richard Ellis.
Mr. Siegel's employment agreement further provides that Mr. Siegel will be
entitled to an annual forgivable draw of $2.5 million for a period of five
years following the closing date of the merger. Commissions received by Mr.
Siegel during any 12-month period ending on an anniversary of the closing of
the merger will reduce only the draw payable for that 12-month period. CB
Richard Ellis has also agreed to cause Insignia/ESG to forgive a $1.5 million
loan granted to Mr. Siegel, including all accrued and unpaid interest thereon,
following the merger. Under the employment agreement with CB Richard Ellis, Mr.
Siegel will also be entitled to reimbursement of certain expenses and to
certain benefits and perquisites, including participation in CB Richard Ellis'
employee benefit plans, premium payments on Mr. Siegel's existing life
insurance policy, office space and support staff. The employment agreement
provides that if Mr. Siegel's employment agreement is terminated for cause or
resigns without good reason during the five-year period immediately following
the closing date of the merger, he is obligated to pay back to CB Richard Ellis
a pro rata share of the $5.4 million retention bonus based on the number of
months remaining in the five-year period at the time of his termination. If Mr.
Siegel's employment is terminated without cause or he resigns for good reason,
he will be entitled to continue to receive his annual $2.5 million draw and his
annual $200,000 bonus through the fifth anniversary of the closing date of the
merger. These payments will cease, however, if Mr. Siegel violates the terms of
the non-competition and non-solicitation provisions of the employment agreement
after the termination of his employment with CB Richard Ellis.
Mr. Siegel's employment agreement provides that (a) he will not compete
with CB Richard Ellis for a period of five years from the closing date of the
merger, (b) he will not employ any person who was an employee of CB Richard
Ellis or its affiliates within a period of two years after such person leaves
the employ of CB Richard Ellis or its affiliate and (c) he will not solicit for
a period of six months following his termination or following the fifth
anniversary of the closing date of the merger, whichever is later, anyone for
the purpose of providing management, leasing, brokerage or related real estate
services with respect to properties managed and clients served by CB Richard
Ellis at the time of Mr. Siegel's termination. If Mr. Siegel's employment is
terminated without cause or he resigns for good reason and Mr. Siegel repays a
portion of his retention bonus, the non-competition and non-solicitation
periods will be changed to 12 months from the date of the termination.
Under his employment agreement, Mr. Siegel will be entitled to receive an
option to purchase 25,000 shares of common stock of CB Richard Ellis
exercisable within 90 days from the date of the grant at an exercise price of
$16.00 per share. For each share Mr. Siegel elects to purchase through the
exercise of the option, CB Richard Ellis will issue to Mr. Siegel an additional
option to purchase three shares of common stock of CB Richard Ellis at an
exercise price of $16.00 per share.
ALAN FROGGATT EMPLOYMENT AGREEMENT. Mr. Froggatt is currently a director
and chief executive officer of the European operations of Insignia and the
chief executive officer of our subsidiary, Insignia Richard Ellis. We are party
to an existing employment agreement with Mr. Froggatt. The CBRE
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Companies are in the process of negotiating with Mr. Froggatt regarding
amendments to his employment agreement, which may result in an increase in Mr.
Froggatt's compensation and benefits if the merger is completed.
POST-CLOSING RESTRICTIONS. In connection with the signing of the merger
agreement, each of the CBRE Companies and Andrew L. Farkas executed letters in
which they agreed to abide by certain restrictions regarding our real estate
assets after the closing of the merger. The CBRE Companies agreed that for a
period of five years following the closing of the merger, they would not sell,
transfer or assign to Mr. Farkas, or allow him to participate in, any of our
real estate-related assets. This restriction does not prohibit Mr. Farkas from
continued involvement in our "Nautica" development project in St. Thomas, U.S.
Virgin Islands, so long as Mr. Farkas does not receive more than 50% of the
total economics made available to management for that project. Mr. Farkas also
executed a letter in which he agreed to the foregoing restrictions. However,
the letter signed by Mr. Farkas specifies that he is not prohibited from:
o owning the participation, or "promotional" rights in our real
estate-related assets that he holds as of the closing of the merger;
o entering into any agreement with us to acquire any of the real
estate-related assets at any time prior to the closing of the merger;
o entering into discussions with the CBRE Companies regarding obtaining
any approvals required by the merger agreement at any time prior to the
closing of the merger;
o closing any transaction regarding the real estate-related assets that he
may agree to with us prior to the closing of the merger; or
o to the extent that Mr. Farkas enters into any agreement with us prior to
the closing of the merger to acquire any of our real estate-related
assets, entering into any agreement relating to those assets after he has
acquired them.
SPECIAL COMMITTEE COMPENSATION. Robert J. Denison, Stephen M. Ross and H.
Strauss Zelnick, the three members of the special committee, each will receive
compensation of $70,000 in connection with serving on the special committee. Of
this amount, $35,000 has been paid and the balance will be paid on the earlier
to occur of the consummation of the merger or the adoption by our board of
directors of a resolution disbanding the special committee.
INDEMNIFICATION AND INSURANCE. The merger agreement provides that all
rights of our current or former directors, officers, employees and agents to
indemnification for acts or omissions occurring at or prior to the effective
time of the merger, as provided in Insignia's and its subsidiaries' respective
certificates of incorporation or bylaws or in other specified agreements, will
survive the merger and remain in effect for a period of six years and one month
from the effective time of the merger. In addition, for six years and one month
from the effective time of the merger, the CBRE Companies have agreed to
indemnify our current or former directors, officers, employees and agents
against all losses arising from acts or omissions in their capacity as
directors or officers of Insignia and its subsidiaries occurring at or prior to
the effective time of the merger. CBRE Holding and CB Richard Ellis Services
have also agreed, for a period of six years and one month from the effective
time of the merger, to cause the surviving corporation to provide to our and
our subsidiaries' present and former directors and officers liability and
fiduciary liability insurance protection with the same coverage and in the same
amount, and on terms no less favorable to the directors and officers than that
currently provided by our directors' and officers' liability insurance
policies; provided, however, that the surviving corporation will not be
obligated to make premium payments for this insurance to the extent that the
annual premiums exceed 300% of the annual premiums currently paid by us for
this insurance except that the surviving corporation will be obligated to
obtain this insurance with the maximum coverage as can be obtained at an annual
premium equal to 300% of the annual premiums currently paid by us.
During the six-year and one-month period after the effective time of the
merger, if any claims are made against any present or former director or
officer of Insignia based on or arising out of the services of such person at
or prior to the effective time of the merger in his capacity as a director or
officer of
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Insignia, the obligations to indemnify the current or former directors or
officers under the certificate of incorporation and bylaws of Insignia and its
subsidiaries will remain in effect until the final disposition of all of these
claims.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO OUR STOCKHOLDERS
The following is a description of the material U.S. federal income tax
consequences of the merger to holders of shares of our common stock who dispose
of their shares in the merger, who are United States Persons, as defined below,
and who, on the date of disposition, hold their shares as capital assets, as
defined in the Internal Revenue Code of 1986, each referred to as a "United
States Holder." This discussion is based on the Internal Revenue Code, proposed
and final income tax regulations issued under the Internal Revenue Code and
administrative and judicial interpretations of the Internal Revenue Code and
regulations, each as in effect on the date of this proxy statement. These
income tax laws, regulations and interpretations, however, may change at any
time, and any change could be retroactive to the date of this proxy statement.
Although we will not seek any rulings from the Internal Revenue Service or an
opinion of counsel with respect to the merger, we believe that the merger will
have the U.S. federal income tax consequences described below to the United
States Holders.
We urge all holders to consult their own tax advisors regarding the
specific tax consequences that may result from their individual circumstances
as well as foreign, state, local and other tax consequences of the disposition
of shares in the merger. The following discussion does not address potential
foreign, state, local and other tax consequences, nor does it address special
tax consequences that may be applicable to particular classes of taxpayers,
including the following:
o financial institutions;
o real estate investment trusts;
o regulated investment companies;
o brokers and dealers or traders in securities or currencies;
o persons whose functional currency is not the U.S. dollar;
o insurance companies;
o tax-exempt organizations;
o S corporations;
o persons who hold common stock as part of a position in a straddle or as
part of a hedging or conversion transaction;
o persons who acquired common stock as a result of an exercise of employee
stock options or rights or otherwise as compensation;
o persons who hold employee stock options or rights to acquire common
stock; and
o taxpayers subject to alternative minimum tax.
A "United States Person" is a beneficial owner of common stock who, for
U.S. federal income tax purposes, is:
o a citizen or resident of the U.S., including some former citizens or
residents of the U.S.;
o a partnership or corporation created or organized in or under the laws
of the U.S. or any state in the U.S., including the District of Columbia;
o an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
o a trust if the trust validly has elected to be treated as a United
States person for U.S. federal income tax purposes or if (A) a U.S. court
can exercise primary supervision over its administration and (B) one or
more United States persons have the authority to control all of its
substantial decisions.
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If a partnership holds our common stock, the tax treatment of the partner
will generally depend on the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding our common stock,
you should consult your tax advisor.
A United States Holder generally will realize gain or loss upon the
surrender of the holder's shares in the merger in an amount equal to the
difference, if any, between the amount of cash received and the holder's
aggregate adjusted tax basis in the shares surrendered.
In general, any gain or loss realized by a United States Holder in the
merger will be eligible for capital gain or loss treatment. Any capital gain or
loss recognized by a United States Holder will be long-term capital gain or
loss if the shares giving rise to the recognized gain or loss have been held
for more than one year at the time of the consummation of the merger.
Otherwise, the capital gain or loss will be short-term. A non-corporate United
States Holder's long-term capital gain generally is subject to U.S. federal
income tax at a maximum rate of 20%. Any capital loss can be offset only
against other capital gains plus $3,000 of other income in any tax year ($1,500
in the case of a married individual filing a separate return). Any unutilized
capital loss will carry over as a capital loss to succeeding years for an
unlimited time until the loss is exhausted.
For corporations, a capital gain is subject to U.S. federal income tax at
a maximum rate of 35%, while any capital loss can be offset only against other
capital gains. Any unutilized capital loss generally can be carried back three
years and forward five years to offset net capital gains generated in those
years.
Under the U.S. federal backup withholding tax rules, unless an exemption
applies, the paying agent in the merger will be required to withhold, and will
withhold, 30% of all cash payments to which a holder of shares or other payee
is entitled under the merger agreement, unless the stockholder or other payee
provides a tax identification number, certifies that number is correct and
otherwise complies with the backup withholding tax rules. Each of our
stockholders and, if applicable, each other payee should complete and sign the
Substitute Form W-9 included as part of the letter of transmittal to be
returned to the paying agent in order to provide the information and
certification necessary to avoid backup withholding tax, unless an exemption
applies and is established in a manner satisfactory to the paying agent.
The U.S. federal income tax consequences set forth above are for general
information only and are not intended to constitute a complete description of
all tax consequences relating to the merger. You are urged to consult your own
tax advisor to determine the particular tax consequences to you of the merger,
including the applicability and effect of foreign, state, local and other tax
laws.
EFFECTIVE TIME OF MERGER
If the merger agreement is adopted and the merger is approved by the
requisite vote of our stockholders and the other conditions to the merger are
satisfied or, to the extent permitted, waived, the merger will be consummated
and become effective at the time a certificate of merger is filed with the
Secretary of State of the State of Delaware or such later time as otherwise
agreed by Insignia and Apple Acquisition and provided in the certificate of
merger.
PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
Apple Acquisition has designated to act as exchange agent
for purposes of making the cash payments provided by the merger agreement to
holders of our common stock and our preferred stock. At the effective time of
the merger, CBRE Holding will deposit, or cause to be deposited, with the
exchange agent immediately available funds in an aggregate amount necessary to
pay the merger consideration to all holders of our common stock and the
consideration payable to the holders of our preferred stock. The exchange agent
will use these funds for the sole purpose of paying the merger consideration to
holders of our common stock and our preferred stock. The exchange agent will,
in accordance with irrevocable instructions, deliver to holders of our common
stock and our preferred stock their merger consideration according to the
procedure summarized below.
As soon as reasonably practicable after the effective time of the merger,
Insignia, as the surviving corporation in the merger, will instruct the
exchange agent to mail to you a letter of transmittal and
45
instructions advising you of the effectiveness of the merger and the procedure
for surrendering to the exchange agent your stock certificates in exchange for
payment of the per share merger consideration. Upon the surrender for
cancellation to the exchange agent of your stock certificates, together with a
letter of transmittal, duly executed and completed in accordance with its
instructions, and any other items specified by the letter of transmittal, the
exchange agent will pay to you your per share merger consideration and your
stock certificates will be canceled. Payments of merger consideration will be
reduced by any applicable withholding taxes. No interest will be paid or
accrued on the merger consideration.
If your stock certificates have been lost, mutilated or destroyed, you may
instead deliver to the exchange agent an affidavit and indemnity bond in form
and substance, and with surety, reasonably satisfactory to the surviving
corporation.
If the merger consideration, or any portion of it, is to be paid to a
person other than you, it will be a condition to the payment of the merger
consideration that your stock certificates be properly endorsed or otherwise in
proper form for transfer and that you pay to the paying agent any transfer or
other taxes required by reason of the transfer or establish to the satisfaction
of the surviving corporation, that the taxes have been paid or are not required
to be paid.
YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE EXCHANGE AGENT
WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
At and after the effective time of the merger, you will cease to have any
rights as our stockholder, except for the right to surrender your stock
certificates, according to the procedure described in this section, in exchange
for payment of the per share merger consideration, without interest, less any
applicable withholding taxes, or, if you exercise your appraisal rights, the
right to perfect your right to receive payment for your shares under Delaware
law.
At the effective time of the merger, our stock ledger with respect to
shares of our common stock that were outstanding prior to the time of the
merger will be closed and no further registration of transfers of these shares
will be made.
Six months following the effective time of the merger, the exchange agent
will, on demand, deliver to the surviving corporation of the merger all cash
that has not yet been distributed in payment of the merger consideration, plus
any accrued interest, and the exchange agent's duties will terminate.
Thereafter, you may surrender your stock certificates to Insignia and receive
the per share merger consideration, without interest, less any applicable
withholding taxes. However, you will have no greater rights against Insignia
than may be accorded to general creditors of Insignia under applicable law.
Neither CBRE Holding, CB Richard Ellis Services, Insignia nor the exchange
agent will be liable to stockholders for any merger consideration delivered to
a public official under any applicable abandoned property, escheat or similar
law.
FINANCING OF THE MERGER; FEES AND EXPENSES OF THE MERGER
Based upon our total outstanding shares of common stock as of the record
date for the special meeting and the outstanding indebtedness of us and CB
Richard Ellis Services as of , 2003 and assuming we do not consummate a
sale of our real estate-related assets resulting in net cash proceeds greater
than approximately $45 million prior to the date of the merger and that the
merger consideration is $11.00 per share, the total amount of funds required to
consummate the merger, repay some of our and CB Richard Ellis Services'
indebtedness and to pay our and the CBRE Companies' related fees and expenses
is estimated to be approximately $ million. The CBRE Companies plan to
fund the purchase price with the following sources of cash:
o not less than $100 million, and up to $145 million, of equity financing
pursuant to a subscription agreement and a commitment letter delivered to
CBRE Holding by Blum Strategic Partners, L.P., Blum Strategic Partners
II, L.P. and Blum Strategic Partners II GmbH & Co. KG, which together
currently own a majority of CBRE Holding's capital stock;
o a portion of the net proceeds of at least $ million of debt financing
pursuant to a commitment letter delivered to CB Richard Ellis Services by
Credit Suisse First Boston; and
46
o the general working capital of CB Richard Ellis Services and Insignia.
DEBT FINANCING
CB Richard Ellis Services has received a commitment letter from Credit
Suisse First Boston, or CSFB, in which CSFB has agreed to provide an aggregate
of $ million of loans, subject to the terms and conditions contained in the
commitment letter. The commitment letter provides that CSFB will syndicate the
loan to a group of financial institutions and that CSFB's obligation to provide
the financing is subject to a number of conditions, which generally include the
following:
o CSFB not having become aware of any information not previously disclosed
to it that it reasonably believes to be inconsistent in a material and
adverse manner with its understanding of the business, assets,
operations, condition (financial or otherwise), projections or prospects
of CB Richard Ellis Services and its subsidiaries (after giving effect to
the merger and related transactions), taken as a whole;
o there not having occurred any event, change or condition that has had,
or could reasonably be expected to have, a material adverse effect on the
business, assets, operations, condition (financial or otherwise), or
prospects of CB Richard Ellis Services and its subsidiaries (after giving
effect to the merger and related transactions), taken as a whole, since
December 31, 2001;
o there not having occurred a "Company Material Adverse Effect," as
defined in the merger agreement, with respect to Insignia (see "The
Merger Agreement--Conditions to the Merger");
o CSFB's reasonable satisfaction that, prior to and during any syndication
of the loans, there is no competing issues of debt securities or
commercial bank or other credit facilities of CB Richard Ellis Services,
Insignia or any of their respective subsidiaries being offered, placed or
arranged;
o the securities evidencing the indebtedness have Moody's and Standard &
Poors ratings not less than as specified in the commitment letter;
o certain existing stockholders of CB Richard Ellis Services will have
provided to CB Richard Ellis Services not less than $100 million and up
to $145 million of equity financing as described below under "Equity
Financing";
o the absence of a disruption or adverse change in the financial or
capital markets generally or for CB Richard Ellis Services' or Insignia's
securities specifically or in the market for new issuances of leveraged
loans or high yield securities, in each case which could in the
reasonable judgment of CSFB reasonably be expected to materially impair
the satisfactory syndication or the placement of the debt financing
contemplated in the commitment letter; and
o other customary conditions.
If the borrowing under the senior secured credit facilities contemplated
by the CSFB commitment letter has not occurred by July 14, 2003, then the
commitment letter will automatically terminate unless CSFB, in its sole
discretion, agrees to an extension. Prior to that date, CSFB may terminate the
commitment letter if any event occurs or information becomes available that, in
the reasonable judgment of CSFB, results or is likely to result in the failure
to satisfy the conditions in the commitment letter, provided that the failure
could not reasonably be expected to be cured prior to July 14, 2003.
It is a condition to the obligation of CBRE Holding, CB Richard Ellis
Services and Apple Acquisition to complete the merger that CBRE Holding or CB
Richard Ellis Services shall have received at least $610 million of debt
financing on the terms contemplated by the commitment letter with CSFB or on
overall pricing, cost, timing and maturity terms no less favorable and on other
terms that are no less favorable in any material respect to CBRE Holding and CB
Richard Ellis Services. There can be no assurance that CBRE Holding or CB
Richard Ellis Services can consummate this or any other financing, in which
event, it is unlikely that the merger will be consummated.
EQUITY FINANCING
CBRE Holding entered into a subscription agreement pursuant to which some
of its current stockholders agreed to make equity contributions to CBRE Holding
in the following amounts: Blum
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Strategic Partners, L.P. agreed to contribute $20 million, Blum Strategic
Partners II, L.P. agreed to contribute approximately $78.4 million and Blum
Strategic Partners II GmbH & Co. KG agreed to contribute approximately $1.6
million. These three stockholders currently own a majority of the outstanding
capital stock of CBRE Holding. These equity investments will be contributed by
CBRE Holding to CB Richard Ellis Services, which equity contribution will be
contributed to Apple Acquisition.
In addition, CBRE Holding entered into a letter agreement with some of its
current stockholders pursuant to Blum Strategic Partners II, L.P. will acquire
up to approximately $44.1 million of debt or equity securities of CBRE Holding
or one of its subsidiaries and Blum Strategic Partners II GmbH & Co. KG will
acquire up to approximately $0.9 million of the same securities. The amount of
the debt and/or equity securities purchased by the letter agreement will be
reduced to the extent of any aggregate "Net Proceeds" received by us at or
prior to the closing of the merger from the sales of real estate assets
specified in the merger agreement. For the definition of "Net Proceeds," see
"The Merger Agreement--Potential Adjustments to the Common Stock Merger
Consideration." The cash received by CBRE Holding or its subsidiaries under
this letter agreement, if any, will be contributed or transferred to us or
Apple Acquisition immediately prior to the time of the merger.
The only condition to the completion of the transactions contemplated by
the subscription agreement and the letter agreement is the prior or
contemporaneous closing of the merger.
Blum Strategic Partners, L.P., Blum Strategic Partners II, L.P. and Blum
Strategic Partners II GmbH & Co. KG are private equity investment funds that
are affiliates of Blum Capital Partners, L.P. Each of these investment funds
will satisfy its obligations under the subscription agreement and commitment
letter, as applicable, with cash capital contributions from its partners. The
aggregate capital commitments of the partners of Blum Strategic Partners, L.P.,
Blum Strategic Partners II, L.P. and Blum Strategic Partners II GmbH & Co. KG
are approximately $639 million, $931 million and $19 million, respectively.
Affiliates of Blum Capital Partners, L.P., including those which are
stockholders of CBRE Holding, currently manage over $2.3 billion of capital in
the United States.
FEES AND EXPENSES OF THE MERGER
The merger agreement provides that each party will pay all costs and
expenses incurred by it in connection with the merger agreement and the merger,
except as otherwise provided under "The Merger Agreement--Termination Fee;
Indemnification; Amendment of No Raid Agreement." None of these costs and
expenses will reduce the per share merger consideration to be received by our
stockholders.
APPRAISAL RIGHTS
Under Delaware law, if (1) you properly make a demand for appraisal in
writing prior to the vote taken at the special meeting and (2) your shares are
not voted in favor of the merger agreement or the merger, you will be entitled
to exercise appraisal rights under Section 262 of the General Corporation Law
of the State of Delaware.
Section 262 is reprinted in its entirety as Appendix C to this proxy
statement. The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Appendix C. You should review this discussion and Appendix C carefully if you
wish to exercise statutory appraisal rights or you wish to preserve the right
to do so. Failure to strictly comply with the procedures set forth in Section
262 will result in the loss of your appraisal rights.
If you:
o make the demand described below with respect to your shares;
o are continuously the record holder of your shares from the date of
making the demand through the effective time of the merger;
o otherwise comply with the statutory requirements of Section 262;
o neither vote in favor of the adoption of the merger agreement and the
approval of the merger nor consent to the adoption of the merger
agreement and the approval of the merger in writing; and
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o file a proper petition with the Delaware Court of Chancery, as described
below;
you will be entitled to an appraisal by the Delaware Court of Chancery of the
"fair value" of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, as determined by the Delaware Court of Chancery.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the special meeting, we must notify
you that appraisal rights are available not less than 20 days prior to the
meeting and include in the notice a copy of Section 262. This proxy statement
constitutes your notice of your appraisal rights, and the applicable statutory
provisions are attached to this proxy statement as Appendix C.
If you desire to exercise your appraisal rights, you must not vote in
favor of the adoption of the merger agreement and the approval of the merger
and you must deliver a separate written demand for appraisal to us prior to the
vote at the special meeting. If you sign and return a proxy without expressly
directing, by checking the applicable box on the enclosed proxy card, that your
shares be voted against the proposal or that an abstention be registered with
respect to your shares in connection with the proposal, you effectively will
have waived your appraisal rights as to those shares. This is because, in the
absence of express contrary instructions, your shares will be voted in favor of
the proposal. See "Introduction--Voting and Revocation of Proxies."
Accordingly, if you desire to perfect appraisal rights with respect to any of
your shares, you must, as one of the procedural steps involved in perfection,
either (1) refrain from executing and returning the enclosed proxy card and
from voting in person in favor of the proposal to adopt the merger agreement
and approve the merger or (2) check either the "Against" or the "Abstain" box
next to the proposal on the proxy card or affirmatively vote in person against
the proposal or register in person an abstention with respect to the proposal.
Only a holder of record is entitled to assert appraisal rights for the
shares of our stock registered in that holder's name. A demand for appraisal
must be executed by or on behalf of the holder of record and must reasonably
inform us of the holder's identity and that the holder of record intends to
demand appraisal of the holder's shares. If you have a beneficial interest in
shares that are held of record in the name of another person, such as a broker,
fiduciary or other nominee, you must act promptly to cause the record holder to
follow properly and in a timely manner the procedures to perfect appraisal
rights, and your demand must be executed by or for the record owner. If your
shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, your demand must be executed by or for all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal. However, the agent must identify the record owner(s)
and expressly disclose the fact that, in exercising the demand, the agent is
acting as agent for the record owner(s).
A record owner, such as a broker, fiduciary or other nominee, who holds
shares as a nominee for others may exercise appraisal rights with respect to
the shares held for all or less than all of the beneficial owners of shares as
to which the person is the record owner. In that case, the written demand must
set forth the number of shares covered by the demand. Where the number of
shares is not expressly stated, the demand will be presumed to cover all shares
in the name of the record owner.
If you elect to exercise appraisal rights, you should mail or deliver your
written demand to: Insignia Financial Group, Inc., 200 Park Avenue, New York,
New York 10166, Attention: Corporate Secretary.
The written demand for appraisal should specify your name and mailing
address, the number and class of shares you own and that you are demanding
appraisal of your shares. A proxy or vote against the merger agreement and the
merger will not by itself constitute a demand. Within 10 days after the
effective time of the merger, Insignia must provide notice of the effective
time of the merger to you if you have complied with Section 262.
Within 120 days after the effective time of the merger, either Insignia or
you, if you have complied with the required conditions of Section 262 and are
otherwise entitled to appraisal rights, may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the shares of
all stockholders demanding an appraisal. Insignia does not have any present
intention to file this petition in the event that a stockholder makes a written
demand. Accordingly, if you desire to have your shares appraised, you should
initiate any petitions necessary for the perfection of your appraisal rights
within the
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time periods and in the manner prescribed in Section 262. If you file a
petition, you must serve a copy on Insignia. If appraisal rights are available
and if you have complied with the applicable provisions of Section 262, within
120 days after the effective time of the merger, you will be entitled, upon
written request, to receive from Insignia a statement setting forth the
aggregate number of shares of each class not voting in favor of the adoption of
the merger agreement and the approval of the merger and with respect to which
we received demands for appraisal, and the aggregate number of holders of those
shares. This statement must be mailed within 10 days after Insignia has
received the written request for the statement or within 10 days after the
expiration of the period for delivery of demands for appraisal rights,
whichever is later.
If a petition for an appraisal is timely filed by a holder of our shares
and a copy is served upon Insignia, Insignia will then be obligated within 20
days to file with the Delaware Register in Chancery a duly verified list
containing the names and addresses of all stockholders who have demanded an
appraisal of their shares of stock and with whom agreements as to the value of
their shares have not been reached. After notice to those stockholders as
required by the Court, the Delaware Court of Chancery is empowered to conduct a
hearing on the petition to determine those stockholders who have complied with
Section 262 and who have become entitled to appraisal rights. If you have
demanded an appraisal, the Delaware Court of Chancery may require you to submit
your stock certificates to the Delaware Register in Chancery for notation on
the stock certificates of the pendency of the appraisal proceeding. If you fail
to comply with this direction, the Delaware Court of Chancery may dismiss the
proceedings as to you.
Where proceedings are not dismissed, the Delaware Court of Chancery will
appraise the shares owned by stockholders demanding an appraisal, determining
the "fair value" of those shares, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. THE DELAWARE
COURT OF CHANCERY'S APPRAISAL MAY BE MORE THAN, LESS THAN OR EQUAL TO THE PER
SHARE MERGER CONSIDERATION FOR OUR COMMON STOCK. You should be aware that
investment advisors' opinions as to fairness, from a financial point of view,
are not opinions as to "fair value" under Section 262. In determining fair
value, the Delaware Court of Chancery is to take into account all relevant
factors. In relevant case law, the Delaware Supreme Court discussed the factors
that could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court' should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that, in making this determination of fair value,
the court may consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts ascertainable as of
the date of the merger that throw light on the future prospects of the merged
corporation. The Delaware Supreme Court also stated that "elements of future
value, including the nature of the enterprise, which are known or susceptible
of proof as of the date of the merger and not the product of speculation, may
be considered." Section 262, however, provides that fair value is to be
"exclusive of any element of value arising from the accomplishment or
expectation of the merger." In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenting stockholder's exclusive remedy.
The Delaware Court of Chancery will also determine the amount of interest,
if any, to be paid upon the amounts to be received by persons whose shares of
our common stock have been appraised. The cost of the appraisal proceeding may
be determined by the Delaware Court of Chancery and taxed against the parties
as the Delaware Court of Chancery deems equitable under the circumstances. Upon
application of a stockholder who has demanded an appraisal, the Delaware Court
of Chancery may order that all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all of the shares entitled to an
appraisal.
If you have demanded appraisal in compliance with Section 262, you will
not, after the effective time of the merger, be entitled to vote for any
purpose any shares subject to your demand or to receive payment of dividends or
other distributions on your shares, except for dividends or distributions
payable to holders of record as of a date prior to the effective time of the
merger.
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If no petition for appraisal is filed with the Delaware Court of Chancery
within 120 days after the effective time of the merger, your rights to
appraisal will cease. You may withdraw your demand for appraisal by delivering
to Insignia a written withdrawal of your demand for appraisal and an acceptance
of the merger. However, (1) any attempt to withdraw made more than 60 days
after the effective time of the merger will require written approval of
Insignia and (2) no appraisal proceeding in the Delaware Court of Chancery may
be dismissed as to any stockholder without the approval of the Delaware Court
of Chancery, and the approval may be conditioned upon such terms as the
Delaware Court of Chancery deems just.
IF YOU FAIL TO COMPLY FULLY WITH THE STATUTORY PROCEDURE SET FORTH IN
SECTION 262, YOU WILL FORFEIT YOUR RIGHTS OF APPRAISAL AND WILL BE ENTITLED TO
RECEIVE THE MERGER CONSIDERATION FOR YOUR SHARES AS PROVIDED IN THE MERGER
AGREEMENT. CONSEQUENTLY, ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS
SHOULD CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE THESE RIGHTS.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, certain
mergers and acquisitions may not be consummated unless notice has been given,
and specified information has been furnished, to the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice and
specified waiting period requirements have been satisfied. The merger is
subject to the requirements of the Hart-Scott-Rodino Act and of other non-U.S.
laws relating to trade regulation. Insignia, on the one hand, and CBRE Holding,
on the other hand, each filed a notification form under the Hart-Scott-Rodino
Act on March 14, 2003 with the Federal Trade Commission and the Department of
Justice. CBRE Holding and some of its stockholders also are required to make a
filing under the Hart-Scott-Rodino Act in connection with the equity financing
to be provided to CBRE Holding in connection with the merger, which filing was
made with the Federal Trade Commission and the Department of Justice on March
20, 2003. On April 2, 2003, the Federal Trade Commission granted early
termination of the waiting period under the Hart-Scott-Rodino Act with respect
to each filing.
In addition, CBRE Holding is required to file a notification of
concentration with the Office of Competition, Consumer Affairs and the
Repression of Fraud, Ministry of the Economy, Finance and Industry, which is
the antitrust regulatory agency of France. CBRE Holding made this filing on
March 18, 2003 and was granted approval as of April 17, 2003.
We and CBRE Holding each conduct operations in foreign countries where
regulatory filings may be required as a result of the merger. In particular, as
a result of our operations in the United Kingdom, we, CB Richard Ellis
Services, CBRE Holding and some of the stockholders of CBRE Holding and their
affiliates are required to make a filing under the U.K. Financial Services and
Markets Act 2000 as a result of the merger. These filings were made on March
28, 2003, April 14, 2003 and April 22, 2003 and we are waiting to receive the
appropriate consent from the U.K. Financial Services Authority. Both we and
CBRE Holding intend to make any other foreign filings that we and CBRE Holding
determine are necessary or appropriate in connection with the merger.
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THE MERGER AGREEMENT
The following discussion of the material terms of the merger agreement is
qualified in its entirety by reference to the complete text of the merger
agreement, which is attached to this proxy statement as Appendix A, exclusive
of all schedules, and is incorporated herein by reference. We encourage you to
read the merger agreement in its entirety. Insignia, after the effective time
of the merger, is sometimes referred to as the "surviving corporation."
GENERAL
The merger agreement provides for Apple Acquisition to merge with and into
us. We will be the surviving corporation in the merger and become a
wholly-owned direct subsidiary of CB Richard Ellis Services and a wholly-owned
indirect subsidiary of CBRE Holding.
CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION
At the effective time of the merger our certificate of incorporation will
be the certificate of incorporation of the surviving corporation and the bylaws
of Apple Acquisition will become the bylaws of the surviving corporation. Also,
as of the effective time of the merger, the directors of Apple Acquisition will
become the directors of the surviving corporation and our officers will remain
the officers of the surviving corporation.
CONSIDERATION TO BE RECEIVED BY OUR STOCKHOLDERS
At the effective time of the merger:
o each share of our common stock issued and outstanding immediately prior
to the effective time will be converted into the right to receive $11.00
in cash, subject to decrease as described below and subject to increase
of up to $1.00 per share as described below;
o each outstanding share of our series A convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share; and
o each outstanding share of our series B convertible preferred stock will
be converted into the right to receive $100.00 in cash, plus an amount
equal to any compound dividends accrued and unpaid on the share;
in each case, less any applicable withholding taxes, other than shares held in
our treasury, held by CBRE Holding, CB Richard Ellis Services or Apple
Acquisition or any of their respective subsidiaries, or held by stockholders
who perfect their appraisal rights under Delaware law. No interest will be paid
on any of the foregoing amounts.
Each share of common stock of Apple Acquisition issued and outstanding
immediately prior to the effective time will, by virtue of the merger, become
one fully paid and non-assessable share of common stock of the surviving
corporation, all of which will be held by CB Richard Ellis Services.
POTENTIAL ADJUSTMENTS TO THE COMMON STOCK MERGER CONSIDERATION
Potential Increase in Common Stock Merger Consideration. The merger
agreement also provides that we will have the right, but not the obligation, to
market for sale to third parties at or prior to the effective time of the
merger certain of our real estate-related assets which are specified in the
merger agreement. These real estate-related assets constitute substantially all
of the real estate assets owned in whole or in part by us. Our board of
directors is obligated to direct the president of Insignia Financial Services,
Inc., a subsidiary of ours, to inform CB Richard Ellis Services of such
marketing and sale activities and to provide CB Richard Ellis Services with any
agreement relating to the sale of any of these assets prior to our execution of
the agreement, but CB Richard Ellis Services does not have the right to reject
any such sale. If and to the extent we receive at or prior to the closing of
the merger aggregate cash net proceeds (as defined below, in excess of a
threshold amount the amount of such excess will be payable
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to holders of our common stock and holders of outstanding warrants, options and
restricted stock awards at the effective time of the merger up to an additional
$1.00 per share of our common stock. The threshold amount generally is $45.0
million plus the aggregate amount of all cash, property or other assets we
contribute, loan or otherwise transfer to these assets between February 17,
2003 and the closing of the merger. If the additional common merger
consideration were calculated as of the record date for the special meeting,
the calculation would be based on a denominator of approximately shares
of our common stock, options and warrants to purchase shares of our common
stock and restricted stock awards outstanding as of that date. For example, in
the event we receive net cash proceeds at or prior to the time of the merger of
$ million in excess of the specified amount from the sale of these real
estate-related assets, this $ million will be paid to our shareholders and to
holders of options and warrants to purchase our common stock and the common
stock merger consideration would increase by approximately $0.25 per share of
our common stock. We would have to realize net cash proceeds of at least $
million at or prior to the time of the merger from the sale of these real
estate-related assets in order to reach the maximum additional consideration of
$1.00 per share of our common stock.
"Net Proceeds" is defined in the merger agreement as the aggregate cash
proceeds "deemed received" by us in the period commencing on or after the date
of the merger agreement and ending prior to or simultaneously with the closing
of the merger from or as a result of (a) the sale of the real estate assets
specified in the merger agreement, (b) cash proceeds payable to us with respect
to our debt or equity interests in our subsidiaries and other entities that own
or have an interest in the real estate assets. The amount of cash proceeds
"deemed received" by us is the amount of cash proceeds that would ultimately be
distributed to us by our direct subsidiaries net of (1) any taxes, other than
income taxes payable by us or any of our subsidiaries as a result of the
transaction or event giving rise to the receipt of cash proceeds, (2) any
liabilities or obligations retained by us or our subsidiaries related to the
real estate assets being sold, (3) fees, costs and expenses payable to third
parties and incurred in connection with the transaction or event that give rise
to the receipt of cash proceeds, (4) any payment required to be made by us or
our subsidiaries in respect of any participation interest related to the
transaction or event giving rise to the receipt of cash proceeds, and (5) any
cash generated by any sale of real estate assets or related investments on or
prior to December 31, 2002. The amount of net proceeds will be determined in
good faith by a mutual written agreement between CBRE Holding and us at or
prior to the closing of the merger.
The real estate assets that we may attempt to sell generally are those
that relate to our real estate principal investment activities, which include:
o our minority investments in operating office, retail, industrial,
apartment and hotel properties,
o our minority investments in office development projects and a related
parcel of undeveloped land,
o our wholly owned investments in real property in Norman, Oklahoma, New
York City and in the U.S. Virgin Islands and
o our investments in two private equity funds that invest primarily in
real estate debt securities.
Insignia Douglas Elliman and Insignia Residential Group, which we recently
sold, are not included in the specified real estate investment assets we are
permitted to sell in an attempt to increase the common stock merger
consideration and the cash proceeds to be received by us from this sale will
not affect the consideration to be paid to you in the merger. See
"Introduction--Recent Developments."
Although we are permitted to sell these assets, and we are attempting to
do so prior to the closing of the merger, we have not entered into any
definitive agreements for these sales and we may not be able to sell any of
these assets at or prior to the closing. If we do enter into a definitive
agreement to sell a material amount of these assets or any sale that
potentially would result in an increase in the merger consideration, we will
publicly announce it as soon as practicable. However, even if we do enter into
any such agreement, there can be no assurance that we will be able to
consummate any transaction at or prior to the time of the merger. Therefore,
when you are asked to vote on the merger you may not know
53
whether or not the common stock merger consideration would be greater than
$11.00 per share of common stock. Accordingly, you should not expect the common
stock merger consideration to be greater than $11.00 per share.
The merger agreement requires us to seek a buyer for an interest owned by
us in a residential apartment property, to reach a definitive sale agreement
with a prospective buyer prior to the closing of the merger that provides for
the purchase of that interest at or after the closing of the merger and, prior
to entering into that sale agreement, to submit that sale agreement to CB
Richard Ellis Services for approval or rejection. If approved, we would execute
the agreement and, if rejected, we would not execute the agreement and we would
be released from any further obligation to try to sell the interest in that
property. If we were able to sell that interest at the closing of the merger,
the net cash proceeds from the sale would be included in determining whether
there would be an adjustment in the merger consideration, as described above.
Adjustment Due to Payment of Dividends. The merger agreement provides that
if legislation is enacted prior to the effective time of the merger that we and
CB Richard Ellis Services agree reduces or eliminates the federal income tax on
dividend income that would be payable by U.S. individual stockholders as a
result of a cash dividend on our common stock, then we will have the right to
declare a cash dividend on our common stock prior to the effective time of the
merger if the distribution of that dividend would result in tax savings to
holders of our common stock. If such a dividend is declared, the per share
common stock merger consideration will be reduced by the amount of that
dividend. The total amount of dividends and the common stock merger
consideration will be $11.00 per share of our common stock, subject to increase
as discussed above. However, we may not declare such a dividend if, in the good
faith judgment of CB Richard Ellis Services, the payment of the dividend and
the related reduction of the merger consideration per share of our common stock
increases the aggregate cost of the transactions contemplated by the merger
agreement to CB Richard Ellis Services or otherwise adversely affects CB
Richard Ellis Services or its direct or indirect stockholders.
Notwithstanding this provision in the merger agreement, we do not expect
any legislation of this type to be enacted prior to the time of the merger, and
you should not expect either receipt of a cash dividend on our common stock or
an adjustment in the merger consideration payable for our common stock as a
result of this provision in the merger agreement.
STOCK OPTIONS, WARRANTS, RESTRICTED STOCK AWARDS AND PARTICIPATION INTERESTS
General. The merger agreement provides that immediately prior to the
effective time (a) all outstanding options and warrants, whether vested or
unvested, will be canceled and will represent the right to receive a cash
payment, without interest, less any applicable withholding taxes, equal to the
excess, if any, of the common stock merger consideration over the per share
exercise price of the option or warrant, multiplied by the number of shares of
common stock subject to the option or warrant, and (b) all outstanding
restricted stock awards will be canceled and will represent the right to
receive a cash payment, without interest, less any applicable withholding
taxes, equal to the common stock merger consideration multiplied by the number
of shares of common stock subject to such awards.
Employees of Insignia Douglas Elliman and Insignia Residential Group.
Under our 1998 Stock Incentive Plan, the sale of our subsidiaries, Insignia
Douglas Elliman and Insignia Residential Group (see "Introduction--Recent
Developments") is considered a termination of the employees of these
subsidiaries. Outstanding vested options to purchase shares of our common stock
held by employees of these companies at the time of this sale remain
exercisable in accordance with the terms of the applicable stock option
agreement of each employee. In the merger, shares of our common stock purchased
by exercising such outstanding options will be converted into the right to
receive the common stock merger consideration. If the vested options are not
exercised during the post-termination exercise period set forth in each of
these employee's stock option agreement, these outstanding options will expire
and be cancelled. Also as a result of the sale of Insignia Douglas Elliman and
Insignia Residential Group, each unvested option to purchase shares of our
common stock held by employees of these companies at the time of the sale was
forfeited and canceled.
In connection with the merger, CB Richard Ellis Services has agreed to pay
to each of the holders of expired and cancelled vested or unvested options
described in the preceding paragraph who, in each
54
case, (1) remains employed by Insignia Douglas Elliman or Insignia Residential
Group (or their respective successors) through the effective time of the merger
or (2) is terminated without cause by Insignia Douglas Elliman or Insignia
Residential Group after March 13, 2003 and on or before the effective time of
the merger, a lump sum cash amount, without interest, less any applicable
withholding taxes, equal to the number of shares of common stock underlying
such options multiplied by the excess, if any, of (x) the common stock merger
consideration over (y) the exercise price per share subject to such expired or
forfeited option. This payment will be paid by CB Richard Ellis Services
promptly after the effective time of the merger.
OUR REPRESENTATIONS AND WARRANTIES
In the merger agreement, we have made representations and warranties to
Apple Acquisition relating to:
o our and our subsidiaries' organization, capital structure and other
similar corporate matters;
o our power and authority to enter into the merger agreement and
consummate the merger and the validity, binding effect and enforceability
of the merger agreement against us;
o required filings with and approvals of governmental authorities;
o the absence of conflict with our and our subsidiaries' governing
documents, agreements and obligations and applicable laws, judgments and
orders;
o the making and accuracy of our SEC filings, the fair presentation of our
financial statements and the absence of undisclosed material liabilities;
o our conduct of business and absence of material adverse changes since
September 30, 2002;
o the absence of material litigation;
o tax, environmental, employee benefit and labor matters;
o our compliance with permits and applicable laws;
o title to our assets;
o our intellectual property rights;
o the opinion of Bear Stearns and our costs incurred or to be incurred in
connection with the merger;
o the identification of, and absence of material violations under,
material contracts;
o our owned and leased real property and related real estate matters;
o our insurance;
o our transactions with affiliates;
o environmental matters regarding us;
o the approval and recommendation of the merger and the merger agreement
by our board of directors and the special committee and the vote of
stockholders required to approve the merger;
o the non-contravention of the Delaware takeover statute; and
o the accuracy of this proxy statement.
OUR COVENANTS
Until the closing of the merger or the earlier termination of the merger
agreement, except as expressly contemplated or permitted by the merger
agreement or to the extent that Apple Acquisition otherwise consents in
writing, we have agreed to:
o conduct our business in all material respects in the ordinary course
consistent with past practice;
55
o use commercially reasonable efforts to preserve intact our present
business organization, maintain our material permits, licenses and
approvals, keep available the services of our current key officers and
employees and independent contractors and preserve our relationships with
material customers, lenders, suppliers and others having material
business relationships with us;
o exercise rights which we have to purchase for cash warrants to acquire
stock of one of our French affiliates, provided that we may pay the
purchase price for the warrants with shares of our common stock if
payment in cash would violate our bank credit agreement;
o terminate the employment or independent contractor relations,
immediately prior to the effective time of the merger, of those employees
or independent contractors specified by CBRE Holding; and
o deliver to Apple Acquisition the resignations of all of our directors at
the effective time of the merger.
We also have agreed to the following specific restrictions during this
period, which are subject to the exceptions described in the merger agreement.
Except as expressly contemplated or permitted by the merger agreement and the
disclosure schedules to the merger agreement, or to the extent that Apple
Acquisition otherwise consents in writing, we have agreed not to, and we have
agreed that our subsidiaries will not:
CAPITALIZATION
o split, combine or reclassify any capital stock or amend the terms of any
rights, warrants or options to purchase our securities;
o declare, set aside or pay any dividends or other distributions on any of
our capital stock or equity interests, except for ordinary course
dividends by our subsidiaries and except that we may declare, set aside
and pay dividends on our series A convertible preferred stock and series
B convertible preferred stock;
o repurchase or otherwise acquire our or our subsidiaries' capital stock,
except for cash repurchases of shares of series A convertible preferred
stock or series B convertible preferred at a price equal to or less than
the proposed merger consideration for such shares; or
o issue, authorize or propose to issue any equity securities or warrants,
options or other securities convertible into or exercisable for our
equity securities, other than shares issuable upon the exercise of
outstanding warrants or options issued prior to the signing of the merger
agreement, the vesting of restricted stock or under our employee stock
purchase plan or upon the conversion of, or the payment of dividends on,
the series A preferred stock or series B preferred stock;
EXTRAORDINARY TRANSACTIONS
o make or authorize capital expenditures in excess of specified amounts,
except as contemplated in our budget for 2003 or as specifically
permitted by the merger agreement; or
o acquire, through merger, stock or asset purchase, joint venture or
otherwise, any entity, business or real property or any interest in any
entity, business or real property;
COMPENSATION AND BENEFITS
except as required by law or existing agreements or employee plans:
o increase the compensation or benefits of, or pay a bonus to, any of our
present or former directors, officers or employees, except as
contemplated in our budget for 2003;
o grant or alter the terms of any severance or termination pay or
benefits;
o loan or grant any advances of money or other property to any present or
former director, officer or employee other than advances to brokers and
other commission-based employees in the ordinary course of business
consistent with past practice;
56
o enter into any new, or amend any existing, employment, consulting,
independent contractor, severance or similar agreement;
o establish, adopt, enter into, amend or terminate any employee benefit
plan or collective bargaining agreement;
o grant any equity or equity-based awards, other than in the ordinary
course of business consistent with past practice;
o hire any new employee or enter into any new independent contractor
relationship, except (1) to replace departing employees or independent
contractors, provided that the compensation and benefits offered to the
replacement do not materially exceed that of the replaced employee or
independent contractor, (2) for new employees earning less than a
specified amount, (3) with respect to outstanding employment offers and
(4) ordinary course hiring of brokers; or
o terminate any employee or independent contractor other than in writing;
INDEBTEDNESS
o assume, incur or guarantee any indebtedness for borrowed money, except
we may generally continue to borrow under our existing credit facilities
to fund our working capital in the ordinary course of business consistent
with past practice;
o make any loans, advances or capital contributions to, or investments in,
any other person, other than to Insignia or any of our subsidiaries or to
brokers in the ordinary course of business consistent with past practice;
o issue or sell any debt securities or warrants or rights to acquire any
debt securities; or
o assume, guarantee or endorse any debt obligations of any other person or
entity, except obligations of our wholly-owned subsidiaries;
MATERIAL CONTRACTS
o enter into or assume any material contract or agreement or amend or
terminate any material contract, other than revenue-producing contracts
with some exceptions, or waive, release or assign any material rights or
claims under any material contract; or
o fail to maintain our existing insurance or a commercially reasonable
substitute;
OTHER COVENANTS
o amend or propose to amend our or our subsidiaries' certificates of
incorporation, by laws or other governing documents;
o enter into any contract, commitment or agreement with any of our
affiliates or any of their immediate family members, except for expense
reimbursements and advances, transactions with any non-employee members
of our board of directors and their affiliates and revenue producing
contracts with specified affiliated entities, in each case, in the
ordinary course of business consistent with past practice;
o adopt a plan of liquidation, dissolution, restructuring or other
reorganization, other than the merger;
o sell, lease, license, encumber or otherwise dispose of any of our
properties or assets, other than sales in the ordinary course of business
and consistent with past practice, sales of obsolete assets and sales of
assets not exceeding specified amounts;
o effect any change in any accounting methods in effect as of December 31,
2001, except as may be required by changes in generally accepted
accounting principles or as otherwise specifically disclosed in documents
filed with the SEC, as concurred in by our independent auditors;
57
o effect any material changes in our tax elections or other changes
affecting our taxes, other than in the ordinary course of business
consistent with past practice;
o settle, pay, compromise or discharge any claims or liabilities (a) in
excess of $250,000 or otherwise material to us or (b) arising out of the
merger agreement and related agreements;
o open any office in a new geographical territory, create any new business
division or otherwise enter into any new line of business;
o willfully take any action that would result in a material breach of the
merger agreement or our ability to satisfy the conditions to the merger;
or
o enter into any agreement not in existence as of February 17, 2003 that
would provide for the making of any payment or result in any adverse
change in rights or obligations of us or our subsidiaries as a result of
the merger and the related debt and equity financings.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF CBRE HOLDING, CB RICHARD ELLIS
SERVICES AND APPLE ACQUISITION
In addition to other customary representations and warranties, CBRE
Holding, CB Richard Ellis Services and Apple Acquisition have made the
following representations and warranties in the merger agreement to us:
o Apple Acquisition has received an executed commitment letter from Credit
Suisse First Boston, pursuant to which CSFB has committed to provide to
CB Richard Ellis Services financing in the amount of $610 million to
complete the merger;
o CBRE Holding has entered into a subscription agreement and a letter
agreement with certain existing stockholders of CBRE Holding under which
they have committed to provide to CBRE Holding not less than $100 million
and up to $145 million of equity and/or debt financing; and
o it is the good faith belief of CBRE Holding, CB Richard Ellis Services,
and Apple Acquisition that the financing contemplated by the commitment
letter, the subscription agreement and the letter agreement will be
obtained.
Furthermore, CBRE Holding, CB Richard Ellis Services and Apple Acquisition
have agreed that:
o they will use their commercially reasonable efforts to arrange and
obtain the financing on the terms set forth in the commitmentletter and
the equity financing on the terms set forth in the subscription
agreement, letter agreement and related documents and if they are unable
to obtain the financing or the equity financing, they have agreed to use
commercially reasonable efforts to obtain alternative financing on
overall pricing, cost, timing and maturity terms that are no less
favorable and other terms that are no less favorable in any material
respect to CBRE Holding and CB Richard Ellis Services than those
contained in the commitment letter;
o following the effective time of the merger, CBRE Holding and CB Richard
Ellis Services will cause Insignia, as the surviving corporation, to
provide employee benefits to our employees that, in the aggregate, are
substantially equivalent to employee benefits provided by CB Richard
Ellis Services and its subsidiaries to their own similarly situated
employees;
o for purposes of determining eligibility to participate in and vesting of
benefits under CBRE Holding's or CB Richard Ellis Services's benefit
plans, CBRE Holding and CB Richard Ellis Services have agreed that
continuing employees of Insignia after the merger will receive credit for
their service to Insignia prior to the time of the merger;
o they will honor all of Insignia's obligations under specified existing
employment and indemnification agreements;
o they will cause Insignia, as the surviving corporation, to pay to each
participant of Insignia's 401(k) restoration plan whose employment with
Insignia terminates, the amount owing to him under that plan as of the
date of termination;
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o they acknowledge that some of our present and former employees and
consultants hold participation interests in the profits generated by some
of our real estate investment assets, they agree to use all commercially
reasonable efforts to provide for the holders of these interests to
receive compensation or a distribution in respect of their interests, if
any is due, only when the underlying real estate assets are sold, rather
than if we sell an interest in the entity that owns the assets and they
consent to changes in the governing documents of those entities, so that
these entities may not sell or otherwise transfer material assets without
the approval of at least one-third in interest of the present or former
employees and consultants holding the profit participation interests;
o for six years and one month from the effective time of the merger, CBRE
Holding will, and will cause CB Richard Ellis Services and the surviving
corporation to, indemnify our and our subsidiaries' present and former
directors and officers against liabilities arising in their capacities as
such prior to the effective time of the merger; and
o for six years and one month from the effective time of the merger, CBRE
Holding and CB Richard Ellis Services have agreed to cause the surviving
corporation to provide to our and our subsidiaries' present and former
directors and officers liability and fiduciary liability insurance
protection with the same coverage and in the same amount, and on terms no
less favorable to the directors and officers than that currently provided
by our directors' and officers' liability insurance policies; provided,
however, that the surviving corporation will not be obligated to make
premium payments for such insurance to the extent that the annual
premiums exceed 300% of the annual premiums currently paid by us for such
insurance except that the surviving corporation will be obligated to
obtain such insurance with the maximum coverage as can be obtained at an
annual premium equal to 300% of the annual premiums currently paid by us.
STOCKHOLDER MEETING
We have agreed to cause a stockholders meeting to be called in order to
consider adoption of the merger agreement and approval of the merger. In
addition, if the special committee or our board of directors withdraws or
changes its recommendation with respect to the merger agreement and the merger
as permitted below, and the merger agreement has not been terminated by us or
Apple Acquisition as permitted below, the merger agreement provides that we
will still hold the special meeting for stockholders to vote on the adoption of
the merger agreement and the approval of the merger.
NO SOLICITATION
We have agreed not to, and not to permit or authorize any of our
subsidiaries or authorize or knowingly permit any of our or our subsidiaries'
officers, directors, employees, investment bankers, attorneys, accountants,
agents or other advisors or representatives to, solicit, initiate or otherwise
knowingly encourage the submission of any Acquisition Proposal (as defined
below), or participate in any discussions or negotiations regarding, or furnish
any information with respect to, or take any other action knowingly to
facilitate any inquiries or the making of any proposal that constitutes, or
that would reasonably be expected to lead to, any Acquisition Proposal, grant
any waiver or release under any standstill or similar agreement in order to
permit the other party to such agreement to acquire our securities or enter
into any agreement with respect to an Acquisition Proposal.
However, we may prior to the special meeting, (a) provide, under a
confidentiality agreement, information to and (b) participate in discussions or
negotiations with, anyone who has made an unsolicited Acquisition Proposal, in
each case only if our board of directors or the special committee determines in
good faith by majority vote, (1) after consultation with outside legal counsel
and financial advisors, that it is necessary to do so in order to comply with
its fiduciary duties to our stockholders under applicable law and (2) that the
Acquisition Proposal is reasonably likely to lead to a Superior Proposal (as
defined below).
In addition, except as described below, we have agreed that neither our
board of directors nor the special committee will:
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o amend, withdraw, modify, change, condition or qualify in any manner
adverse to Apple Acquisition its approval or recommendation of the merger
agreement; or
o recommend any Acquisition Proposal.
However, our board of directors may withdraw or modify its approval of or
recommendation of the merger agreement and it may recommend an Acquisition
Proposal, enter into an agreement regarding such Acquisition Proposal and
terminate the merger agreement prior to its approval by our stockholders if we
receive an Acquisition Proposal that is a Superior Proposal, and
o our board of directors determines in good faith, after consultation with
outside legal counsel and financial advisors, that termination is
required in order to comply with the board of directors' fiduciary duties
to our stockholders under applicable law;
o at least two business days prior to terminating the merger agreement in
connection with the acceptance of a Superior Proposal, our board of
directors gives prior written notice to CB Richard Ellis Services of the
receipt of an Acquisition Proposal and, if applicable, its intention to
withdraw or modify its approval of a recommendation of the merger and its
intention to accept a Superior Proposal, setting forth the terms and
conditions of, and the identity of the person making, the Superior
Proposal;
o prior to or concurrently with the termination, we pay Apple Acquisition
the $7 million termination fee; and
o concurrently with the termination, we enter into a definitive
acquisition agreement regarding the Superior Proposal.
Our obligation to hold a special meeting of our stockholders to approve
the merger and the merger agreement will not be affected by the commencement,
proposal, public disclosure or communication to us of any Acquisition Proposal
or Superior Proposal or by the taking of any action by our board, except that
Insignia will not be obligated to hold the special meeting after the
termination of the merger agreement by us as provided above or by Apple
Acquisition as described below (See "--Termination of the Merger Agreement").
We have agreed to notify Apple Acquisition promptly of any request for
information or other inquiry we receive that we reasonably believe could lead
to an Acquisition Proposal, and to keep Apple Acquisition informed of all
developments relating to any request, inquiry or Acquisition Proposal. We have
also agreed to cease all existing activities and discussions with third parties
regarding the foregoing and to request that all persons who have received
confidential information about Insignia under a confidentiality agreement
either destroy or return the confidential information.
"Acquisition Proposal" means any offer or proposal from any third party,
other than the merger, for:
o a transaction in which a third party would acquire beneficial ownership
of more than 15% of the outstanding shares of any class of our equity
securities, whether from us or pursuant to a tender offer, exchange offer
or otherwise;
o a merger, consolidation, business combination, reorganization, sale of
all or substantially all of our assets, recapitalization, liquidation,
dissolution or similar transaction involving us; or
o except for certain asset sales contemplated by the merger agreement, any
transaction which would result in a third party acquiring more than 15%
of the fair market value on a consolidated basis of our assets, including
the capital stock of our subsidiaries, immediately prior to such
transaction whether by purchase of assets, acquisition of stock of a
subsidiary or otherwise.
"Superior Proposal" means any proposal made by a third party to acquire at
least 50% of the outstanding shares of any class of our equity securities, or
at least 50% of our consolidated assets or a proposal regarding a merger,
consolidation, recapitalization or similar transaction involving us, which a
majority of the disinterested members of our board of directors or the special
committee in good faith determines (1) would, if consummated, result in a
transaction that is more favorable to our stockholders than the merger and (2)
is reasonably capable of being consummated. In making this determination, our
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board of directors or the special committee must take into account, among other
things, relevant legal, financial and regulatory considerations and other
aspects of such proposal and the third party making such proposal and the
conditions and prospects for completion of such proposal, including the
availability of committed financing. Our board also must receive the advice of
its outside legal counsel and financial advisors.
CONDITIONS TO THE MERGER
Each party's obligation to effect the merger is subject to the
satisfaction of the following conditions:
o the adoption of the merger agreement and approval of the merger by the
holders of a majority of the outstanding shares of our common stock as of
the record date;
o the expiration or earlier termination of any waiting period applicable
to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the receipt of any required approval under other similar
applicable laws; and
o the absence of any restraining order, injunction or other order issued
by any court of competent jurisdiction, or other legal restraint or
prohibition, restraining, enjoining or otherwise prohibiting or making
illegal the consummation of the merger.
Our obligation to consummate the merger is subject to the satisfaction of
the following conditions, unless we waive satisfaction of a condition in
writing:
o each of CBRE Holding, CB Richard Ellis Services and Apple Acquisition
must have performed in all material respects, its obligations under the
merger agreement to be performed by it at or prior to the effective time
of the merger; and
o the representations and warranties of CBRE Holding, CB Richard Ellis
Services and Apple Acquisition must be materially true and correct; this
condition will be satisfied as long as all failures of their
representations and warranties to be true and correct, would not prevent
or materially impair the ability of CBRE Holding, CB Richard Ellis
Services and Apple Acquisition to consummate the merger and the other
transactions contemplated by the merger agreement.
The obligation of CBRE Holding, CB Richard Ellis Services and Apple
Acquisition to consummate the merger is subject to the satisfaction of the
following conditions, unless CB Richard Ellis Services waives satisfaction of a
condition in writing:
o we must have performed, in all material respects, our obligations under
the merger agreement to be performed by us at or prior to the effective
time of the merger;
o our representations and warranties must be materially true and correct;
this condition will be satisfied as long as the failure of our
representations and warranties to be true and correct, would not
reasonably be expected to have a Company Material Adverse Effect (as
defined below) and would not result in damages to CBRE Holding, CB
Richard Ellis Services or the surviving corporation of more than $20
million;
o all consents, approvals, authorizations and filings specified in the
merger agreement (consisting of trade regulatory filings and approvals in
the United States, France and United Kingdom) must have been obtained or
made (on April 2, 2003, the Federal Trade Commission granted early
termination of the waiting period under the Hart-Scott-Rodino Act with
respect to each required filing in the United States and the French
antitrust authority granted its approval as of April 17, 2003); and
o CBRE Holding or CB Richard Ellis Services shall have received at least
$610 million of debt financing on the terms contemplated by the
commitment letter with CSFB or on overall pricing, cost, timing, and
maturity terms that are no less favorable and other terms that are no
less favorable in any material respect to CBRE Holding and CB Richard
Ellis Services;
"Company Material Adverse Effect" means any material adverse effect on (a)
the business, assets, liabilities, financial condition or results of operations
of us and our subsidiaries, taken as a whole, or (b)
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our ability to perform our obligations under the merger agreement or related
agreements, except that Company Material Adverse Effect does not include any
material adverse effect arising out of, or resulting from:
o any generally applicable change in law, regulations or U.S. generally
accepted accounting principles or the interpretation of any of these;
o the termination of any of our employees or independent contractors,
other than as a result of our breach of the merger agreement or as a
result of our termination, other than for cause or as requested by the
CBRE Companies, of such employee or independent contractor in writing;
o any Acquisition Proposal, or the announcement of the merger agreement,
the discussions in connection with the merger agreement, or the
agreements relating to the transactions contemplated by the merger
agreement, including any suit, action or proceeding arising out of or in
connection with the merger agreement, other than causes of action brought
by CBRE Holding, CB Richard Ellis Services or Apple Acquisition for
breach of the merger agreement;
o any disposition of our assets that does not violate the merger agreement
or the write-down or write-off of the value of any of these assets for
accounting purposes;
o actions or inactions specifically permitted by a prior written waiver by
CBRE Holding, CB Richard Ellis Services and Apple Acquisition of our
performance of any of our obligations under the merger agreement;
o our failure to obtain any third party consents to the execution and
delivery of the merger agreement or other related agreements;
o any diminution in value of, or adverse developments relating to, certain
of our subsidiaries that own real estate, as specified in the merger
agreement;
o the cancellation or notice of cancellation of third-party management,
tenant representation and/or brokerage contracts to which we are or may
become a party;
o conditions generally affecting the business or industry in which we
operate;
o United States, United Kingdom, French or global general economic or
political conditions or financial markets; and
o any outbreak or escalation of hostilities, including any declaration of
war by the U.S. Congress, or acts of terrorism.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated, and the merger may be abandoned,
at any time prior to the effective time of the merger, whether before or after
adoption of the merger agreement and approval of the merger by our
stockholders:
o by mutual written agreement of CBRE Holding, CB Richard Ellis Services,
Apple Acquisition and us;
o by either Apple Acquisition or us, if the effective time of the merger
does not occur on or before July 14, 2003, so long as the failure of the
merger to occur is not the result of the breach by the terminating party
of a provision of the merger agreement;
o by either Apple Acquisition or us, if any law makes consummation of the
merger illegal or otherwise prohibited or any governmental authority
issues a final order, decree or ruling, or takes any other action,
enjoining or otherwise prohibiting the merger, and the order, decree,
ruling or other action becomes non-appealable;
o by either Apple Acquisition or us, if the merger agreement is not
adopted and the merger is not approved by the requisite vote of our
stockholders at the special meeting or any adjournment of the special
meeting;
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o by Apple Acquisition, if our board of directors or the special committee
(a) withdraws, changes or modifies our approval or recommendation of the
merger or the merger agreement, (b) approves or recommends to our
stockholders another Acquisition Proposal; (c) approves or recommends
that our stockholders tender, or otherwise fails to recommend our
stockholders not to tender, their shares in any tender or exchange offer
that is an Acquisition Proposal, other than by CBRE Holding, CB Richard
Ellis Services, Apple Acquisition or their affiliates; or (d) delivers
any notice that we have received a Superior Proposal and intend to
terminate the merger agreement, provided that Apple Acquisition may only
terminate the merger agreement after the third business day following
such notice;
o by Apple Acquisition, if any person or group, other than CBRE Holding,
CB Richard Ellis Services, Apple Acquisition or their affiliates,
acquires beneficial ownership of a majority of the outstanding shares of
our common stock;
o by us, if there is a breach or failure to perform in any material
respect of any of CBRE Holding's, CB Richard Ellis Services's or Apple
Acquisition's representations, warranties, covenants or agreements
contained in the merger agreement, the effect of which breach or failure
to perform is (1) a failure to receive antitrust approvals or (2) a
material adverse effect on CBRE Holding's, CB Richard Ellis Services's or
Apple Acquisition's ability to consummate the merger;
o by us, concurrently with the execution of an Acquisition Agreement
permitted under the merger agreement in connection with a Superior
Proposal and the payment of the $7 million termination fee to Apple
Acquisition; or
o by Apple Acquisition, if there is a breach or failure to perform in any
material respect of any of our representations, warranties, covenants or
agreements, the effect of which breach or failure to perform is (1) a
failure to receive antitrust approval or (2) a material adverse effect on
Insignia or our ability to consummate the merger and the damages
reasonably likely to be suffered by CBRE Holding, CB Richard Ellis
Services or the surviving corporation as a result of such breach or
breaches exceeds $20 million.
Upon termination, the merger agreement will become void and none of the
parties or their representatives will have any liability or obligation under
the merger agreement, except (1) under specified sections of the merger
agreement, including those pertaining to confidentiality obligations and
obligations relating to each party's not to solicit employment of the other
party's employees of CBRE Holding, CB Richard Ellis Services and Apple
Acquisition and (2) as set forth below under "--Termination Fees;
Indemnification; Amendment of No Raid Agreement." However, no termination will
relieve any party from liability or damages resulting from a willful breach of
the merger agreement.
TERMINATION FEE; INDEMNIFICATION; AMENDMENT OF NO RAID AGREEMENT
Termination Fee. The merger agreement provides for the payment by us to
Apple Acquisition of a fee of $7,000,000 if the merger agreement is terminated
under the following circumstances:
o Apple Acquisition terminates the merger agreement, because (a) our board
of directors or the special committee amended, withdrew, modified,
changed, conditioned or qualified their approval or recommendation of the
merger or the merger agreement in a manner adverse to CBRE Holding, CB
Richard Ellis Services or Apple Acquisition as a result of the receipt or
public announcement or disclosure of an Acquisition Proposal; (b) our
board of directors or the special committee approved or recommended to
our stockholders another Acquisition Proposal; (c) our board of directors
or the special committee approved or recommended that our stockholders
tender, or otherwise failed to recommend our stockholders not to tender,
their shares in any tender or exchange offer that is an Acquisition
Proposal, other than by CBRE Holding, CB Richard Ellis Services, Apple
Acquisition or their affiliates; or (d) we delivered any notice to CB
Richard Ellis Services that we have received a Superior Proposal and we
intend to terminate the merger agreement;
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o any person or group, other than CBRE Holding, CB Richard Ellis Services,
Apple Acquisition or their affiliates acquires beneficial ownership of a
majority of the outstanding shares of our common stock;
o we terminate the merger agreement concurrently with the execution of an
acquisition agreement permitted under the merger agreement in connection
with a Superior Proposal;
o either we or Apple Acquisition terminates the merger agreement because
the merger has not occurred prior to July 14, 2003, our stockholders have
voted against the merger at the special meeting or any adjournment of the
special meeting or Apple Acquisition terminates the merger agreement as a
result of our material breach and:
(1) prior to the termination, a third party has made an Acquisition
Proposal, except that all percentages in that definition are 30%,
instead of 15%, for this purpose; and
(2) within 12 months after the date of termination, we complete, or
enter into an agreement relating to an Acquisition Proposal, except
that all percentages in that definition are 30%, instead of 15%,
for this purpose.
Indemnification. If the merger agreement is terminated: (a) as a result of
the CBRE Companies' breach or failure to perform in any material respect their
representations, warranties or covenants or (b) by mutual agreement of the CBRE
Companies and us or by Apple Acquisition or us if the merger has not been
consummated by July 14, 2003, in either case as a result of the failure to
obtain regulatory approval of the merger or the failure of CBRE Holding or CB
Richard Ellis Services to receive at least $610 million in debt financing on
the terms contemplated in the merger agreement, then the CBRE Companies, as our
sole remedy, will indemnify us for our damages, during the period from February
7, 2003 to the date of termination of the merger agreement, resulting from the
following:
o the termination by any of our commercial real estate services brokers or
independent contractors as of February 7, 2003 of their relationship with
us; or
o the termination or substantial diminution by any of our clients as of
February 7, 2003 of their commercial real estate services relationship
with us;
in each case, if such termination or diminution is a result of the proposed
merger and does not result from our breach of the merger agreement. The CBRE
Companies' indemnification obligation is limited to $50 million and does not
include any damages arising out of conditions generally affecting (a) the
business or industry in which we operate, (b) United States, United Kingdom,
French or global general economic or political conditions or financial markets,
(c) any outbreak or escalation of hostilities, including any declaration of war
by the U.S. Congress, or acts of terrorism or (d) any reduction in the value of
our common stock or other securities.
Amendment of No Raid Agreement. In addition, if the merger agreement is
terminated under circumstances obligating the CBRE Companies to indemnify us
(as described in the immediately prior paragraph above), our no raid agreement
will be automatically amended to prohibit only CBRE Holding from hiring or
engaging as an employee or independent contractor, or to solicit for employment
or for engagement as an independent contractor, any of our employees or
independent contractors, for a period of 18 months commencing upon such
termination by us, with no corresponding restrictions on us to hire or engage,
or solicit for employment or engagement, any employee or independent contractor
of CBRE Holding.
AMENDMENTS TO THE MERGER AGREEMENT
Any provision of the merger agreement may be amended or waived prior to
the effective time of the merger if the amendment or waiver is in writing and
signed, in the case of an amendment, by Insignia, a member of the special
committee on behalf of the special committee, CB Richard Ellis Services and
Apple Acquisition or, in the case of a waiver, by the party against whom the
waiver is to be effective. After adoption of the merger agreement and approval
of the merger by our stockholders, no amendment or modification of the merger
agreement may be made that by law requires further approval of our stockholders
without obtaining this further approval.
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CBRE HOLDING, INC.
OVERVIEW
CBRE Holding is the parent company of CB Richard Ellis Services, one of
the world's largest commercial real estate services companies in terms of
revenue, offering a full range of services to commercial real estate occupiers,
owners, lenders and investors. In the United States, CBRE Holding operates
through CB Richard Ellis, Inc. and L.J. Melody, in the United Kingdom through
CB Hillier Parker and in Canada through CB Richard Ellis Limited. CB Richard
Ellis Investors, LLC, which is referred to herein as CBRE Investors, and its
foreign affiliates conduct business in the United States, Europe and Asia. CBRE
Holding operates in 47 countries through various subsidiaries and pursuant to
cooperation agreements. Approximately 73% of CBRE Holding's revenue is
generated from the United States and 27% is generated from the rest of the
world. See the notes to CBRE Holding's financial statements included elsewhere
in this proxy statement.
Where reference is made in this proxy statement to CBRE Holding's
operations and businesses, the operations and businesses referred to are those
of CBRE Holding's subsidiaries.
HISTORY
CBRE Holding, a Delaware corporation, was incorporated on February 20,
2001 as Blum CB Holding Corporation. On March 26, 2001, Blum CB Holding
Corporation changed its name to CBRE Holding, Inc. CBRE Holding and its former
wholly owned subsidiary, Blum CB Corporation, which is referred to herein as
Blum CB, were created to acquire all of the then-outstanding shares of CB
Richard Ellis Services. Prior to July 20, 2001, CBRE Holding was a wholly owned
subsidiary of Blum Strategic Partners, L.P., which was then known as RCBA
Strategic Partners, L.P., and is an affiliate of Richard C. Blum, who is a
director of both CBRE Holding and CB Richard Ellis Services.
On July 20, 2001, CBRE Holding acquired CB Richard Ellis Services pursuant
to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001,
among CBRE Holding, CB Richard Ellis Services and Blum CB. Blum CB was merged
with and into CB Richard Ellis Services, and CB Richard Ellis Services was the
surviving corporation. This merger is referred to herein as the 2001 merger. CB
Richard Ellis Services' operations after the 2001 merger were substantially the
same as its services prior to the 2001 merger. CBRE Holding has no substantive
operations other than its investment in CB Richard Ellis Services. Information
regarding the 2001 merger is included in CBRE Holding's "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
within the notes to CBRE Holding's financial statements included elsewhere in
this proxy statement.
BUSINESS SEGMENTS
In the third quarter of 2001, subsequent to the 2001 merger, CBRE Holding
reorganized its business segments as part of its efforts to reduce costs and
streamline its operations. CBRE Holding reports its operations through three
geographically organized segments: (1) Americas, (2) Europe, Middle East and
Africa (EMEA) and (3) Asia Pacific. The Americas consists of operations in the
United States, Canada, Mexico, and Central and South America. EMEA mainly
consists of operations in Europe, and Asia Pacific consists of operations in
Asia, Australia and New Zealand. Previously, CBRE Holding operated and reported
its segments based on the applicable type of revenue transaction.
Information regarding revenue and operating income or loss attributable to
each of CBRE Holding's business segments is included in CBRE Holding's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and within the notes to CBRE Holding's financial statements
included elsewhere in the proxy statement.
AMERICAS
The Americas is CBRE Holding's largest business segment in terms of
revenue, earnings and cash flow. It includes the following major lines of
businesses:
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o The Brokerage Services line of business provides sales, leasing and
consulting services relating to commercial real estate. This line of
business is built upon relationships that CBRE Holding establishes with
clients. This business does not require significant capital expenditures
on a recurring basis. However, due to the low barriers to entry and
strong competition, CBRE Holding strives to retain top producers through
an attractive compensation program that motivates its sales force to
achieve higher revenue production. Therefore, the most significant cost
is commission expense. In addition, CBRE Holding believes that the CB
Richard Ellis brand provides it with a competitive operating advantage.
This line of business employs approximately 2,120 individuals in offices
located in most of the largest metropolitan areas in the United States
and approximately 410 individuals in Canada and Latin America.
o The Investment Properties line of business provides similar brokerage
services primarily for commercial, multi-housing and hotel real estate
property marketed for sale to institutional and private investors. This
line of business employs approximately 480 individuals in offices mainly
located in North America.
o The Corporate Services line of business focuses on building
relationships with large corporate clients. The objective is to establish
long-term relationships with clients that could benefit from utilizing
Corporate Services' broad array of services and/or global presence. These
clients are offered the opportunity to be relieved of the responsibility
of managing their commercial real estate activities at a lower cost than
they could achieve by managing these activities themselves. Corporate
Services includes research and consulting, structured finance, project
management, lease administration and transaction management. These
services can be delivered on a bundled or unbundled basis involving other
lines of business in single or multiple markets. This business line
employs approximately 420 individuals, primarily within North America.
o The Commercial Mortgage line of business provides commercial loan
origination and loan servicing through CBRE Holding's wholly owned
subsidiary, L.J. Melody. The Commercial Mortgage business line focuses on
the origination of commercial mortgages without incurring principal risk.
As part of its activities, L.J. Melody has established correspondent
relationships and conduit arrangements with investment banking firms,
national banks, credit companies, insurance companies, pension funds and
government agencies. Additionally, L.J. Melody participates in a
partnership whereby costs are shared in the servicing of its loan
portfolios, which allows for significant cost savings. This business line
employs approximately 325 individuals in the US.
o The Valuation line of business provides valuation, appraisal and market
research services. These services include market value appraisals,
litigation support, discounted cash flow analyses, and feasibility and
fairness opinions. CBRE Holding believes that the valuation business line
is one of the largest in its industry domestically. At December 31, 2002,
this business line had over 200 employees on staff in the Americas. It
has developed proprietary technology for preparing and delivering
valuation reports to its clients, which provides a competitive advantage
over its rivals.
o The Investment Management line of business provides investment
management services through CBRE Holding's wholly owned subsidiary, CBRE
Investors. CBRE Investors' clients include pension plans, investment
funds, insurance companies and other organizations seeking to generate
returns and diversification through investment in real estate. CBRE
Investors sponsors funds and investment programs that span the
risk/return spectrum. In higher yield strategies, CBRE Investors
"co-invests" with its clients/partners. These co-investments typically
range from 2% to 5% of the equity in a particular fund. CBRE Investors is
organized into three general client focused groups according to
investment strategy, which include: Managed Accounts (low risk),
Strategic Partners (value added funds) and Special Situations (higher
yield and highly focused strategies). Operationally, a dedicated
investment team with the requisite skill sets and location executes each
investment strategy. Each team's compensation is driven largely by the
investment performance of its particular strategy/fund. This
organizational structure is designed to align the interests of team
members with those of the firm and its investor clients/partners and to
enhance
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accountability and performance. Dedicated teams share resources such as
accounting, financial controls, information technology, investor services
and research. In addition to the research within the CB Richard Ellis
platform, which focuses primarily on market conditions and forecasts,
CBRE Investors has an in-house team of research professionals who focus
on investment strategy and underwriting. CBRE Investors has approximately
110 employees located in its Los Angeles headquarters and in a regional
office in Boston.
o The Asset Services line of business provides value-added asset and
related services for income-producing properties owned by local, regional
and institutional investors. At December 31, 2002, it managed
approximately 216.8 million square feet of commercial space in the
Americas. Asset Services includes property management, construction
management, marketing, leasing, and accounting and financial services for
investor-owned properties, including office, industrial and retail
properties. Asset Services markets its services primarily to long-term
institutional owners of large commercial real estate assets. Asset
Services' contractual relationships put CBRE Holding in a position to
provide other services for the owner, including refinancing, appraisal,
and lease and sales brokerage services. Asset Services employs more than
1,010 individuals in the US, Canada and Latin America, part of whose
compensation is reimbursed by clients. Most asset services are performed
by management teams located on-site or in the vicinity of the properties
they manage. This provides property owners and tenants with immediate and
easily accessible service, enhancing client awareness of manager
accountability. All personnel are trained and encouraged to continue
their education through both internally-sponsored and outside training.
Asset Services personnel utilize state-of-the-art technology to deliver
marketing, operations and accounting services.
o The Facilities Management line of business specializes in the
administration, management, maintenance and project management of
properties that are occupied by large corporations and institutions. At
December 31, 2002, Facilities Management had approximately 113.1 million
square feet under management in the Americas, comprised of corporate
headquarters, regional offices, administrative offices and manufacturing
and distribution facilities. The Facilities Management business line
employs over 820 individuals in the Americas, most of whose compensation
is reimbursed by clients. In addition to providing a full range of
corporate services through contractual relationships, the Facilities
Management group responds to client requests generated by CBRE Holding's
other business lines for significant, single-assignment acquisition,
disposition and strategic real estate consulting assignments that may
lead to long-term relationships.
EMEA
CBRE Holding's EMEA division has 44 offices located in 27 countries, with
its largest operations located in the United Kingdom, France, Spain, the
Netherlands and Germany. Operations within the various countries typically
provide, at a minimum, the following services: Brokerage, Investment
Properties, Corporate Services, Valuation/Appraisal Services, Asset Services
and Facilities Management, with approximately 83.7 million square feet under
management. Certain countries also provide Financial and Investment Management
services. These services are provided to a wide range of clients and cover
office, retail, leisure, industrial, logistics, biotechnology,
telecommunications and residential property assets.
CBRE Holding, operating as CB Hillier Parker in the United Kingdom, is one
of the leading real estate services companies in that country. It provides a
range of commercial property real estate services to investment, commercial and
corporate clients located in London. CBRE Holding also has four regional
offices in Birmingham, Manchester, Edinburgh and Glasgow. In France, CBRE
Holding is a key market leader in Paris and provides a complete range of
services to the commercial property sector, as well as some services to the
residential property market. In Spain, CBRE Holding provides extensive coverage
operating through its offices in Madrid, Barcelona, Valencia, Malaga, Marbella
and Palma de Mallorca. CBRE Holding's Netherlands business is based in
Amsterdam, while its German operations are located in Frankfurt, Munich, Berlin
and Hamburg. CBRE Holding's operations in these countries generally provide a
full range of services to the commercial property sector, along with some
residential property
67
services. As of December 31, 2002, there were over 1,300 professional and
support staff employed, of which approximately 700 were in the UK.
ASIA PACIFIC
CBRE Holding's Asia Pacific division has 26 offices located in 11
countries. CBRE Holding believes it is one of only a few companies that can
provide a full range of real estate services to large corporations throughout
the region, including: Brokerage, Investment Management (in Japan only),
Corporate Services, Valuation/Appraisal Services, Asset Services and Facilities
Management, with approximately 140.0 million square feet under management. The
CB Richard Ellis brand name is recognized throughout this region as one of the
leading worldwide commercial real estate services firms. This division employs
over 2,000 individuals. In Asia, CBRE Holding's principal operations are
located in China (including Hong Kong), Singapore, South Korea and Japan. The
Pacific region includes Australia and New Zealand with principal offices
located in Auckland, Brisbane, Melbourne, Perth and Sydney.
COMPETITIVE STRENGTHS
The market for CBRE Holding's commercial real estate business is both
highly fragmented and competitive. Thousands of local commercial real estate
brokerage firms and hundreds of regional commercial real estate brokerage firms
have offices throughout the world. Most of CBRE Holding's competitors in the
Brokerage and Asset Services lines of business are local or regional firms that
are substantially smaller than CBRE Holding on an overall basis, but in some
cases may be larger locally. In addition, there are several national, and in
some cases international, real estate brokerage firms with whom CBRE Holding
competes. CBRE Holding believes it has a variety of competitive advantages that
have helped to establish its strong, global leadership position within the
commercial real estate services industry. These advantages include the
following:
Global Brand Name and Presence. CBRE Holding is one of the largest
commercial real estate services providers in the world in terms of revenue and,
together with its predecessors, has been in existence for 97 years. CBRE
Holding operates over 200 offices in 47 countries around the world. CBRE
Holding believes that it is among the leading commercial real estate services
firms in several major U.S. markets including New York, Los Angeles, Chicago,
Houston, Dallas / Fort Worth and Phoenix as well as in many other important
real estate markets around the world including Hong Kong, London and Paris.
CBRE Holding's extensive global reach combined with its localized knowledge
enables it to provide world-class service to its numerous multi-regional and
multi-national clients. Furthermore, as a result of its global brand
recognition and geographic reach, CBRE Holding believes that large
corporations, institutional owners and users of real estate recognize it as a
pre-eminent provider of high quality, professional, multi-functional real
estate services.
Market Leader and Full Service Provider. CBRE Holding provides a full
range of real estate services to meet the needs of its clients. These services
include commercial real estate Brokerage Services, Investment Properties,
Corporate Services, Mortgage Banking, Investment Management, Valuation and
Appraisal Services, Real Estate Market Research, Asset Services and Facilities
Management. CBRE Holding believes that its combination of significant local
market presence, strong client relationships and its scalable, diversified line
of business platforms differentiates it from its competitors and provides it
with a competitive advantage.
Strong Relationships with Established Customers. CBRE Holding has
long-standing relationships with a number of major real estate investors, and
its broad national and international presence has enabled it to develop
extensive relationships with many leading corporations.
Recurring Revenue Stream. CBRE Holding believes it is well positioned to
generate recurring revenue through the turnover of leases and properties for
which it has previously acted as transaction manager. CBRE Holding's years of
strong local market presence have allowed it to develop significant repeat
client relationships, which are responsible for a large part of its business.
Attractive Business Model. CBRE Holding's business model features a
diversified revenue base, a variable cost structure and low capital
requirements.
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- Diversified Revenue Base. CBRE Holding's global operations, multiple
service lines and extensive customer relationships provide it with a
diversified revenue base. Approximately 27% of CBRE Holding's 2002 revenue
was generated outside the United States while 25% of its 2002 revenue was
generated from its non-brokerage business.
- Variable Cost Structure. CBRE Holding's sales and leasing producers are
generally paid on a commission and bonus basis, which correlates with CBRE
Holding's revenue performance. This flexible cost structure allows CBRE
Holding to maintain its operating margins in a variety of economic
conditions.
- Low Capital Requirements. CBRE Holding's business model is structured to
provide high value added services with low capital intensity. In 2002, CBRE
Holding's capital expenditures remained low at approximately 1.4% of 2002
revenue.
Empowered Resources. CBRE Holding's proprietary data network gives its
professionals instant access to local and global market knowledge to meet its
clients' needs. It also enables CBRE Holding's professionals to build
cross-functional teams to work collaboratively on projects. With real-time
access to state-of-the-art information systems, its professionals are empowered
to support clients in achieving their business goals.
Strong Senior Management with a Significant Equity Stake. CBRE Holding's
senior management team consists of a number of highly respected executives,
most of whom have over 20 years of broad experience in the real estate
industry. CBRE Holding's senior management team beneficially owns approximately
5% of CBRE Holding's outstanding common stock.
L.J. Melody competes in the United States with a large number of mortgage
banking firms and institutional lenders as well as regional and national
investment banking firms and insurance companies in providing its mortgage
banking services. Appraisal and valuation services are provided by other
international, national, regional and local appraisal firms and some
international, national and regional accounting firms. CBRE Investors has
numerous competitors including other real estate investment managers and
investment banks.
CBRE Holding's Asset Services and Facilities Management lines of business
compete for the right to manage properties controlled by third parties. The
competitor may be the owner of the property who is trying to decide upon the
efficiency of outsourcing or another management services company. Increasing
competition in recent years has resulted in increased pressure to provide
additional services at lower rates. CBRE Holding has mitigated that pressure by
reducing the cost of delivery through automation and by providing services that
generate premium fees. One way CBRE Holding seeks to grow the Asset Services
and Facilities Management lines of business is through assignments that provide
synergies with CBRE Holding's other lines of business.
RISK FACTORS
THE SUCCESS OF CBRE HOLDING'S BUSINESS IS SIGNIFICANTLY RELATED TO GENERAL
ECONOMIC CONDITIONS AND, ACCORDINGLY, ITS BUSINESS COULD BE HARMED IN THE
EVENT OF AN ECONOMIC SLOWDOWN OR RECESSION.
During 2002, CBRE Holding continued to be adversely affected by the
slowdown in the global economy, which negatively impacted the commercial real
estate market. This caused a decline in leasing activities within the United
States, which was partially offset by improved overall revenues in Europe and
Asia.
Moreover, in part because of the terrorist attacks on September 11, 2001
and the subsequent outbreak of hostilities as well as the conflict with Iraq
and the risk of conflict with North Korea, the economic climate in the United
States and abroad remains uncertain, which may have a further adverse effect on
commercial real estate market conditions and, in turn, CBRE Holding's operating
results.
Periods of economic slowdown or recession in the United States and in
other countries, rising interest rates, a declining demand for real estate, or
the public perception that any of these events may occur, can harm many
segments of CBRE Holding's business. These economic conditions could result in
a general decline in rents, which in turn would reduce revenue from property
management fees and brokerage
69
commissions derived from property sales and leases. In addition, these
conditions could lead to a decline in sales prices as well as a decline in
demand for funds invested in commercial real estate and related assets. An
economic downturn or a significant increase in interest rates also may reduce
the amount of loan originations and related servicing by the commercial
mortgage banking business. If the brokerage and mortgage banking businesses are
negatively impacted, it is likely that the other lines of business would also
suffer due to the relationship among the various business lines. Further, as a
result of CBRE Holding's debt level and the terms of the debt instruments
entered into in connection with the 2001 merger and related transactions, CBRE
Holding's exposure to adverse general economic conditions is heightened.
IF THE PROPERTIES THAT CBRE HOLDING MANAGES FAIL TO PERFORM, ITS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED.
The revenue CBRE Holding generates from its Asset Services and Facilities
Management lines of business is generally a percentage of aggregate rent
collections from properties, although many management agreements provide for a
specified minimum management fee. Accordingly, CBRE Holding's success partially
depends upon the performance of the properties it manages. The performance of
these properties will depend upon the following factors, among others, many of
which are partially or completely outside of CBRE Holding's control:
o CBRE Holding's ability to attract and retain creditworthy tenants;
o the magnitude of defaults by tenants under their respective leases;
o CBRE Holding's ability to control operating expenses;
o governmental regulations, local rent control or stabilization ordinances
which are in, or may be put into, effect;
o various uninsurable risks;
o financial conditions prevailing generally and in the areas in which
these properties are located;
o the nature and extent of competitive properties; and
o the real estate market generally.
CBRE HOLDING'S GROWTH HAS DEPENDED SIGNIFICANTLY UPON ACQUISITIONS, WHICH
MAY NOT BE AVAILABLE IN THE FUTURE AND MAY NOT PERFORM AS CBRE HOLDING
EXPECTED.
A significant component of CBRE Holding's growth has occurred through
acquisitions. Any future growth through acquisitions will be partially
dependent upon the continued availability of suitable acquisition candidates at
favorable prices and upon advantageous terms and conditions. However, future
acquisitions may not be available at advantageous prices or upon favorable
terms and conditions. In addition, acquisitions involve the risks that the
businesses acquired will not perform in accordance with expectations and that
business judgments concerning the value, strengths and weaknesses of businesses
acquired will prove incorrect.
CBRE Holding has had, and may continue to experience, difficulties in
integrating operations and accounting systems acquired from other companies.
These difficulties include the diversion of management's attention from other
business concerns and the potential loss of its key employees or those of the
acquired operations. CBRE Holding believes that most acquisitions will
initially have an adverse impact on operating and net income. In addition, CBRE
Holding generally believes that there will be significant costs related to
integrating information technology, accounting and management services and
rationalizing personnel levels. Accordingly, CBRE Holding may not be able to
effectively manage acquired businesses and some acquisitions may not have an
overall benefit.
CBRE Holding has several different accounting systems as a result of
acquisitions it has made. If CBRE Holding is unable to fully integrate the
accounting and other systems of the businesses it owns, it may not be able to
effectively manage its acquired businesses. Moreover, the integration process
itself may be disruptive to business, as it requires coordination of
geographically diverse organizations and implementation of new accounting and
information technology systems.
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CBRE HOLDING'S SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS COULD HARM
ITS ABILITY TO OPERATE THE BUSINESS, REMAIN IN COMPLIANCE WITH DEBT
COVENANTS AND MAKE PAYMENTS ON THE OUTSTANDING DEBT.
CBRE Holding is highly leveraged and has significant debt service
obligations. For the year ended December 31, 2002, CBRE Holding's interest
expense was $60.5 million. CBRE Holding's substantial level of indebtedness
increases the possibility that it may be unable to generate sufficient cash to
pay the principal of, interest on or other amounts due with respect to its
indebtedness. In addition, CBRE Holding may incur additional debt from time to
time to finance strategic acquisitions, investments, joint ventures or for
other purposes, subject to the restrictions contained in the documents
governing its indebtedness. If CBRE Holding incurs additional debt, the risks
associated with its substantial leverage, including its ability to service its
debt, would increase.
CBRE Holding's substantial debt could have other important consequences,
which include but are not limited to the following:
o CBRE Holding could be required to use a substantial portion, if not all,
of its free cash flow from operations to pay principal and interest on
its debt; additionally, its level of debt may restrict it from raising
additional financing on satisfactory terms to fund working capital,
strategic acquisitions, investments, joint ventures and other general
corporate requirements.
o The interest expense of CBRE Holding could increase if interest rates
increase because all of its debt under its existing senior credit
facility, including $221.0 million in term loans and a revolving credit
facility of up to $90.0 million, bear interest at floating rates,
generally between three-month LIBOR plus 3.25% and three-month LIBOR plus
3.75% or between the Alternate Base Rate (ABR) plus 2.25% and ABR plus
2.75%. The ABR is the higher of (1) Credit Suisse First Boston's prime
rate or (2) the Federal Funds Effective Rate plus one-half of one
percent.
o CBRE Holding's substantial leverage could increase its vulnerability to
general economic downturns and adverse competitive and industry
conditions placing it at a disadvantage compared to those of its
competitors that are less leveraged.
o CBRE Holding's debt service obligations could limit its flexibility in
planning for, or reacting to, changes in its business and in the real
estate services industry.
o CBRE Holding's failure to comply with the financial and other
restrictive covenants in the documents governing its indebtedness, which,
among others, require it to maintain specified financial ratios and limit
its ability to incur additional debt and sell assets, could result in an
event of default that, if not cured or waived, could harm its business or
prospects and could result in its filing for bankruptcy.
CBRE Holding cannot be certain that its earnings will be sufficient to
allow it to pay principal and interest on its debt and meet its other
obligations. If CBRE Holding does not have sufficient earnings, it may be
required to refinance all or part of its existing debt, sell assets, borrow
more money or sell more securities, none of which CBRE Holding can guarantee it
will be able to do.
CBRE HOLDING HAS NUMEROUS SIGNIFICANT COMPETITORS, SOME OF WHICH MAY HAVE
GREATER FINANCIAL RESOURCES THAN IT DOES.
CBRE Holding competes across a variety of business disciplines within the
commercial real estate industry, including investment management, tenant
representation, corporate services, construction and development management,
property management, agency leasing, valuation and mortgage banking. In
general, with respect to each of its business disciplines, CBRE Holding cannot
assure that it will be able to continue to compete effectively, maintain its
current fee arrangements or margin levels, or not encounter increased
competition. Each of the business disciplines in which it competes is highly
competitive on an international, national, regional and local level. Although
CBRE Holding is one of the largest real estate services firms in the world in
terms of revenue, its relative competitive position varies significantly across
product and service categories and geographic areas. Depending on the product
or service, CBRE Holding faces competition from other real estate service
providers, institutional lenders, insurance companies, investment banking
firms, investment managers and accounting firms. Many of its competitors are
local or regional firms, which are substantially smaller than CBRE Holding;
however,
71
they may be substantially larger on a local or regional basis. CBRE Holding is
also subject to competition from other large national and multi-national firms.
CBRE HOLDING'S INTERNATIONAL OPERATIONS SUBJECT IT TO SOCIAL, POLITICAL AND
ECONOMIC RISKS OF DOING BUSINESS IN FOREIGN COUNTRIES.
CBRE Holding conducts a portion of its business and employs a substantial
number of employees outside the United States. In 2002, CBRE Holding generated
approximately 27% of its revenue from operations outside the United States.
Circumstances and developments related to international operations that could
negatively affect its business, financial condition or results of operations
include, but are not limited to, the following factors:
o difficulties and costs of staffing and managing international
operations;
o currency restrictions, which may prevent the transfer of capital and
profits to the United States;
o unexpected changes in regulatory requirements;
o potentially adverse tax consequences;
o the responsibility of complying with multiple and potentially
conflicting laws;
o the impact of regional or country-specific business cycles and economic
instability;
o the geographic, time zone, language and cultural differences among
personnel in different areas of the world;
o greater difficulty in collecting accounts receivable in some geographic
regions such as Asia, where many countries have underdeveloped insolvency
laws and clients are often slow to pay, and in some European countries,
where clients also tend to delay payments;
o political instability; and
o foreign ownership restrictions with respect to operations in countries
such as China.
CBRE Holding has committed additional resources to expand its worldwide
sales and marketing activities, to globalize its service offerings and products
in selected markets and to develop local sales and support channels. If CBRE
Holding is unable to successfully implement these plans, to maintain adequate
long-term strategies that successfully manage the risks associated with its
global business or to adequately manage operational fluctuations, its business,
financial condition or results of operations could be harmed.
In addition, CBRE Holding's international operations and, specifically,
the ability of its non-U.S. subsidiaries to dividend or otherwise transfer cash
among its subsidiaries (including transfers of cash to pay interest and
principal on its senior notes) may be affected by currency exchange control
regulations, transfer pricing regulations and potentially adverse tax
consequences, among other things.
CBRE HOLDING'S REVENUE AND EARNINGS MAY BE ADVERSELY AFFECTED BY FOREIGN
CURRENCY FLUCTUATIONS.
CBRE Holding's revenue from non-U.S. operations has been primarily
denominated in the local currency where the associated revenue was earned.
During its fiscal year ended December 31, 2002, approximately 27% of its
business was transacted in currencies of foreign countries, the majority of
which included the Euro, the British Pound Sterling, the Hong Kong dollar, the
Singapore dollar and the Australian dollar. Thus, CBRE Holding may experience
fluctuations in revenues and earnings because of corresponding fluctuations in
foreign currency exchange rates.
CBRE Holding has made significant acquisitions of non-U.S. companies and
may acquire additional foreign companies in the future. As CBRE Holding
increases its foreign operations, fluctuations in the value of the U.S. dollar
relative to the other currencies in which CBRE Holding may generate earnings
could adversely affect its business, operating results and financial condition.
Due to the constantly changing currency exposures to which CBRE Holding is
subject and the volatility of currency exchange rates, it cannot predict the
effect of exchange rate fluctuations upon future operating results. In
addition, fluctuations in currencies relative to the U.S. dollar may make it
more difficult to perform period-to-period comparisons of CBRE Holding's
reported results of operations.
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From time to time, CBRE Holding's management uses currency hedging
instruments, including foreign currency forward and option contracts and
borrows in foreign currencies. Economic risks associated with these hedging
instruments include unexpected fluctuations in inflation rates, which impact
cash flow relative to paying down debt and unexpected changes in the underlying
net asset position. These hedging activities may also not be effective.
A SIGNIFICANT PORTION OF CBRE HOLDING'S OPERATIONS ARE CONCENTRATED IN
CALIFORNIA AND ITS BUSINESS COULD BE HARMED IF THE ECONOMIC DOWNTURN
CONTINUES IN THE CALIFORNIA REAL ESTATE MARKET.
For the year ended December 31, 2002, approximately $215.3 million, or
29%, of the $745.8 million in CBRE Holding's total sales and lease revenue,
including revenue from investment property sales, was generated from
transactions originating in the State of California. As a result of the
geographic concentration in California, a continuation of the economic downturn
in the California commercial real estate markets and in the local economies in
San Diego, Los Angeles or Orange County could further harm the results of
operations.
CBRE HOLDING'S CO-INVESTMENT ACTIVITIES SUBJECT IT TO REAL ESTATE
INVESTMENT RISKS WHICH COULD CAUSE FLUCTUATIONS IN EARNINGS AND CASH FLOW.
An important part of the strategy for the investment management business
involves investing CBRE Holding's capital in certain real estate investments
with its clients. As of December 31, 2002, CBRE Holding had committed an
additional $22.6 million to fund future co-investments. Participation in real
estate transactions through co-investment activity could increase fluctuations
in earnings and cash flow. Other risks associated with these activities
include, but are not limited to, the following:
o losses from investments;
o difficulties associated with international co-investments described in
"--CBRE Holding's international operations subject it to social,
political and economic risks of doing business in foreign countries" and
"--CBRE Holding's revenue and earnings may be adversely affected by
foreign currency fluctuations"; and
o potential lack of control over the disposition of any co-investments and
the timing of the recognition of gains, losses or potential incentive
participation fees.
CBRE HOLDING MAY INCUR LIABILITIES RELATED TO ITS SUBSIDIARIES BEING
GENERAL PARTNERS OF NUMEROUS GENERAL AND LIMITED PARTNERSHIPS.
CBRE Holding has subsidiaries that are general partners in numerous
general and limited partnerships that invest in or manage real estate assets in
connection with its co-investments, including several partnerships involved in
the acquisition, rehabilitation, subdivision and sale of multi-tenant
industrial business parks. Any subsidiary that is a general partner is
potentially liable to its partners and for the obligations of the partnership,
including those obligations related to environmental contamination of
properties owned or managed by the partnership. If CBRE Holding's exposure as a
general partner is not limited, or if the exposure as a general partner expands
in the future, any resulting losses may harm CBRE Holding's business, financial
condition or results of operations.
CBRE HOLDING'S JOINT VENTURE ACTIVITIES INVOLVE UNIQUE RISKS THAT ARE OFTEN
OUTSIDE OF ITS CONTROL, WHICH IF REALIZED, COULD HARM ITS BUSINESS.
CBRE Holding has utilized joint ventures for large commercial investments,
initiatives in Internet-related technology and local brokerage partnerships. In
the future, CBRE Holding may acquire interests in additional general and
limited partnerships and other joint ventures formed to own or develop real
property or interests in real property. CBRE Holding has acquired and may
continue to acquire minority interests in joint ventures. Additionally, it may
also acquire interests as a passive investor without rights to actively
participate in management of the joint ventures. Investments in joint ventures
involve additional risks, including, but not limited to, the following:
o the other participants may become bankrupt or have economic or other
business interests or goals that are inconsistent with CBRE Holding's;
and
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o CBRE Holding may not have the right or power to direct the management
and policies of the joint ventures and other participants may take action
contrary to CBRE Holding's instructions or requests and against CBRE
Holding's policies and objectives.
If a joint venture participant acts contrary to CBRE Holding's interest,
it could harm CBRE Holding's business, results of operations and financial
condition.
CBRE HOLDING'S SUCCESS DEPENDS UPON THE RETENTION OF ITS SENIOR MANAGEMENT,
AS WELL AS ITS ABILITY TO ATTRACT AND RETAIN QUALIFIED AND EXPERIENCED
EMPLOYEES.
CBRE Holding's continued success is highly dependent upon the efforts of
its executive officers and key employees. The only members of senior management
that are parties to employment agreements are Raymond Wirta, the Chief
Executive Officer; Brett White, the President; and Kenneth Kay, the Chief
Financial Officer. If any of the key employees leave and CBRE Holding is unable
to quickly hire and integrate a qualified replacement, business and results of
operations may suffer. In addition, the growth of the business is largely
dependent upon CBRE Holding's ability to attract and retain qualified personnel
in all areas of the business, including brokerage and property management
personnel. If CBRE Holding is unable to attract and retain these qualified
personnel, growth may be limited, and business and operating results could
suffer.
IF CBRE HOLDING FAILS TO COMPLY WITH LAWS AND REGULATIONS APPLICABLE TO
REAL ESTATE BROKERAGE AND MORTGAGE TRANSACTIONS AND OTHER SEGMENTS OF ITS
BUSINESS, IT MAY INCUR SIGNIFICANT FINANCIAL PENALTIES.
Due to the broad geographic scope of CBRE Holding's operations and the
numerous forms of real estate services performed, CBRE Holding is subject to
numerous federal, state and local laws and regulations specific to the services
performed. For example, the brokerage of real estate sales and leasing
transactions requires CBRE Holding to maintain brokerage licenses in each state
in which CBRE Holding operates. If CBRE Holding fails to maintain its licenses
or conducts brokerage activities without a license, it may be required to pay
fines, return commissions received or have licenses suspended. In addition,
because the size and scope of real estate sales transactions have increased
significantly during the past several years, both the difficulty of ensuring
compliance with the numerous state licensing regimes and the possible loss
resulting from non-compliance have increased. Furthermore, the laws and
regulations applicable to CBRE Holding's business, both in the United States
and in foreign countries, may change in ways that materially increase the costs
of compliance.
CBRE HOLDING MAY HAVE LIABILITIES IN CONNECTION WITH REAL ESTATE BROKERAGE
AND PROPERTY MANAGEMENT ACTIVITIES.
As a licensed real estate broker, CBRE Holding and its licensed employees
are subject to statutory due diligence, disclosure and standard-of-care
obligations. Failure to fulfill these obligations could subject CBRE Holding or
its employees to litigation from parties who purchased, sold or leased
properties they brokered or managed. CBRE Holding could become subject to
claims by participants in real estate sales claiming that it did not fulfill
its statutory obligations as a broker.
In addition, in CBRE Holding's property management business, it hires and
supervises third party contractors to provide construction and engineering
services for its managed properties. While CBRE Holding's role is limited to
that of a supervisor, it may be subjected to claims for construction defects or
other similar actions. Adverse outcomes of property management litigation could
negatively impact CBRE Holding's business, financial condition or results of
operations.
CBRE HOLDING'S RESULTS OF OPERATIONS VARY SIGNIFICANTLY AMONG QUARTERS,
WHICH MAKES COMPARISON OF ITS QUARTERLY RESULTS DIFFICULT.
A significant portion of CBRE Holding's revenue is seasonal. Historically,
this seasonality has caused CBRE Holding's revenue, operating income, net
income and cash flow from operating activities to be lower in the first two
quarters and higher in the third and fourth quarters of each year. The
concentration of earnings and cash flow in the fourth quarter is due to an
industry-wide focus on completing transactions toward the fiscal year-end while
incurring constant, non-variable expenses throughout the year.
EMPLOYEES
At December 31, 2002, CBRE Holding had approximately 9,500 employees. CBRE
Holding believes that relations with its employees are good.
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PROPERTIES
CBRE Holding leases the following offices:
LOCATION SALES OFFICES CORPORATE OFFICES TOTAL
----------------------------------------- --------------- ------------------- ------
Americas ................................ 134 2 136
Europe, Middle East and Africa .......... 43 1 44
Asia Pacific ............................ 25 1 26
--- --- ---
Total ................................... 202 4 206
CBRE Holding does not own any offices, which is consistent with its
strategy to lease instead of own. In general, these offices are fully utilized.
There is adequate alternative office space available at acceptable rental rates
to meet CBRE Holding's needs, although rental rates in some markets may
negatively affect CBRE Holding's profits in those markets.
LEGAL PROCEEDINGS
CBRE Holding is a party to a number of pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. CBRE Holding's
management believes that any liability that may result from disposition of
these lawsuits will not have a material effect on CBRE Holding's consolidated
financial position or results of operations.
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CBRE HOLDING'S SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth CBRE Holding's and its predecessor company,
CB Richard Ellis Services, Inc.'s (the Predecessor) selected historical
consolidated financial information for the year ended December 31, 2002, the
periods, ended December 31, 2001 and July 20, 2001 and the years ended December
31, 2000, 1999 and 1998. The statement of operations data for the twelve months
ended December 31, 2002, the period from February 20, 2001 (inception) through
December 31, 2001, the period from January 1, 2001 through July 20, 2001 and
for the twelve months ended December 31, 2000 and the balance sheet data as of
December 31, 2001 and 2002 were derived from CBRE Holding's and Predecessor's
audited consolidated financial statements included elsewhere in this proxy
statement. The statement of operations data for the twelve month periods ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998,
1999 and 2000 were derived from audited consolidated financial statements of
Predecessor that are not included in this proxy statement.
The selected financial data presented below are not necessarily indicative
of results of future operations and should be read in conjunction with CBRE
Holding's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and CBRE Holding's financial statements included
elsewhere in this proxy statement.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMPANY COMPANY PREDECESSOR
-------------- -------------- -----------------
CBRE CBRE CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES,
INC. INC. INC.
-------------- -------------- -----------------
FEBRUARY 20, PERIOD
TWELVE 2001 FROM
MONTHS (INCEPTION) JANUARY 1,
ENDED THROUGH 2001
DECEMBER 31, DECEMBER 31, THROUGH
2002 2001(1) JULY 20, 2001
-------------- -------------- -----------------
STATEMENT OF OPERATIONS DATA(2):
Revenue ............................. $ 1,170,277 $ 562,828 $ 607,934
Operating income (loss) ............. $ 106,062 $ 62,732 $ (14,174)
Interest expense, net ............... $ 57,229 $ 27,290 $ 18,736
Net income (loss) ................... $ 18,727 $ 17,426 $ (34,020)
Basic EPS(3) ........................ $ 1.25 $ 2.22 $ (1.60)
Weighted average shares
outstanding for basic EPS(3)(4) .... 15,025,308 7,845,004 21,306,584
Diluted EPS(3) ...................... $ 1.23 $ 2.20 $ (1.60)
Weighted average shares
outstanding for diluted
EPS(3)(4) .......................... 15,222,111 7,909,797 21,306,584
OTHER DATA:
EBITDA (5) .......................... $ 130,676 $ 74,930 $ 11,482
Net cash provided by (used in)
operating activities ............... $ 64,882 $ 91,334 $ (120,230)
Net cash used in investing
activities ......................... $ (24,130) $ (261,393) $ (12,139)
Net cash (used in) provided by
financing activities ............... $ (17,838) $ 213,831 $ 126,230
PREDECESSOR PREDECESSOR PREDECESSOR
----------------- ----------------- ----------------
CB RICHARD CB RICHARD CB RICHARD
ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC.
----------------- ----------------- ----------------
TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------- ----------------- ----------------
STATEMENT OF OPERATIONS DATA(2):
Revenue ............................. $ 1,323,604 $ 1,213,039 $ 1,034,503
Operating income (loss) ............. $ 107,285 $ 76,899 $ 78,476
Interest expense, net ............... $ 39,146 $ 37,438 $ 27,993
Net income (loss) ................... $ 33,388 $ 23,282 $ 24,557
Basic EPS(3) ........................ $ 1.60 $ 1.11 $ (0.38)
Weighted average shares
outstanding for basic EPS(3)(4) .... 20,931,111 20,998,097 20,136,117
Diluted EPS(3) ...................... $ 1.58 $ 1.10 $ (0.38)
Weighted average shares
outstanding for diluted
EPS(3)(4) .......................... 21,097,240 21,072,436 20,136,117
OTHER DATA:
EBITDA (5) .......................... $ 150,484 $ 117,369 $ 110,661
Net cash provided by (used in)
operating activities ............... $ 80,859 $ 70,340 $ 76,005
Net cash used in investing
activities ......................... $ (32,469) $ (23,096) $ (222,911)
Net cash (used in) provided by
financing activities ............... $ (53,523) $ (37,721) $ 119,438
76
COMPANY COMPANY PREDECESSOR PREDECESSOR PREDECESSOR
-------------- -------------- ----------------- ---------------- ---------------
CBRE CBRE CB RICHARD CB RICHARD CB RICHARD
HOLDINGS HOLDINGS ELLIS SERVICES, ELLIS SERVICES ELLIS SERVICES
INC. INC. INC. INC. INC.
-------------- -------------- ----------------- ---------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 1999 1998
-------------- -------------- ----------------- ---------------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents ........... $ 79,701 $ 57,450 $ 20,854 $ 27,844 $ 19,551
Total assets ........................ $ 1,324,876 $ 1,354,512 $ 963,105 $ 929,483 $ 856,892
Long-term debt ...................... $ 511,133 $ 522,063 $ 303,571 $ 357,872 $ 373,691
Total liabilities ................... $ 1,067,920 $ 1,097,693 $ 724,018 $ 715,874 $ 660,175
Total stockholders' equity .......... $ 251,341 $ 252,523 $ 235,339 $ 209,737 $ 190,842
Number of shares outstanding(4) ..... 14,307,893 14,380,414 20,605,023 20,435,692 20,636,134
----------
Note: CBRE Holding has not declared any cash dividends on its common stock for
the periods shown.
(1) The results include the activities of CB Richard Ellis Services, Inc.
(CBRE), from July 20, 2001, the date of the 2001 merger.
(2) The results include the activities of REI from April 17, 1998 and Hillier
Parker from July 7, 1998. For the year ended December 31, 1998, basic and
diluted loss per share include a deemed dividend of $32.3 million on the
repurchase of CBRE's preferred stock.
(3) EPS represents earnings (loss) per share. See Earnings Per Share
Information in Note 16 of Notes to CBRE Holding's Consolidated Financial
Statements included elsewhere in this proxy statement.
(4) For the period from February 20, 2001 (inception) through December 31,
2001 the 7,845,004 and the 7,909,797 represent the weighted average
shares outstanding for basic and diluted earnings per share,
respectively. These balances take into consideration the lower number of
shares outstanding prior to the 2001 merger. The 14,380,414 represents
the outstanding number of shares at December 31, 2001.
(5) EBITDA represents earnings before net interest expense, income taxes,
depreciation and amortization. CBRE Holding's management believes that
the presentation of EBITDA will enhance a reader's understanding of CBRE
Holding's operating performance. Furthermore, EBITDA is a measure used by
CBRE Holding's senior management to evaluate the performance of its
various lines of business and for other required or discretionary
purposes, such as its use of EBITDA as a significant component when
measuring performance under its employee incentive programs.
Additionally, many of CBRE Holding's debt covenants are based upon
EBITDA. EBITDA should not be considered as an alternative to (i)
operating income determined in accordance with accounting principles
generally accepted in the United States of America or (ii) operating cash
flow determined in accordance with accounting principles generally
accepted in the United States of America. CBRE Holding's calculation of
EBITDA may not be comparable to similarly titled measures reported by
other companies.
77
EBITDA is calculated as follows:
COMPANY COMPANY PREDECESSOR
-------------- -------------- -----------------
CBRE CBRE CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES,
INC. INC. INC.
-------------- -------------- -----------------
PERIOD
FEBRUARY 20, FROM
TWELVE 2001 JANUARY 1,
MONTHS (INCEPTION) 2001
ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, JULY 20,
2002 2002(1) 2001
-------------- -------------- -----------------
(DOLLARS IN THOUSANDS)
Operating income (loss) ..... $106,062 $62,732 $ (14,174)
Add: Depreciation and
amortization ............... 24,614 12,198 25,656
-------- ------- ---------
EBITDA ...................... 130,676 74,930 11,482
======== ======= =========
PREDECESSOR PREDECESSOR PREDECESSOR
----------------- ----------------- ----------------
CB RICHARD CB RICHARD CB RICHARD
ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC.
----------------- ----------------- ----------------
TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
Operating income (loss) ..... $107,285 $ 76,899 $ 78,476
Add: Depreciation and
amortization ............... 43,199 40,470 32,185
-------- -------- --------
EBITDA ...................... 150,484 117,369 110,661
======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This proxy statement contains forward-looking statements that involve
risks and uncertainties. CBRE Holding's actual results could differ materially
from those anticipated in forward-looking statements for many reasons,
including those anticipated in "Risk Factors" and elsewhere in this proxy
statement. You should read the following discussion in conjunction with "CBRE's
Holding's Selected Historical Consolidated Financial Data" and CBRE Holding's
financial statements included elsewhere in this proxy statement.
OVERVIEW
CBRE Holding is one of the world's largest global commercial real estate
services firms in terms of revenue, offering a full range of services to
commercial real estate occupiers, owners, lenders and investors. Operations are
conducted in 47 countries through 206 offices with approximately 9,500
employees. CBRE Holding has worldwide capabilities to assist buyers in the
purchase and sellers in the disposition of commercial property, to assist
tenants in finding available space and owners in finding qualified tenants, to
provide valuation and appraisals for real estate property, to assist in the
placement of financing for commercial real estate, to provide commercial loan
servicing, to provide research and consulting services, to help institutional
investors manage commercial real estate portfolios, to provide property and
facilities management services and to serve as the outsource service provider
to corporations seeking to be relieved of the responsibility for managing their
real estate operations.
A significant portion of CBRE Holding's revenue is seasonal. Historically,
this seasonality has caused CBRE Holding's revenue, operating income, net
income and cash flow from operating activities to be lower in the first two
quarters and higher in the third and fourth quarters of each year. The
concentration of earnings and cash flow in the fourth quarter is due to an
industry-wide focus on completing transactions toward the fiscal year-end while
incurring constant, non-variable expenses throughout the year. In addition,
CBRE Holding'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. The international operations are subject to political
instability, currency fluctuations and changing regulatory environments. To
date, CBRE Holding does not believe that general inflation has had a material
impact upon its operations. Revenue, commissions and other variable costs
related to revenue are primarily affected by real estate market supply and
demand rather than general inflation.
BASIS OF PRESENTATION
On July 20, 2001, CBRE Holding acquired CB Richard Ellis Services, Inc.
(CBRE) pursuant to an Amended and Restated Agreement and Plan of Merger, dated
May 31, 2001 (the 2001 Merger Agreement), among CBRE Holding, CBRE and Blum CB
Corp. (Blum CB), a wholly owned subsidiary
78
of CBRE Holding. Blum CB was merged with and into CBRE, with CBRE being the
surviving corporation. At the effective time of the 2001 Merger, CBRE became a
wholly owned subsidiary of CBRE Holding.
The results of operations, including the segment operations and cash
flows, for the year ended December 31, 2001 have been derived by combining the
results of operations and cash flows of CBRE Holding for the period from
February 20, 2001 (inception) to December 31, 2001 with the results of
operations and cash flows of CBRE, prior to the 2001 Merger, from January 1,
2001 through July 20, 2001, the date of the 2001 Merger. The results of
operations and cash flows of CBRE prior to the 2001 Merger incorporated in the
following discussion are the historical results and cash flows of CBRE, the
predecessor to CBRE Holding. These CBRE results do not reflect any purchase
accounting adjustments, which are included in the results of CBRE Holding
subsequent to the 2001 Merger. Due to the effects of purchase accounting
applied as a result of the 2001 Merger and the additional interest expense
associated with the debt incurred to finance the 2001 Merger, the results of
operations of CBRE Holding may not be comparable in all respects to the results
of operations for CBRE prior to the 2001 Merger. However, CBRE Holding's
management believes a discussion of the 2001 operations is more meaningful by
combining the results of CBRE Holding with the results of CBRE.
On February 17, 2003, CBRE Holding entered into a merger agreement with
Insignia Financial Group, Inc. Additional information regarding this
transaction is included in the "Liquidity and Capital Resources" section of
"CBRE Holding's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth items derived from the consolidated
statements of operations for the years ended December 31, 2002, 2001 and 2000,
presented in dollars and as a percentage of revenue:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
2002 2001 2000
------------------------ -------------------------- ------------------------
(DOLLARS IN THOUSANDS)
Revenue .................................. 1,170,277 100.0% 1,170,762 100.0% 1,323,604 100.0%
Costs and expenses:
Commissions, fees and other
incentives ............................ 554,942 47.4 547,577 46.8 628,097 47.4
Operating, administrative and
other ................................. 493,949 42.2 512,632 43.8 551,528 41.7
Depreciation and amortization ........... 24,614 2.1 37,854 3.2 43,199 3.3
Equity income from
unconsolidated subsidiaries . ......... (9,326) ( 0.8) (4,428) ( 0.4) (6,505) ( 0.5)
Merger-related and other
nonrecurring charges .................. 36 -- 28,569 2.5 -- --
--------- ----- --------- ----- --------- -----
Operating income ......................... 106,062 9.1 48,558 4.1 107,285 8.1
Interest income .......................... 3,272 0.3 3,994 0.4 2,554 0.2
Interest expense ......................... 60,501 5.2 50,020 4.3 41,700 3.2
--------- ----- --------- ----- --------- -----
Income before provision for income
taxes ................................... 48,833 4.2 2,532 0.2 68,139 5.1
Provision for income taxes ............... 30,106 2.6 19,126 1.6 34,751 2.6
--------- ----- --------- ----- --------- -----
Net income (loss) ........................ $ 18,727 1.6% $ (16,594) ( 1.4)% $ 33,388 2.5%
========= ===== ========== ===== ========= =====
EBITDA ................................... $130,676 11.2% $ 86,412 9.8% $150,484 11.4%
========= ===== ========== ===== ========= =====
79
EBITDA is calculated as follows:
YEAR ENDED DECEMBER 31
--------------------------------------
2002 2001 2000
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Operating income ........................... $106,062 $48,558 $107,285
Add: Depreciation and amortization ......... 24,614 37,854 43,199
-------- ------- --------
EBITDA ..................................... 130,676 86,412 $150,484
======== ======= ========
EBITDA represents earnings before net interest expense, income taxes,
depreciation and amortization. CBRE Holding's management believes that the
presentation of EBITDA will enhance a reader's understanding of CBRE Holding's
operating performance. Furthermore, EBITDA is a measure used by CBRE Holding's
senior management to evaluate the performance of its various lines of business
and for other required or discretionary purposes, such as its use of EBITDA as
a significant component when measuring performance under its employee incentive
programs. Additionally, many of CBRE Holding's debt covenants are based upon
EBITDA. Net cash that will be available to CBRE Holding 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 accounting principles generally accepted in the United
States of America or (ii) operating cash flow determined in accordance with
accounting principles generally accepted in the United States of America. CBRE
Holding's calculation of EBITDA may not be comparable to similarly titled
measures reported by other companies.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
CBRE Holding reported consolidated net income of $18.7 million for the
year ended December 31, 2002 on revenue of $1,170.3 million as compared to a
consolidated net loss of $16.6 million on revenue of $1,170.8 million for the
year ended December 31, 2001.
Revenue on a consolidated basis for the year ended December 31, 2002 was
comparable to the year ended December 31, 2001. Declines in lease transaction
revenue, principally in the Americas and Asia Pacific, combined with a
nonrecurring prior year sale of mortgage fund contracts of $5.6 million, was
mostly offset by higher worldwide sales transaction revenue, consulting fees,
investment management fees and loan fees.
Commissions, fees and other incentives on a consolidated basis totaled
$554.9 million for the year ended December 31, 2002, an increase of $7.4
million or 1.3% from the year ended December 31, 2001. Commissions, fees and
other incentives as a percentage of revenue increased slightly to 47.4% in the
current year as compared to 46.8% in the prior year. This increase was
primarily due to higher producer compensation within CBRE Holding's
international operations associated with expanded international activities.
These increases were partially offset by lower variable commissions,
principally in the Americas, driven by lower lease transaction revenue.
Operating, administrative and other expenses on a consolidated basis were
$493.9 million for the year ended December 31, 2002, a decrease of $18.7
million or 3.6% as compared to the year ended December 31, 2001. This decrease
was primarily driven by cost cutting measures and operational efficiencies from
programs initiated in May 2001 as well as foreign currency transaction and
settlement gains resulting from the weaker United States (US) dollar. These
reductions were partially offset by an increase in bonuses and other
incentives, primarily within CBRE Holding's international operations, due to
higher results.
Depreciation and amortization expense on a consolidated basis decreased by
$13.2 million or 35.0% mainly due to the discontinuation of goodwill
amortization after the 2001 Merger in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142) and lower depreciation expense, principally due to lower capital
expenditures in the current year. The year ended December 31, 2002 also
included a reduction of amortization expense of $2.0 million arising from the
adjustment of certain intangible assets to their estimated fair values as of
the acquisition date as determined by independent third party appraisers in
2002.
80
Equity income from unconsolidated subsidiaries increased by $4.9 million
or 110.6% for the year ended December 31, 2002 as compared to the prior year,
primarily due to improved performance from several domestic joint ventures.
The year ended December 31, 2001 included merger-related and other
nonrecurring charges on a consolidated basis of $28.6 million. These costs
primarily consisted of merger-related costs of $18.3 million, the write-off of
assets, primarily e-business investments, of $7.2 million as well as severance
costs of $3.1 million related to CBRE Holding's cost reduction program
instituted in May 2001.
Consolidated interest expense was $60.5 million, an increase of $10.5
million or 21.0% over the year ended December 31, 2001. This was primarily
attributable to CBRE Holding's change in debt structure as a result of the 2001
Merger.
Income tax expense on a consolidated basis was $30.1 million for the year
ended December 31, 2002 as compared to $19.1 million for the year ended
December 31, 2001. The income tax provision and effective tax rate were not
comparable between periods due to effects of the 2001 Merger and the adoption
of SFAS No. 142, which resulted in the elimination of the amortization of
goodwill. In addition, the decline in the market value of assets associated
with the deferred compensation plan for which no tax benefit was realized
contributed to an increased effective tax rate.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
CBRE Holding reported a consolidated net loss of $16.6 million for the
year ended December 31, 2001 on revenue of $1,170.8 million compared to
consolidated net income of $33.4 million on revenue of $1,323.6 million for the
year ended December 31, 2000. The 2001 results include a nonrecurring sale of
mortgage fund management contracts of $5.6 million. The 2000 results include a
nonrecurring sale of certain non-strategic assets of $4.7 million.
Revenue on a consolidated basis decreased by $152.8 million or 11.5%
during the year ended December 31, 2001 as compared to the year ended December
31, 2000. This was mainly driven by a $98.2 million decrease in lease
transaction revenue and a $62.8 million decline in sales transaction revenue
during 2001. The lower revenue was primarily attributable to CBRE Holding's
North American operation. However, the European and Asian operations also
experienced lower sales and lease transaction revenue as compared to 2000.
These decreases were slightly offset by a $6.4 million or 11.0% increase in
loan origination and servicing fees as well as a $6.0 million or 8.1% increase
in appraisal fees driven by increased refinancing activities due to a decline
in interest rates in the US and increased fees in the European operation.
Commissions, fees and other incentives on a consolidated basis totaled
$547.6 million, a decrease of $80.5 million or 12.8% for the year ended
December 31, 2001 as compared to the prior year. This decrease was primarily
due to the lower sales and lease transaction revenue within North America. This
decline in revenue also resulted in lower variable commissions expense within
this region as compared to 2000. This was slightly offset by producer
compensation within the international operations, which is typically fixed in
nature and does not decrease as a result of lower revenue. Accordingly,
commissions, fees and other incentives as a percentage of revenue decreased
slightly to 46.8% for 2001 as compared to 47.4% for 2000.
Operating, administrative and other expenses on a consolidated basis were
$512.6 million, a decrease of $38.9 million or 7.1% for the year ended December
31, 2001 as compared to the prior year. This decrease was due to cost cutting
measures and operational efficiencies from programs initiated in May 2001. An
organizational restructure was also implemented after the 2001 Merger
transaction that included the reduction of administrative staff in corporate
and divisional headquarters and the scaling back of unprofitable operations. In
addition, bonus incentives and profit share declined due to CBRE Holding's
lower results.
Depreciation and amortization expense on a consolidated basis decreased by
$5.3 million or 12.4% primarily due to the discontinuation of goodwill
amortization after the 2001 Merger in accordance with SFAS No. 142.
Equity income from unconsolidated subsidiaries decreased by $2.1 million
or 31.9% for the year ended December 31, 2001 as compared to the year ended
December 31, 2000, primarily due to decreased results from several domestic
joint ventures.
81
Merger-related and other nonrecurring charges on a consolidated basis were
$28.6 million for the year ended December 31, 2001. This included
merger-related costs of $18.3 million, the write-off of assets, primarily
e-business investments, of $7.2 million and severance costs of $3.1 million
attributable to CBRE Holding's cost reduction program instituted in May 2001.
Consolidated interest expense was $50.0 million, an increase of $8.3
million or 20.0% for the year ended December 31, 2001 as compared to the year
ended December 31, 2000. This was attributable to CBRE Holding's increased debt
as a result of the 2001 Merger.
Provision for income taxes on a consolidated basis was $19.1 million for
the year ended December 31, 2001 as compared to a provision for income taxes of
$34.8 million for the year ended December 31, 2000. The income tax provision
and effective tax rate were not comparable between periods due to the 2001
Merger. In addition, CBRE Holding adopted SFAS No. 142, which resulted in the
elimination of the amortization of goodwill.
82
SEGMENT OPERATIONS
In the third quarter of 2001, subsequent to the 2001 Merger transaction,
CBRE Holding reorganized its business segments as part of its efforts to reduce
costs and streamline its operations. CBRE Holding reports its operations
through three geographically organized segments: (1) Americas, (2) Europe,
Middle East and Africa (EMEA) and (3) Asia Pacific. The Americas consists of
operations located in the US, Canada, Mexico, and Central and South America.
EMEA mainly consists of operations in Europe, while Asia Pacific includes
operations in Asia, Australia and New Zealand. The Americas 2001 results
include a nonrecurring sale of mortgage fund contracts of $5.6 million as well
as merger-related and other nonrecurring charges of $26.9 million. The Americas
2000 results include a nonrecurring sale of certain non-strategic assets of
$4.7 million. Asia Pacific's 2001 results include merger-related and other
nonrecurring charges of $1.2 million. The following table summarizes the
revenue, costs and expenses and operating income (loss) by operating segment
for the years ended December 31, 2002, 2001 and 2000:
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
2002 2001 2000
------------------------ -------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
AMERICAS
Revenue ..................................... $896,064 100.0% $928,799 100.0% $1,074,080 100.0%
Costs and expenses:
Commissions, fees and other incentives ..... 438,842 48.9 448,813 48.4 530,284 49.3
Operating, administrative and other ........ 367,312 41.0 388,645 41.8 422,698 39.4
Depreciation and amortization .............. 16,958 1.9 27,452 3.0 28,600 2.7
Equity income from unconsolidated
subsidiaries ............................. (8,425) ( 0.9) (3,808) ( 0.4) (5,553) ( 0.5)
Merger-related and other nonrecurring
charges .................................. 36 -- 26,923 2.8 -- --
-------- ----- -------- ----- ---------- -----
Operating income ............................ $ 81,341 9.1% $40,774 4.4% $ 98,051 9.1%
======== ===== ======== ===== ========== =====
EBITDA ...................................... $ 98,299 11.0% $68,226 10.2% $ 126,651 11.8%
======== ===== ======== ===== ========== =====
EMEA
Revenue ..................................... $182,222 100.0% $161,306 100.0% $ 164,539 100.0%
Costs and expenses:
Commissions, fees and other incentives ..... 75,475 41.4 63,343 39.3 61,194 37.1
Operating, administrative and other ........ 84,963 46.6 81,728 50.6 84,172 51.2
Depreciation and amortization .............. 4,579 2.5 6,492 4.0 9,837 6.0
Equity income from unconsolidated
subsidiaries ............................. (82) -- (2) -- (3) --
Merger-related and other nonrecurring
charges .................................. -- -- 451 0.3 -- --
-------- ----- --------- ----- ----------- -----
Operating income ............................ $ 17,287 9.5% $ 9,294 5.8% $ 9,339 5.7%
======== ===== ========= ===== =========== =====
EBITDA ...................................... $ 21,866 12.0% $15,786 10.1% $ 19,176 11.7%
======== ===== ========= ===== =========== =====
ASIA PACIFIC
Revenue ..................................... $ 91,991 100.0% $80,657 100.0% $ 84,985 100.0%
Costs and expenses:
Commissions, fees and other incentives ..... 40,625 44.2 35,421 43.9 36,619 43.1
Operating, administrative and other ........ 41,674 45.3 42,259 52.4 44,658 52.5
Depreciation and amortization .............. 3,077 3.3 3,910 4.9 4,762 5.6
Equity income from unconsolidated
subsidiaries ............................. (819) ( 0.9) (618) ( 0.8) (949) ( 1.1)
Merger-related and other nonrecurring
charges .................................. -- -- 1,195 1.5 -- --
-------- ----- --------- ----- ----------- -----
Operating income (loss) ..................... $ 7,434 8.1% $(1,510) ( 1.9)% $ (105) ( 0.1)%
======== ===== ========= ===== =========== =====
EBITDA ...................................... $ 10,511 11.4% $ 2,400 4.5% $ 4,657 5.5%
======== ===== ========= ===== =========== =====
83
EBITDA is calculated as follows:
YEAR ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
---------- ------------- ----------
(DOLLARS IN THOUSANDS)
AMERICAS
Operating income ........................... $81,341 $ 40,774 $ 98,051
Add: Depreciation and amortization ......... 16,958 27,452 28,600
------- --------- --------
EBITDA ..................................... 98,299 68,226 126,651
======= ========= ========
EMEA
Operating income ........................... $17,287 $ 9,294 $ 9,339
Add: Depreciation and amortization ......... 4,579 6,492 9,837
------- --------- --------
EBITDA ..................................... 21,866 15,786 19,176
======= ========= ========
ASIA PACIFIC
Operating income (loss) .................... $ 7,434 $ (1,510) $ (105)
Add: Depreciation and amortization ......... 3,077 3,910 4,762
------- --------- --------
EBITDA ..................................... 10,511 2,400 4,657
======= ========= ========
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Americas
Revenue decreased by $32.7 million or 3.5% for the year ended December 31,
2002 as compared to the year ended December 31, 2001, primarily driven by lower
lease transaction revenue, partially offset by an increase in sales transaction
revenue and loan fees. The lease transaction revenue decrease was primarily due
to a lower average value per transaction partially offset by a higher number of
transactions. The sales transaction revenue increase was driven by a higher
number of transactions as well as a higher average value per transaction. Loan
fees also increased compared to the prior year principally due to an increase
in the number of transactions. Commissions, fees and other incentives decreased
by $10.0 million or 2.2% for the year ended December 31, 2002 as compared to
the year ended December 31, 2001, caused primarily by lower variable
commissions due to lower lease transaction revenue. Commissions, fees and other
incentives as a percentage of revenue were relatively flat when compared to the
prior year at approximately 48.9%. Operating, administrative and other expenses
decreased by $21.3 million or 5.5% as a result of cost reduction and efficiency
measures, the organizational restructure implemented after the 2001 Merger, and
foreign currency transaction and settlement gains resulting from the weaker US
dollar.
EMEA
Revenue increased by $20.9 million or 13.0% for the year ended December
31, 2002 as compared to the year ended December 31, 2001. This was mainly
driven by higher sales transaction revenue across Europe as well as higher
lease transaction revenue and investment management fees in France.
Commissions, fees and other incentives increased by $12.1 million or 19.2% due
to higher producer compensation as a result of increased revenue arising from
expanded activities in the United Kingdom (UK), France, Germany, Italy and
Spain. Operating, administrative and other expenses increased by $3.2 million
or 4.0% mainly attributable to higher incentives due to increased results,
higher occupancy costs and consulting fees.
Asia Pacific
Revenue increased by $11.3 million or 14.1% for the year ended December
31, 2002 as compared to the year ended December 31, 2001. This increase was
primarily driven by higher investment management fees in Japan and an increase
in overall revenue in Australia and New Zealand, partially offset by lower
revenues as a result of conversions of small, wholly owned offices to affiliate
offices elsewhere in Asia. Commissions, fees and other incentives increased by
$5.2 million or 14.7% primarily driven by higher producer compensation expense
due to increased personnel requirements in Australia, China and New
84
Zealand, slightly offset by lower commissions due to conversions to affiliate
offices elsewhere in Asia. Operating, administrative and other expenses
decreased by $0.6 million or 1.4% primarily as a result of conversions to
affiliate offices. This decrease was mostly offset by an increased accrual for
bonuses due to higher results in Australia and New Zealand.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Americas
Revenue decreased by $145.3 million or 13.5% for the year ended December
31, 2001 as compared to the year ended December 31, 2000, primarily driven by
the softening global economy as well as the tragic events of September 11,
2001. Lease transaction revenue decreased by $85.3 million and sales
transaction revenue declined by $55.5 million due to a lower number of
transactions completed as well as a lower average value per transaction during
2001 as compared to 2000. Consulting and referral fees also decreased by $12.1
million or 20.0% as compared to 2000. These declines were slightly offset by an
increase in loan origination and servicing fees of $6.4 million as well as
higher appraisal fees of $4.4 million driven by increased refinancing
activities due to the low interest rate environment in North America.
Commissions, fees and other incentives decreased by $81.5 million or 15.4% for
the year ended December 31, 2001 as compared to the year ended December 31,
2000, caused primarily by the lower lease transaction and sales transaction
revenue. The decline in revenue also resulted in lower variable commissions
expense. As a result, commissions, fees and other incentives as a percentage of
revenue decreased from 49.3% in 2000 to 48.4% in 2001. Operating,
administrative and other expenses decreased by $34.1 million or 8.1% as a
result of cost reduction and efficiency measures initiated in May 2001 as well
as the organizational restructure implemented after the 2001 Merger. Key
executive bonuses and profit share also declined due to the lower results.
EMEA
Revenue decreased by $3.2 million or 2.0% for the year ended December 31,
2001 as compared to the year ended December 31, 2000. This was mainly driven by
lower sales transaction and lease transaction revenue due to the overall
weakness in the European economy, particularly in France and Germany. This was
slightly offset by higher consulting and referral fees in the UK as well as an
overall increase in appraisal fees throughout Europe. Commissions, fees and
other incentives increased by $2.1 million or 3.5% for the year ended December
31, 2001 as compared to the year ended December 31, 2000, primarily due to a
higher number of producers, mainly in the UK. Producer compensation in EMEA is
typically fixed in nature and does not decrease with a decline in revenue.
Operating, administrative and other expenses decreased by $2.4 million or 2.9%
for the year ended December 31, 2001 as compared to the year ended December 31,
2000, mainly attributable to decreased bonuses and other incentives due to
lower 2001 results.
Asia Pacific
Revenue decreased by $4.3 million or 5.1% for the year ended December 31,
2001 as compared to the year ended December 31, 2000. This was primarily driven
by lower lease transaction revenue due to the weak economy in China and
Singapore. Operating, administrative and other expenses decreased by $2.4
million or 5.4% for the year ended December 31, 2001 as compared to the year
ended December 31, 2000. The decrease was primarily due to lower personnel
requirements and other cost containment measures put in place during May 2001
as well as the organizational restructure implemented after the 2001 Merger.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the terms of the 2001 Merger Agreement, each issued and
outstanding share of common stock of CBRE was converted into the right to
receive $16.00 in cash, except for: (i) shares of common stock of CBRE owned by
CBRE Holding and Blum CB immediately prior to the 2001 Merger, totaling
7,967,774 shares, which were cancelled, (ii) treasury shares and shares of
common stock of CBRE owned by any of its subsidiaries which were cancelled and
(iii) shares of common stock of CBRE held by stockholders who perfected
appraisal rights for such shares in accordance with Delaware law. All shares of
common stock of CBRE outstanding prior to the 2001 Merger were acquired by CBRE
Holding and subsequently cancelled. Immediately prior to the 2001 Merger, the
following, collectively referred to as
85
the buying group, contributed to CBRE Holding all the shares of CBRE's common
stock that he or it directly owned in exchange for an equal number of shares of
Class B common stock of CBRE Holding: Blum Strategic Partners, L.P. (formerly
known as RCBA Strategic Partners, L.P.), FS Equity Partners III, L.P. (FSEP), a
Delaware limited partnership, FS Equity Partners International, L.P. (FSEP
International), a Delaware limited partnership, The Koll Holding Company, a
California corporation, Frederic V. Malek, a director of CBRE Holding and CBRE,
Raymond E. Wirta, the Chief Executive Officer and a director of CBRE Holding
and CBRE, and Brett White, the President and a director of CBRE Holding and
CBRE. Such shares of common stock of CBRE, which totaled 7,967,774 shares of
common stock, were then cancelled. In addition, CBRE Holding offered to
purchase for cash, options outstanding to acquire common stock of CBRE at a
purchase price per option equal to the greater of the amount by which $16.00
exceeded the exercise price of the option, if at all, or $1.00. In connection
with the 2001 Merger, CBRE purchased its outstanding options on behalf of CBRE
Holding, which were recorded as merger-related and other nonrecurring charges
by CBRE in the period from January 1, 2001 through July 20, 2001.
The funding to complete the 2001 Merger, as well as the refinancing of
substantially all of the outstanding indebtedness of CBRE, was obtained
through: (i) the cash contribution of $74.8 million from the sale of Class B
common stock of CBRE Holding for $16.00 per share, (ii) the sale of shares of
Class A common stock of CBRE Holding for $16.00 per share to employees and
independent contractors of CBRE, (iii) the sale of 625,000 shares of Class A
common stock of CBRE Holding to the California Public Employees' Retirement
System for $16.00 per share, (iv) the issuance and sale by CBRE Holding of
65,000 units for $65.0 million to DLJ Investment Funding, Inc. and other
purchasers, which units consist of $65.0 million in aggregate principal amount
of 16% Senior Notes due July 20, 2011 and 339,820 shares of Class A common
stock of CBRE Holding, (v) the issuance and sale by Blum CB of $229.0 million
in aggregate principal amount of 11 1/4% Senior Subordinated Notes due June 15,
2011 for $225.6 million (which were assumed by CBRE in connection with the 2001
Merger) and (vi) borrowings by CBRE under a new $325.0 million senior credit
agreement with Credit Suisse First Boston (CSFB) and other lenders.
Following the 2001 Merger, the common stock of CBRE was delisted from the
New York Stock Exchange. CBRE also successfully completed a tender offer and
consent solicitation for all of the outstanding principal amount of its 8 7/8%
Senior Subordinated Notes due 2006 (the Subordinated Notes). The Subordinated
Notes were purchased at $1,079.14 for each $1,000 principal amount of
Subordinated Notes, which included a consent payment of $30.00 per $1,000
principal amount of Subordinated Notes. CBRE Holding also repaid the
outstanding balance of CBRE's existing revolving credit facility. CBRE Holding
entered into the 2001 Merger in order to enhance the flexibility to operate
CBRE's existing businesses and to develop new ones.
CBRE Holding believes it can satisfy its obligations, working capital
requirements and funding of investments, other than those related to the
proposed merger with Insignia, with internally generated cash flow, borrowings
under the revolving line of credit with CSFB and other lenders or any
replacement credit facilities. In the near term, further material acquisitions,
if any, that necessitate cash will require new sources of capital such as an
expansion of the revolving credit facility and/or issuing additional debt or
equity. CBRE Holding anticipates that its existing sources of liquidity,
including cash flow from operations, will be sufficient to meet its anticipated
non-acquisition cash requirements for the foreseeable future, but at a minimum
for the next twelve months.
Net cash provided by operating activities totaled $64.9 million for the
current year, an increase of $93.8 million compared to the prior year. This
increase was primarily due to improved 2002 earnings, as well as lower payments
made in the current year for 2001 bonus and profit sharing as compared to the
2000 bonus and profit sharing payments made in the prior year.
CBRE Holding utilized $24.1 million in investing activities during the
current year, a decrease of $249.4 million compared to the prior year. This
decrease was primarily due to the prior year payment of the purchase price and
related expenses associated with the acquisition of CBRE by CBRE Holding.
Capital expenditures of $14.3 million, net of concessions received, were lower
than 2001 by $7.0 million driven primarily by efforts to reduce spending and
improve cash flow. Capital expenditures for 2002 and 2001 consisted primarily
of purchases of computer hardware and software and furniture and fixtures. CBRE
Holding expects to have capital expenditures, net of concessions received, of
approximately $28.8 million in 2003 due to leasehold improvements anticipated
in New York and London.
86
Net cash used in financing activities totaled $17.8 million for the year
ended December 31, 2002, compared to cash provided by financing activities of
$340.1 million for the year ended December 31, 2001. This decrease was mainly
attributable to the debt and equity financing required by the 2001 Merger in
the prior year.
CBRE Holding issued $229.0 million in aggregate principal amount of 11 1/4%
Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and
sold by Blum CB Corp. for approximately $225.6 million, net of discount, on
June 7, 2001 and assumed by CBRE in connection with the 2001 Merger. The Notes
are jointly and severally guaranteed on a senior subordinated basis by CBRE
Holding and its domestic subsidiaries. The Notes require semi-annual payments
of interest in arrears on June 15 and December 15, having commenced on December
15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at
105.625% of par on that date and at declining prices thereafter. In addition,
before June 15, 2004, CBRE Holding may redeem up to 35.0% of the originally
issued amount of the Notes at 111 1/4% of par, plus accrued and unpaid interest,
solely with the net cash proceeds from public equity offerings. In the event of
a change of control, CBRE Holding is obligated to make an offer to purchase the
Notes at a redemption price of 101.0% of the principal amount, plus accrued and
unpaid interest. The amounts included in the accompanying consolidated balance
sheets, net of unamortized discount, were $225.9 million and $225.7 million at
December 31, 2002 and 2001, respectively.
CBRE Holding also entered into a $325.0 million Senior Credit Facility
(the Credit Facility) with CSFB and other lenders. The Credit Facility is
jointly and severally guaranteed by CBRE Holding and its domestic subsidiaries
and is secured by substantially all of their assets. The Credit Facility
includes the Tranche A term facility of $50.0 million, maturing on July 20,
2007; the Tranche B term facility of $185.0 million, maturing on July 18, 2008;
and the revolving line of credit of $90.0 million, including revolving credit
loans, letters of credit and a swingline loan facility, maturing on July 20,
2007. Borrowings under the Tranche A and revolving facility bear interest at
varying rates based on CBRE Holding's option at either three-month LIBOR plus
2.50% to 3.25% or the alternate base rate plus 1.50% to 2.25% as determined by
reference to CBRE Holding's ratio of total debt less available cash to EBITDA,
which is defined in the debt agreement. Borrowings under the Tranche B facility
bear interest at varying rates based on CBRE Holding's option at either
three-month LIBOR plus 3.75% or the alternate base rate plus 2.75%. The
alternate base rate is the higher of (1) CSFB's prime rate or (2) the Federal
Funds Effective Rate plus one-half of one percent.
The Tranche A facility will be repaid by July 20, 2007 through quarterly
principal payments over six years, which total $7.5 million each year through
June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The
Tranche B facility requires quarterly principal payments of approximately $0.5
million, with the remaining outstanding principal due on July 18, 2008. The
revolving line of credit requires the repayment of any outstanding balance for
a period of 45 consecutive days commencing on any day in the month of December
of each year as determined by CBRE Holding. CBRE Holding repaid its revolving
credit facility as of November 5, 2002 and December 1, 2001, and at December
31, 2002 and 2001, CBRE Holding had no revolving line of credit principal
outstanding. The total amount outstanding under the Credit Facility included in
senior secured term loans and current maturities of long-term debt in the
accompanying consolidated balance sheets was $221.0 million and $230.3 million
at December 31, 2002 and 2001, respectively.
CBRE Holding issued an aggregate principal amount of $65.0 million of
16.0% Senior Notes due on July 20, 2011 (the Senior Notes). The Senior Notes
are unsecured obligations, senior to all current and future unsecured
indebtedness, but subordinated to all current and future secured indebtedness
of CBRE Holding. Interest accrues at a rate of 16.0% per year and is payable
quarterly in cash in arrears. Interest may be paid in kind to the extent CBRE's
ability to pay cash dividends is restricted by the terms of the Credit
Facility. Additionally, interest in excess of 12.0% may, at CBRE Holding's
option, be paid in kind through July 2006. CBRE Holding elected to pay in kind
interest in excess of 12.0%, or 4.0%, that was payable on April 20, 2002, July
20, 2002 and October 20, 2002. The Senior Notes are redeemable at CBRE
Holding's option, in whole or in part, at 116.0% of par commencing on July 20,
2001 and at declining prices thereafter. As of December 31, 2002, the
redemption price was 112.8% of par. In the event of a change in control, CBRE
Holding is obligated to make an offer to purchase all of the outstanding Senior
Notes
87
at 101.0% of par. The total amount included in the accompanying consolidated
balance sheets was $61.9 million and $59.7 million, net of unamortized
discount, at December 31, 2002 and 2001, respectively.
The Senior Notes are solely CBRE Holding's obligation to repay. CBRE has
neither guaranteed nor pledged any of its assets as collateral for the Senior
Notes and is not obligated to provide cashflow to CBRE Holding for repayment of
these Senior Notes. However, CBRE Holding has no substantive assets or
operations other than its investment in CBRE to meet any required principal and
interest payments on the Senior Notes. CBRE Holding will depend on CBRE's cash
flows to fund principal and interest payments as they come due.
The Notes, the Credit Facility and the Senior Notes all contain numerous
restrictive covenants that, among other things, limit CBRE Holding's ability to
incur additional indebtedness, pay dividends or distributions to stockholders,
repurchase capital stock or debt, make investments, sell assets or subsidiary
stock, engage in transactions with affiliates, issue subsidiary equity and
enter into consolidations or mergers. The Credit Facility requires CBRE Holding
to maintain a minimum coverage ratio of interest and certain fixed charges and
a maximum leverage and senior leverage ratio of earnings before interest,
taxes, depreciation and amortization to funded debt. The Credit Facility
requires CBRE Holding to pay a facility fee based on the total amount of the
unused commitment.
On March 12, 2002, Moody's Investor Service downgraded CBRE Holding's
senior secured term loans and Senior Subordinated Notes to B1 from Ba3 and to
B3 from B2, respectively. On February 23, 2003, Moody's Investor Service
confirmed the ratings of CBRE Holding's senior secured term loans and Senior
Subordinated Notes at B1 and B3, respectively. On May 21, 2002 Standard and
Poor's Ratings Service affirmed the ratings of CBRE Holding's senior secured
term loans and Senior Subordinated Notes at BB- and B, respectively, but
revised the outlook from stable to negative. On February 19, 2003, Standard and
Poor's Ratings Service placed its ratings on CBRE Holding on CreditWatch with
negative implications in response to the proposed merger with Insignia. Neither
the Moody's nor the Standard and Poor's ratings impact CBRE Holding's ability
to borrow or affect CBRE Holding's interest rates for the senior secured term
loans.
A subsidiary of CBRE Holding has a credit agreement with Residential
Funding Corporation (RFC) for the purpose of funding mortgage loans that will
be resold. The credit agreement in 2001 initially provided for a revolving line
of credit of $150.0 million, bore interest at the greater of one-month LIBOR or
3.0% (RFC Base Rate), plus 1.0%, and expired on August 31, 2001. Through
various executed amendments and extension letters in 2001, the revolving line
of credit was increased to $350.0 million and the maturity date was extended to
January 22, 2002.
Effective January 23, 2002, CBRE Holding entered into a Second Amended and
Restated Warehousing Credit and Security Agreement. This agreement provided for
a revolving line of credit in the amount of $350.0 million until February 28,
2002 and $150.0 million for the period from March 1, 2002 through August 31,
2002. Additionally, on February 1, 2002, CBRE Holding executed a Letter
Agreement with RFC that redefined the RFC Base Rate to the greater of one-month
LIBOR or 2.25% per annum. On April 20, 2002, CBRE Holding obtained a temporary
revolving line of credit increase of $210.0 million that resulted in a total
line of credit equaling $360.0 million, which expired on July 31, 2002. Upon
expiration of the temporary increase and through various executed amendments
and extension letter agreements, CBRE Holding established a revolving line of
credit of $200.0 million, redefined the RFC Base Rate to the greater of
one-month LIBOR or 2.0% and extended the maturity date of the agreement to
December 20, 2002. On December 16, 2002, CBRE Holding entered into the Third
Amended and Restated Warehousing Credit and Security Agreement effective
December 20, 2002. The agreement provides for a revolving line of credit of
$200.0 million, bears interest at the RFC Base Rate plus 1.0% and expires on
August 31, 2003.
During the years ended December 31, 2002 and 2001, respectively, CBRE
Holding had a maximum of $309.0 million and $164.0 million revolving line of
credit principal outstanding with RFC. At December 31, 2002 and 2001,
respectively, CBRE Holding had a $63.1 million and a $106.8 million warehouse
line of credit outstanding, which are included in short-term borrowings in the
accompanying consolidated balance sheets. Additionally, CBRE Holding had a
$63.1 million and a $106.8 million warehouse receivable, which are also
included in the accompanying consolidated balance sheets as of December 31,
88
2002 and 2001, respectively. Subsequent to December 31, 2002 and 2001, the
warehouse lines of credit that were outstanding on those dates were repaid with
the proceeds from the warehouse receivables.
A subsidiary of CBRE Holding has a credit agreement with JP Morgan Chase.
The credit agreement provides for a non-recourse revolving line of credit of up
to $20.0 million, bears interest at 1.0% of the bank's cost of funds and
expires on May 28, 2003. At December 31, 2002 and 2001, CBRE Holding had no
revolving line of credit principal outstanding.
During 2001, CBRE Holding incurred $37.2 million of non-recourse debt
through a joint venture. In September 2002, the maturity date on this
non-recourse debt was extended to June 18, 2003. At December 31, 2002 and 2001,
respectively, CBRE Holding had $40.0 million and $37.2 million of non-recourse
debt outstanding, which is included in short-term borrowings in the
accompanying consolidated balance sheets.
The following is a summary of CBRE Holding's various contractual
obligations (dollars in thousands):
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------------- ----------- ----------- ----------- ----------
Total debt(1) ............................... $ 632,909 $121,776 $ 21,263 $16,863 $473,007
Operating leases(2) ......................... 487,311 66,632 109,286 78,014 233,379
Deferred compensation plan liability(3)(4) .. 106,252 -- -- -- 106,252
Pension liability(3)(4) ..................... 10,766 -- -- -- 10,766
---------- -------- -------- ------- --------
Total Contractual Obligations ............... $1,237,238 $188,408 $130,549 $94,877 $823,404
========== ======== ======== ======= ========
OTHER COMMITMENTS
AMOUNT OF COMMITMENTS EXPIRATION
----------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
--------- ----------- ----------- ----------- ----------
Letters of credit(2) ................. $ 7,841 $ 6,795 $ 1,046 $ -- $ --
Guarantees(2) ........................ 1,046 -- 1,046 -- --
Co-investment commitments(2) ......... 22,625 13,409 9,216 -- --
------- ------- ------- ------- -------
Total Commitments .................... $31,512 $20,204 $11,308 $ -- $ --
======= ======= ======= ======= =======
----------
(1) Includes capital lease obligations. See Note 12 of the Notes to
Consolidated Financial Statements.
(2) See Note 13 of the Notes to Consolidated Financial Statements.
(3) See Note 11 of the Notes to Consolidated Financial Statements.
(4) An undeterminable portion of this amount will be paid in years one
through five.
ACQUISITIONS
During 2001, CBRE Holding acquired a professional real estate services
firm in Mexico for an aggregate purchase price of approximately $1.7 million in
cash. CBRE Holding also purchased the remaining ownership interests that it did
not already own in CB Richard Ellis/Hampshire, LLC for a purchase price of
approximately $1.8 million in cash.
LITIGATION
CBRE Holding is a party to a number of pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. CBRE Holding's
management believes that any liability that may result from disposition of
these lawsuits will not have a material effect on CBRE Holding's consolidated
financial position or results of operations.
89
NET OPERATING LOSSES
CBRE Holding had federal income tax net operating losses (NOLs) of
approximately $7.9 million at December 31, 2001 and had no federal income tax
NOLs at December 31, 2002.
RELATED PARTY TRANSACTIONS
CBRE Holding's investment management business involves investing CBRE
Holding's own capital in certain real estate investments with clients,
including its equity investments in CB Richard Ellis Strategic Partners, LP,
Global Innovation Partners, LLC and other co-investments. CBRE Holding has
provided investment management, property management, brokerage, appraisal and
other professional services to these equity investees and earned revenues from
these co-investments of $22.4 million, $15.4 million and $7.3 million during
the years ended December 31, 2002, 2001 and 2000, respectively.
Included in other current assets in the accompanying consolidated balance
sheets is a note receivable from CBRE Holding's equity investment in Investor
1031, LLC in the amount of $1.2 million as of December 31, 2002. This note was
issued on June 20, 2002, bears interest at 20.0% per annum and is due for
repayment on July 15, 2003.
Included in other current and long-term assets in the accompanying
consolidated balance sheets are employee loans of $5.9 million and $1.6 million
as of December 31, 2002 and 2001, respectively. The majority of these loans
represent prepaid retention and recruitment awards issued to employees at
varying principal amounts, bear interest at rates up to 10.0% per annum and
mature on various dates through 2007. These loans and related interest are
typically forgiven over time, assuming that the relevant employee is still
employed by, and is in good standing with, CBRE Holding. As of December 31,
2002, the outstanding employee loan balances included a $0.3 million loan to
Raymond Wirta, CBRE Holding's Chief Executive Officer, and a $0.2 million loan
to Brett White, CBRE Holding's President. These non-interest bearing loans to
Mr. Wirta and Mr. White were issued during 2002 and are due and payable on
December 31, 2003.
The accompanying consolidated balance sheets also include $4.8 million and
$5.9 million of notes receivable from sale of stock as of December 31, 2002 and
2001, respectively. These notes are primarily composed of full-recourse loans
to employees, officers and certain shareholders of CBRE Holding, which are
secured by CBRE Holding's common stock that is owned by the borrowers. These
full-recourse loans are at varying principal amounts, require quarterly
interest payments, bear interest at rates up to 10.0% per annum and mature on
various dates through 2010.
Pursuant to CBRE Holding's 1996 Equity Incentive Plan (EIP), Mr. Wirta
purchased 30,000 shares of CBRE common stock in 2000 at a purchase price of
$12.875 per share that was paid for by delivery of a full recourse promissory
note bearing interest at 7.40%. As part of the 2001 Merger, the 30,000 shares
of CBRE common stock were exchanged for 30,000 shares of Class B common stock
of CBRE Holding. These shares of Class B common stock were substituted for CBRE
shares as security for the promissory note. All interest charged on the
outstanding promissory note balance for any year is forgiven if Mr. Wirta's
performance produces a high enough level of bonus (approximately $7,500 of
interest is forgiven for each $10,000 of bonus). As a result of bonuses paid in
2001 and in 2002, all interest on Mr. Wirta's promissory note for 2000 and 2001
was forgiven. As of December 31, 2002 and 2001, Mr. Wirta had an outstanding
loan balance of $385,950, which is included in notes receivable from sale of
common stock in the accompanying consolidated balance sheets.
Pursuant to CBRE Holding's 1996 EIP, Mr. White purchased 25,000 shares of
CBRE common stock in 1998 at a purchase price of $38.50 per share and 20,000
shares of CBRE common stock in 2000 at a purchase price of $12.875 per share.
These purchases were paid for by delivery of full recourse promissory notes
bearing interest at 7.40%. As part of the 2001 Merger, Mr. White's shares of
CBRE common stock were exchanged for a like amount of shares of Class B common
stock of CBRE Holding. These shares of Class B common stock were substituted
for the CBRE shares as security for the notes. A First Amendment to Mr. White's
1998 promissory note provided that the portion of the then outstanding
principal in excess of the fair market value of the shares would be forgiven in
the event that Mr. White was an employee of CBRE Holding or its subsidiaries on
November 16, 2002 and the fair market value
90
of a share of CBRE Holding's common stock was less than $38.50 on November 16,
2002. Mr. White's 1998 promissory note was subsequently amended, terminating
the First Amendment and adjusting the original 1998 Stock Purchase Agreement by
reducing the purchase price from $38.50 to $16.00. During 2002, the 25,000
shares held as security for the Second Amended Promissory Note were tendered as
full payment for the remaining balance of $400,000 on the 1998 promissory note.
All interest charged on the outstanding promissory note balances for any year
is forgiven if Mr. White's performance produces a high enough level of bonus
(approximately $7,500 of interest is forgiven for each $10,000 of bonus). As a
result of bonuses paid in 2001 and in 2002, all interest on Mr. White's
promissory notes for 2000 and 2001 was forgiven. As of December 31, 2002 and
2001, respectively, Mr. White had outstanding loan balances of $257,300 and
$657,300, which are included in notes receivable from sale of common stock in
the accompanying consolidated balance sheets.
As of December 31, 2002 and 2001, Mr. White had an outstanding loan of
$164,832, which is included in notes receivable from sale of common stock in
the accompanying consolidated balance sheets. This outstanding loan relates to
the acquisition of 12,500 shares of CBRE's common stock prior to the 2001
Merger. Subsequent to the 2001 Merger, these shares were converted into shares
of CBRE Holding's common stock and the related loan amount was carried forward.
This loan bears interest at 6.0% and is payable at the earlier of: (i) October
14, 2003, (ii) the date of the sale of shares held by CBRE Holding pursuant to
the related security agreement or (iii) the date of the termination of Mr.
White's employment.
At the time of the 2001 Merger, Mr. Wirta delivered to CBRE Holding an
$80,000 promissory note, which bore interest at 10% per year, as payment for
the purchase of 5,000 shares of CBRE Holding's Class B common stock. Mr. Wirta
repaid this promissory note in full in April of 2002. Additionally, Mr. Wirta
and Mr. White delivered full-recourse notes in the amounts of $512,504 and
$209,734, respectively, as payment for a portion of the shares purchased in
connection with the 2001 Merger. During 2002, Mr. Wirta paid down his loan
amount by $40,004 and Mr. White paid off his note in its entirety. As of
December 31, 2002, Mr. Wirta has an outstanding loan of $472,500, which is
included in notes receivable from sale of common stock in the accompanying
consolidated balance sheet.
In the event that CBRE Holding's common stock is not freely tradable on a
national securities exchange or an over-the-counter market by June 2004, CBRE
Holding has agreed to loan Mr. Wirta up to $3.0 million on a full-recourse
basis to enable him to exercise an existing option to acquire shares held by
The Koll Holding Company, if Mr. Wirta is employed by CBRE Holding at the time
of exercise, was terminated without cause or resigned for good reason. This
loan will become repayable upon the earliest to occur of: (1) 90 days following
termination of his employment, other than by CBRE Holding without cause or by
him for good reason, (2) seven months following the date CBRE Holding's common
stock becomes freely tradable as described above or (3) the receipt of proceeds
from the sale of the pledged shares. This loan will bear interest at the prime
rate in effect on the date of the loan, compounded annually, and will be
repayable to the extent of any net proceeds received by Mr. Wirta upon the sale
of any shares of CBRE Holding's common stock. Mr. Wirta will pledge the shares
received upon exercise of the option as security for the loan.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
CBRE Holding's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America, which require management to make estimates and assumptions that
affect reported amounts. The estimates and assumptions are based on historical
experience and on other factors that management believes to be reasonable.
Actual results may differ from those estimates under different assumptions or
conditions. CBRE Holding believes that the following critical accounting
policies represent the areas where more significant judgments and estimates are
used in the preparation of its consolidated financial statements:
Revenue Recognition
CBRE Holding records real estate commissions on sales upon close of escrow
or upon transfer of title. Real estate commissions on leases are generally
recorded as income once CBRE Holding satisfies all obligations under the
commission agreement. A typical commission agreement provides that CBRE Holding
earns a portion of the lease commission upon the execution of the lease
agreement by the tenant,
91
while the remaining portion(s) of the lease commission is earned at a later
date, usually upon tenant occupancy. The existence of any significant future
contingencies will result in the delay of recognition of revenue until such
contingencies are satisfied. For example, if CBRE Holding does not earn all or
a portion of the lease commission until the tenant pays their first month's
rent and the lease agreement provides the tenant with a free rent period, CBRE
Holding delays revenue recognition until cash rent is paid by the tenant.
Investment management and property management fees are recognized when earned
under the provisions of the related agreements. Appraisal fees are recorded
after services have been rendered. Loan origination fees are recognized at the
time the loan closes and CBRE Holding has no significant remaining obligations
for performance in connection with the transaction, while loan servicing fees
are recorded to revenue as monthly principal and interest payments are
collected from mortgagors. Other commissions, consulting fees and referral fees
are recorded as income at the time the related services have been performed
unless significant future contingencies exist.
In establishing the appropriate provisions for trade receivables, CBRE
Holding makes assumptions with respect to their future collectibility. CBRE
Holding's assumptions are based on an individual assessment of a customer's
credit quality as well as subjective factors and trends, including the aging of
receivables balances. In addition to these individual assessments, in general,
outstanding trade accounts receivable amounts that are greater than 180 days
are fully provided for.
Principles of Consolidation
CBRE Holding's consolidated financial statements included elsewhere in
this proxy statement include the accounts of CBRE Holding and its
majority-owned and controlled subsidiaries. Additionally, the consolidated
financial statements include the accounts of CBRE prior to the 2001 Merger as
CBRE is considered the predecessor to CBRE Holding for purposes of Regulation
S-X. The equity attributable to minority shareholders' interests in
subsidiaries is shown separately in the accompanying consolidated balance
sheets. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CBRE Holding's investments in unconsolidated subsidiaries in which it has
the ability to exercise significant influence over operating and financial
policies, but does not control, are accounted for under the equity method.
Accordingly, CBRE Holding's share of the earnings of these equity-method basis
companies is included in consolidated net income. All other investments held on
a long-term basis are valued at cost less any impairment in value.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid by CBRE Holding
over the fair value of the tangible and intangible assets and liabilities of
CBRE at July 20, 2001, the date of the 2001 Merger. Other intangible assets
include a trademark, which was separately identified as a result of the 2001
Merger, is not being amortized and has an indefinite estimated life. The
remaining other intangible assets represent management contracts and loan
servicing rights and are amortized on a straight-line basis over estimated
useful lives ranging up to ten years.
CBRE Holding fully adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. This statement requires CBRE Holding to
perform at least an annual assessment of impairment of goodwill and other
intangible assets deemed to have indefinite useful lives based on assumptions
and estimates of fair value and future cash flow information. In June 2002,
CBRE Holding completed the first step of the transitional goodwill impairment
test and determined that no impairment existed as of January 1, 2002. CBRE
Holding also completed its required annual impairment test as of October 1,
2002 and determined that no impairment existed as of that date. An independent
third-party valuation firm was engaged to perform all of the impairment tests.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement applies
to legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and
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(or) the normal operation of a long-lived asset, except for certain obligations
of lessees. The statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of its fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Adoption of this statement is not
expected to have any material impact on CBRE Holding's financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds the following pronouncements:
o SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
o SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
o SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements"
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions.
The provisions of this statement related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions
of this statement related to SFAS No. 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this statement shall be
effective for financial statements issued on or after May 15, 2002. Adoption of
this statement has not had and is not expected to have any material effect on
CBRE Holding's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan
and supersedes Emerging Issues Task Force Issue No. 94.3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. CBRE Holding will account for
such costs, if any, under SFAS No. 146 on a prospective basis.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No.
5, "Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures" and
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." This
interpretation also rescinds FIN 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others." FIN 45 expands the disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the fair
value of an obligation assumed under certain guarantees. The disclosure
requirements of FIN 45 are effective as of December 31, 2002 and require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 has not had and is not expected to have a material
impact on CBRE Holding's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures about the effect on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Finally,
SFAS No. 148 amends Accounting Principles Board (APB) Opinion No. 28,
93
"Interim Financial Reporting," to require disclosure about those effects in
interim financial information. For entities that voluntarily change to the fair
value based method of accounting for stock-based employee compensation, the
transition and the disclosure provisions are effective for fiscal years ending
after December 15, 2002. The amendments to APB No. 28 are effective for interim
periods beginning after December 15, 2002. CBRE Holding continues to account
for stock-based compensation under the recognition and measurement principles
of APB Opinion No. 25 and does not plan to voluntarily change to the fair value
based method of accounting for stock-based compensation. CBRE Holding will
adopt the interim disclosure provisions of SFAS No. 148 for the quarter ended
March 31, 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which is an interpretation of Accounting Research Bulletin
(ARB) No. 51, "Consolidated Financial Statements." This interpretation
addresses consolidation of entities that are not controllable through voting
interests or in which the equity investors do not bear the residual economic
risks. The objective of this interpretation is to provide guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests and results of operations of a VIE need
to be consolidated with its primary beneficiary. A company that holds variable
interests in an entity will need to consolidate the entity if the company's
interest in the VIE is such that the company will absorb a majority of the
VIE's expected losses and/or receive a majority of the VIE's expected residual
returns or if the VIE does not have sufficient equity at risk to finance its
activities without additional subordinated financial support from other
parties. For VIEs in which a significant (but not majority) variable interest
is held, certain disclosures are required. The consolidation requirements of
FIN 46 apply immediately to VIEs created after January 31, 2003. The
consolidation requirements apply to existing VIEs in the first fiscal year or
interim period beginning after June 15, 2003. Certain disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the VIE was established. The adoption of this interpretation is not
expected to have a material impact on CBRE Holding's financial position or
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CBRE Holding'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 27% of CBRE Holding's business is transacted in local
currencies of foreign countries. CBRE Holding attempts to manage its exposure
primarily by balancing monetary assets and liabilities, and maintaining cash
positions only at levels necessary for operating purposes. CBRE Holding
routinely monitors its transaction exposure to currency exchange rate changes
and occasionally enters into currency forward and option contracts to limit its
exposure, as appropriate. At December 31, 2002, CBRE Holding was not a party to
any such contracts. CBRE Holding does not engage in any speculative activities
in respect of foreign currency.
CBRE Holding manages its interest expense by using a combination of fixed
and variable rate debt. CBRE Holding's fixed and variable long-term debt at
December 31, 2002 consisted of the following (dollars in thousands):
94
GREATER OF INTEREST RATE
ONE-MONTH 3.0% OR THREE-MONTH THREE-MONTH RANGE OF
FIXED YEN LIBOR ONE-MONTH LIBOR LIBOR 4.37% TO
YEAR OF MATURITY RATE +4.95% LIBOR +1.0% +3.25% +3.75% 6.50% TOTAL
--------------------- ------------- ----------- ------------- ------------- ------------- --------------- -------------
2003 ................ $ 752 $ 40,005 $ 63,140 $ 8,125 $ 1,850 $ 7,904 $ 121,776
2004 ................ 40 -- -- 8,750 1,850 -- 10,640
2005 ................ 23 -- -- 8,750 1,850 -- 10,623
2006 ................ 19 -- -- 8,750 1,850 -- 10,619
2007 ................ 19 -- -- 4,375 1,850 -- 6,244
Thereafter(1) ....... 300,032 -- -- -- 172,975 -- 473,007
--------- -------- -------- -------- --------- ------- ---------
Total .............. $ 300,885 $ 40,005 $ 63,140 $ 38,750 $ 182,225 $ 7,904 $ 632,909
========= ======== ======== ======== ========= ======= =========
Weighted Average
Interest Rate ...... 12.1% 5.0% 3.0% 4.7% 5.2% 4.9% 8.2%
========= ======== ======== ======== ========= ======= =========
----------
(1) Primarily includes the 11 1/4% Senior Subordinated Notes, the 16% Senior
Notes and the Tranche B term loans under the senior secured credit
facilities.
CBRE Holding utilizes sensitivity analyses to assess the potential effect
of its variable rate debt. If interest rates were to increase by 47 basis
points, approximately 10% of the weighted average variable rate at year end,
the net impact would be a decrease of $1.6 million on annual pre-tax income and
cash provided by operating activities for the twelve months ended December 31,
2002.
Based on dealers' quotes, the estimated fair value of CBRE Holding's
$225.9 million 11 1/4% Senior Subordinated Notes is $208.4 million at December
31, 2002. There was no trading activity for the 16% Senior Notes, which are due
in 2011. Their carrying value as of December 31, 2002 totaled $61.9 million.
Estimated fair values for the term loans under the senior secured credit
facilities and the remaining long-term debt are not presented because CBRE
Holding believes that they are not materially different from book value,
primarily because the majority of the remaining debt is based on variable rates
that approximate terms that could be obtained at December 31, 2002.
CHANGE IN ACCOUNTANTS
On April 23, 2002, CBRE Holding dismissed its independent auditors, Arthur
Andersen LLP, and engaged the services of Deloitte & Touche LLP as its new
independent auditors for the fiscal year ended December 31, 2002. CBRE
Holding's board of directors and its audit committee authorized the dismissal
of Arthur Andersen and the engagement of Deloitte & Touche.
Arthur Andersen's reports on CBRE Holding's consolidated financial
statements for the fiscal years ended December 31, 2001 and 2000 and for the
period from CBRE Holding's inception through the date of Arthur Andersen's
dismissal did not contain any adverse opinion or disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope or
accounting principles.
During the period from CBRE Holding's inception through the date of Arthur
Andersen's dismissal, there were no (1) disagreements with Arthur Andersen on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which disagreements, if not resolved
to Arthur Andersen's satisfaction, would have caused it to make reference to
the subject matter of the disagreements in connection with its report on CBRE
Holding's consolidated financial statements or (2) reportable events as defined
in Item 304(a)(1)(v) of Regulation S-K.
FINANCIAL STATEMENTS
Please see Appendix D hereto for the consolidated financial statements and
supplementary date of CBRE Holding.
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OTHER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 15, 2003, certain information
with respect to shares of common stock beneficially owned by each of our
directors, our chief executive officer and each of our four other most highly
compensated executive officers serving as such at December 31, 2002, by all of
our directors and executive officers as a group and by persons who are known to
us to be the beneficial owners of more than five percent of the issued and
outstanding shares of our common stock. These persons have sole voting power
and sole dispositive power with respect to all shares set forth in the table
unless otherwise specified in the footnotes to the table. The table does not
include shares of our common stock subject to options, warrants and restricted
stock awards that are not currently exercisable or will not become exercisable
within 60 days of March 12, 2003. The merger agreement provides that unvested
options, warrants and restricted stock awards will become fully vested at the
effective time of the merger and the holders will be entitled to receive
payments for these options, warrants and restricted stock awards. See "The
Merger--Interests of Executive Officers and Directors in the Merger."
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
----------------------------------------------- ---------------------------------- -----------------
Andrew L. Farkas .............................. 2,428,465(1) 9.8%
Insignia Financial Group, Inc.
200 Park Avenue
New York, New York 10166
Dimensional Fund Advisors, Inc. ............... 2,061,731(2) 8.7%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Stephen Feinberg .............................. 2,665,819(3) 11.2%
450 Park Avenue, 28th Floor
New York, New York 10022
Eminence Capital, L.L.C., ..................... 1,406,000(4) 5.9%
200 Park Avenue, Suite 3300
New York, New York 10166
Carl C. Icahn ................................. 1,753,700(5) 7.4%
High River Limited Partnership
Barberry Corporation
767 Fifth Avenue, 47th Floor
New York, New York 10153
James A. Aston ................................ 303,979(6) 1.3%
Robert J. Denison ............................. 53,266(7) *
Robin L. Farkas ............................... 229,634(8) 1.0%
Alan C. Froggatt .............................. 35,195(9) *
Frank M. Garrison ............................. 272,895(10) 1.1%
Robert G. Koen ................................ 53,000(11) *
Stephen M. Ross ............................... 12,000(12) *
Stephen B. Siegel ............................. 180,000(13) *
Ronald Uretta ................................. 300,540(14) 1.3%
H. Strauss Zelnick ............................ 64,000(15) *
All directors and executive officers as a group
(13 individuals) ............................. 3,986,306(1)(6)-(16) 16.8%
----------
(*) Denotes less than 1%.
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(1) Includes shares owned by (i) Metro Shelter Directives, Inc. and (ii)
F III, Inc. Also includes 1,040,000 shares subject to options and
warrants that are or will become exercisable within 60 days of March
31, 2003. Andrew L. Farkas is the son of Robin L. Farkas
(2) Dimensional Fund Advisors, Inc. ("Dimensional"), an investment
advisor registered under Section 203 of the Investment Advisers Act of
1940, furnishes investment advice to four investment companies
registered under the Investment Company Act of 1940, and serves as
investment manager to certain other investment vehicles, including
commingled group trusts (these investment companies and investment
vehicles are the "Portfolios"). In its role as investment adviser and
investment manager, Dimensional possessed both investment and voting
power over 2,061,731 shares of our common stock as of December 31,
2002. The Portfolios own all the securities reported in this statement
and Dimensional disclaims beneficial ownership of such securities. The
foregoing is based upon a Schedule 13G/A filed by Dimensional with the
Commission, dated February 13, 2003.
(3) 250,000 shares of series A convertible preferred stock and 125,000
shares of series B convertible preferred stock (collectively, the
"Preferred Stock") of the Company are held of record by Madeleine
L.L.C. on behalf of various private investment funds referred to below
that are managed by Stephen Feinberg. Mr. Feinberg possesses sole
voting and investment authority over such shares. The Preferred Stock
is convertible at any time into a total of 2,597,402 shares of our
common stock. The private investment funds include Cerberus Partners,
L.P., Cerberus Institutional Partners, L.P. and Cerberus
International, Ltd. The foregoing is based upon a Schedule 13D/A filed
by Mr. Feinberg with the Commission dated June 28, 2002. Also includes
a total of 68,417 shares of common stock issued as dividends paid on
the Preferred Stock prior to June 18, 2002.
(4) Eminence Capital, LLC ("Eminence") serves as the beneficial owner of
1,406,000 shares on behalf of a number of private investment vehicles
and managed accounts advised by Eminence. The foregoing is based upon
a Schedule 13G/A filed by Eminence with the Commission dated February
13, 2003.
(5) Barberry Corp., a Delaware corporation ("Barberry") is the general
partner of High River Limited Partnership, a Delaware limited
partnership ("High River"). Barberry is 100 percent owned by Carl C.
Icahn. As such, Mr. Icahn is in a position directly and indirectly to
determine the investment and voting decisions made by Barberry and
High River. The foregoing is based upon a Schedule 13G/A filed by Mr.
Icahn with the Commission dated February 10, 2003.
(6) Includes 240,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003 and 129
shares held in an IRA. Also includes 8,934 shares owned by Mr. Aston's
children, with respect to which Mr. Aston disclaims beneficial
ownership.
(7) Includes 266 shares held by First Security Management, Inc., a
corporation of which Mr. Denison is the president and sole
shareholder. Also includes 53,000 shares subject to options and
warrants that are or will become exercisable within 60 days of April
15, 2003.
(8) Includes 53,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003. Also
includes 7,998 shares owned by Mr. Farkas's spouse, with respect to
which Mr. Farkas disclaims beneficial ownership. Robin L. Farkas is
the father of Andrew L. Farkas.
(9) Includes 9,794 shares subject to options that are or will become
exercisable within 60 days of April 15, 2003. Also includes 3,396
shares owned by Mr. Froggatt's spouse, with respect to which Mr.
Froggatt disclaims beneficial ownership.
(10) Includes 260,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003.
(11) Includes 53,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003.
97
(12) Includes 12,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003.
(13) Includes (a) 80,000 shares subject to options that are or will become
exercisable within 60 days of April 15, 2003 and (b) 350 shares owned
by Mr. Siegel's child, with respect to which Mr. Siegel disclaims
beneficial ownership.
(14) Includes (a) 240,000 shares subject to options and warrants that are
or will become exercisable within 60 days of April 15, 2003, and (b)
133 shares owned by Mr. Uretta's spouse and 2,238 shares owned by Mr.
Uretta's children, with respect to which Mr. Uretta disclaims
beneficial ownership.
(15) Includes 53,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003.
(16) Includes 24,000 shares subject to options and warrants that are or
will become exercisable within 60 days of April 15, 2003.
OTHER MATTERS FOR ACTION AT THE SPECIAL MEETING
Our board of directors is not aware of any matters to be presented for
action at the special meeting other than that described in this proxy statement
and does not intend to bring any other matters before the special meeting.
However, if other matters should come before the special meeting, it is
intended that the holders of proxies solicited hereby will vote on those
matters in their discretion.
STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the merger, we do not currently
expect to hold a 2003 annual meeting of stockholders because, following the
merger, we will not be a publicly held company. However, if the merger is not
consummated for any reason, we will promptly convene an annual meeting of
stockholders. In that event, we must receive stockholder proposals intended to
be presented at that meeting at our principal executive offices no later than
the tenth day following our public announcement of the date of that meeting,
for inclusion in our proxy statement and form of proxy relating to that
meeting.
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and, in accordance with the Exchange Act, file
reports, proxy statements and other information with the SEC. CBRE Holding also
files reports and other information with the SEC. Our and CBRE Holding's
reports, proxy statements and other information can be inspected and copies
made at the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the SEC's regional office at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these materials can also be obtained from the Public Reference Room of the SEC
at its Washington address at prescribed rates. Information regarding the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. Copies of these materials also may be accessed through the
SEC's web site at www.sec.gov.com. Our common stock is listed on the New York
Stock Exchange under the symbol "IFS." These materials may be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
----------
You should rely only on the information contained in this proxy statement
to vote your shares at the special meeting. We have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement.
Insignia has supplied all information contained in this proxy statement
relating to Insignia and our affiliates. CBRE Holding, CB Richard Ellis
Services and Apple Acquisition have supplied all information contained in this
proxy statement relating to them and their affiliates.
This proxy statement is dated , 2003. You should not assume that
the information contained in this proxy statement is accurate as of any date
other than that date, and the mailing of this
98
proxy statement to stockholders does not create any implication to the
contrary. This proxy statement does not constitute a solicitation of a proxy in
any jurisdiction where, or to or from any person to whom, it is unlawful to
make a proxy solicitation.
By order of the Board of Directors
/s/ Andrew L. Farkas
Andrew L. Farkas
Chairman and Chief Executive Officer
, 2003
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 17, 2003
BY AND AMONG
INSIGNIA FINANCIAL GROUP, INC.,
CBRE HOLDING, INC.
CB RICHARD ELLIS SERVICES, INC.
AND
APPLE ACQUISITION CORP.
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS ........................................................... A-1
1.1. Definitions ............................................................... A-1
ARTICLE 2 THE MERGER ............................................................ A-8
2.1. The Merger ................................................................ A-8
2.2. Organizational Documents .................................................. A-8
2.3. Directors and Officers .................................................... A-8
ARTICLE 3 CONVERSION OF SECURITIES AND RELATED MATTERS .......................... A-8
3.1. Capital Stock of Acquiror ................................................. A-8
3.2. Cancellation of Treasury Stock and Acquiror-Owned Shares .................. A-9
3.3. Conversion of Company Shares .............................................. A-9
3.4. Conversion of Company Series A Preferred Shares ........................... A-9
3.5. Conversion of Company Series B Preferred Shares ........................... A-9
3.6. Exchange of Certificates .................................................. A-9
3.7. Company Stock Options and Restricted Shares ............................... A-11
3.8. Warrants .................................................................. A-11
3.9. Supplemental Stock Purchase and Loan Plan ................................. A-12
3.10. Dissenting Shares ......................................................... A-12
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY ......................... A-12
4.1. Corporate Existence and Power ............................................. A-12
4.2. Corporate Authorization ................................................... A-13
4.3. Governmental Authorization ................................................ A-13
4.4. Non-Contravention ......................................................... A-13
4.5. Capitalization ............................................................ A-13
4.6. Subsidiaries .............................................................. A-15
4.7. Company SEC Documents; Financial Statements; Undisclosed Liabilities ...... A-15
4.8. [Reserved] ................................................................ A-16
4.9. Absence of Certain Changes ................................................ A-16
4.10. Litigation ................................................................ A-16
4.11. Taxes ..................................................................... A-17
4.12. Employee Benefits ......................................................... A-17
4.13. Compliance with Laws; Licenses, Permits and Registrations ................. A-20
4.14. Title to Assets ........................................................... A-20
4.15. Intellectual Property ..................................................... A-20
4.16. Transaction Fees; Opinions of Financial Advisor ........................... A-20
4.17. Labor Matters ............................................................. A-21
4.18. Material Contracts ........................................................ A-22
4.19. Real Estate ............................................................... A-23
4.20. Environmental ............................................................. A-24
4.21. Insurance ................................................................. A-24
4.22. Affiliate Transactions .................................................... A-24
4.23. Required Vote; Board Approval; State Takeover Statutes .................... A-24
4.24. Information to Be Supplied ................................................ A-25
4.25. No Knowledge of Breach .................................................... A-25
4.26. Disclaimer of Other Representations and Warranties ........................ A-25
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF HOLDING, PARENT AND ACQUIROR ........ A-25
5.1. Corporate Existence and Power ............................................. A-25
5.2. Corporate Authorization ................................................... A-26
i
5.3. Governmental Authorization ............................................. A-26
5.4. Non-Contravention ...................................................... A-26
5.5. Parent SEC Documents ................................................... A-26
5.6. [Reserved] ............................................................. A-27
5.7. Financing .............................................................. A-27
5.8. Information to Be Supplied ............................................. A-27
5.9. Disclaimer of Other Representations and Warranties ..................... A-28
5.10. No Knowledge of Breach ................................................. A-28
ARTICLE 6 COVENANTS OF THE COMPANY ........................................... A-29
6.1. Company Interim Operations ............................................. A-29
6.2. Stockholder Meeting .................................................... A-31
6.3. Acquisition Proposals; Board Recommendation ............................ A-31
6.4. French Warrants ........................................................ A-33
6.5. Supplemental Company Disclosure Schedule ............................... A-33
6.6. Pre-Closing Terminations ............................................... A-34
ARTICLE 7 COVENANTS OF HOLDING, PARENT AND ACQUIROR .......................... A-34
7.1. Director and Officer Liability ......................................... A-34
7.2. Employee Benefits ...................................................... A-36
7.3. Conduct of Holding, Parent and Acquiror ................................ A-36
7.4. Transfer Taxes and Other Tax Matters ................................... A-37
7.5. Financing Arrangements ................................................. A-37
7.6. Certain Existing Obligations ........................................... A-37
ARTICLE 8 COVENANTS OF HOLDING, PARENT, ACQUIROR AND THE COMPANY ............. A-38
8.1. Efforts and Assistance ................................................. A-38
8.2. Proxy Statement ........................................................ A-39
8.3. Public Announcements ................................................... A-40
8.4. Access to Information; Notification of Certain Matters ................. A-40
8.5. Further Assurances ..................................................... A-41
8.6. Disposition of Litigation .............................................. A-41
8.7. Confidentiality and No-Raid Agreements ................................. A-41
8.8. Resignation of Directors ............................................... A-41
8.9. Sales of Real Estate Investment Assets ................................. A-41
8.10. Treatment of Net Proceeds .............................................. A-42
8.11. 401(k) Restoration Plan ................................................ A-42
ARTICLE 9 CONDITIONS TO MERGER ............................................... A-42
9.1. Conditions to the Obligations of Each Party ............................ A-42
9.2. Conditions to the Obligations of the Company ........................... A-43
9.3. Conditions to the Obligations of Holding, Parent and Acquiror .......... A-43
ARTICLE 10 TERMINATION ....................................................... A-44
10.1. Termination ............................................................ A-44
10.2. Effect of Termination .................................................. A-45
10.3. Fees and Expenses ...................................................... A-46
10.4. Indemnification ........................................................ A-46
ARTICLE 11 MISCELLANEOUS ..................................................... A-47
11.1. Notices ................................................................ A-47
11.2. Survival ............................................................... A-47
11.3. Amendments; No Waivers ................................................. A-47
11.4. Successors and Assigns ................................................. A-48
ii
11.5. Counterparts; Effectiveness; Third Party Beneficiaries .......... A-48
11.6. Governing Law ................................................... A-48
11.7. Jurisdiction .................................................... A-48
11.8. Enforcement ..................................................... A-48
11.9. Entire Agreement ................................................ A-48
11.10. Authorship ...................................................... A-49
11.11. Severability .................................................... A-49
11.12. Waiver of Jury Trial ............................................ A-49
11.13. Headings; Construction .......................................... A-49
EXHIBITS:
Exhibit A Form of Voting Agreement
Exhibit B Form of Joint Press Release
iii
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made and entered
into as of this 17th day of February 2003, by and among Insignia Financial
Group, Inc., a Delaware corporation (the "COMPANY"), CBRE Holding, Inc., a
Delaware corporation ("HOLDING"), CB Richard Ellis Services, Inc., a Delaware
corporation wholly owned by Holding ("PARENT"), and Apple Acquisition Corp., a
Delaware corporation wholly owned by Parent ("ACQUIROR").
WHEREAS, a Special Committee (as defined herein) of the Board of Directors
of the Company has (i) determined that the Merger (as defined herein) is
advisable and in the best interest of the Company's stockholders, and (ii)
approved the Merger and recommended approval of the Merger by the Board of
Directors of the Company;
WHEREAS, the Board of Directors of the Company has (i) determined that the
Merger is advisable and in the best interest of the Company's Stockholders (as
defined below), and (ii) approved the Merger;
WHEREAS, the Board of Directors of each of Parent and Acquiror has (i)
determined that the Merger is advisable and in the best interest of its
stockholders, and (ii) approved the Merger;
WHEREAS, simultaneously with the execution of this Agreement, certain
Company Stockholders have entered into voting agreements with Parent (the
"VOTING AGREEMENTS"), each of which is in the form attached hereto as Exhibit
A, pursuant to which, among other things, such Company Stockholders have agreed
to vote their Company Shares in favor of adopting and approving this Agreement
and the Merger; and
WHEREAS, by resolutions duly adopted, the respective Boards of Directors
of the Company, Parent and Acquiror have approved and adopted this Agreement
and the transactions and other agreements contemplated hereby.
NOW, THEREFORE, in consideration of the premises and promises contained
herein, and intending to be legally bound, the parties hereto agree as set
forth below.
ARTICLE 1
DEFINITIONS
1.1. DEFINITIONS.
(a) As used herein, the following terms have the meanings set forth below:
"ACQUIROR SHARE" means one share of common stock of Acquiror, $0.01 par
value per share.
"ACQUISITION PROPOSAL" means any offer or proposal (whether or not in
writing) from any Third Party regarding any of the following: (a) a transaction
pursuant to which a Third Party acquires or would acquire beneficial ownership
of more than fifteen percent (15%) of the outstanding shares of any class of
Equity Interests of the Company, whether from the Company or pursuant to a
tender offer or exchange offer or otherwise, (b) a merger, consolidation,
business combination, reorganization, sale of all or substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving the
Company, or (c) except for any transaction set forth in Section 6.1 of the
Company Disclosure Schedule, any transaction which would result in a Third
Party acquiring more than 15% of the fair market value on a consolidated basis
of the assets (including, without limitation, the capital stock of
Subsidiaries) of the Company and its Subsidiaries immediately prior to such
transaction (whether by purchase of assets, acquisition of stock of a
Subsidiary or otherwise).
"AFFILIATE" means, with respect to any Person, any other Person, directly
or indirectly, controlling, controlled by, or under common control with, such
first Person. For purposes of this definition, the term "CONTROL" (including
the correlative terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH") means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
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"BUSINESS DAY" means any day, other than a Saturday, Sunday or one on
which banks are authorized by Law to be closed in New York, New York or Los
Angeles, California.
"CASH DISTRIBUTION" means a cash distribution or payment (without
duplication) made on or after the date of this Agreement and prior to the
Closing Date by a Real Estate Investment Entity or (without duplication) a
Relevant Subsidiary to any holder of a debt obligation of or an Equity Interest
in such Real Estate Investment Entity or Relevant Subsidiary (if, and only if,
such payment is not an interest payment or a distribution of net operating
earnings), excluding any distribution or payment directly or indirectly made
with (x) the proceeds of any indebtedness (including any refinancing) unless
such indebtedness is (i) non-recourse to the Company and its Subsidiaries or
(ii) non-recourse to the Company and its Subsidiaries with exceptions to such
non-recourse provisions that are no less favorable to the Company and its
Subsidiaries (and are applicable only to the same Subsidiaries) as the
indebtedness of such Real Estate Investment Entity that is being refinanced
(but which in no event would generally be characterized as full recourse), or
(y) any cash generated by sale of any Real Estate Investment Asset on or prior
to December 31, 2002. For the avoidance of doubt, management fees, advisory
fees or other similar fees or payments made to a Company Subsidiary will not be
deemed to constitute a Cash Distribution.
"CHANGE IN CONTROL PRICE" means the higher of (i) the Common Merger
Consideration, or (ii) the highest Fair Market Value per Company Share at any
time during the sixty (60) day period preceding the Closing.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended, together
with the rules and regulations promulgated thereunder.
"COMPANY BALANCE SHEET" means the Company's consolidated balance sheet
included in the Company 10-K relating to its fiscal year ended on December 31,
2001.
"COMPANY CHARTER" means the certificate of incorporation of the Company,
including, without limitation, the Certificate of Designation with respect to
the Series A Preferred Stock filed with the Secretary of State on June 7, 2002,
the Certificate of Designation with respect to the Series B Preferred Stock
filed with the Secretary of State on June 7, 2002 and any such other amendments
or restatements thereof.
"COMPANY JOINT VENTURE" means a Joint Venture of the Company or any of its
Subsidiaries.
"COMPANY MATERIAL ADVERSE EFFECT" means any material adverse effect on (a)
the business, assets, liabilities, financial condition or results of operations
of the Company and its Subsidiaries, taken as a whole, or (b) the ability of
the Company to perform its obligations under this Agreement or the other
agreements and transactions contemplated hereby to which it is a party;
provided, however, that this definition shall exclude any adverse effect
arising out of, attributable to or resulting from:
(i) any generally applicable change in Law or GAAP or interpretation of
any thereof;
(ii) the termination of any employee's or independent contractor's
employment by, or independent contractor relationship with, the Company or
any of its Subsidiaries, or any notice thereof, other than (A) as a result
of any breach by the Company or any of its Subsidiaries of the terms of
this Agreement or (B) as a result of any termination (other than for cause
or pursuant to Section 6.6) by the Company or any of its Subsidiaries of
any employee or independent consultant in writing;
(iii) the announcement of discussions among the parties hereto
regarding the transactions contemplated hereby, the announcement of any
other actual or proposed Acquisition Proposal, the announcement of this
Agreement or the transactions contemplated hereby, any suit, action or
proceeding arising out of or in connection with this Agreement or the
transactions contemplated hereby (other than causes of action brought by
Holding, Parent or Acquiror for breach of this Agreement) or any actions
taken pursuant to Sections 8.1(a) and 8.1(b);
(iv) the disposition of any assets that would not violate the terms of
this Agreement or the write down or write off of the value of any such
assets for accounting purposes;
(v) actions or inactions specifically permitted by a prior written
waiver by Holding, Parent and Acquiror of performance by the Company of
any of its obligations under this Agreement;
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(vi) the failure of the Company or any of its Subsidiaries to obtain
any Third Party consents to the execution and delivery of this Agreement,
or the agreements relating to the transactions contemplated hereby to the
extent such Third Party consents are set forth in the Company Disclosure
Schedule;
(vii) any diminution in value of, or adverse developments after the
date of this Agreement relating to, the Real Estate Investment Entities,
other than as a result of the Company's breach of this Agreement;
(viii) the cancellation or notice of cancellation of third-party
management, tenant representation and/or brokerage contracts to which
the Company or any of its Subsidiaries is or may become a party;
(ix) conditions generally affecting the business or industry in which
the Company or any of its Subsidiaries operate;
(x) U.S., U.K., French or global general economic or political
conditions or financial markets; and
(xi) any outbreak or escalation of hostilities (including, without
limitation, any declaration of war by the U.S. Congress) or acts of
terrorism.
"COMPANY OPTION" means any option to purchase Company Shares, whether
granted pursuant to the Company Option Plans or otherwise.
"COMPANY OPTION PLANS" means the Company's 1998 Stock Incentive Plan,
Richard Ellis Group Limited 1997 Unapproved Share Option Scheme, St. Quintin
Holdings Limited 1999 Unapproved Share Option Scheme and Brooke International
(China) Limited Share Option Scheme, each as amended, supplemented or otherwise
modified.
"COMPANY PREFERRED SHARE" means one share of Series A Preferred Stock or
one share of Series B Preferred Stock.
"COMPANY SERIES A PREFERRED SHARE" means one share of the Series A
Preferred Stock.
"COMPANY SERIES B PREFERRED SHARE" means one share of the Series B
Preferred Stock.
"COMPANY SHARE" means one share of common stock of the Company, par value
$0.01 per share.
"COMPANY SEC DOCUMENTS" means (a) the annual reports on Form 10-K of the
Company for the years ended December 31, 1999, 2000 and 2001 (the "COMPANY
10-K"), (b) the quarterly reports on Form 10-Q of the Company for the quarters
ended March 31, 2002, June 30, 2002 and September 30, 2002, (c) the Company's
proxy and information statements relating to meetings of, or actions taken
without a meeting by, the Company Stockholders, since January 1, 2002, and (d)
all other reports, filings, registration statements and other documents filed
by the Company with the SEC since January 1, 1999; in each case including all
exhibits, appendices and attachments thereto, whether filed therewith or
incorporated by reference therein.
"COMPANY STOCKHOLDERS" or "STOCKHOLDERS" means the stockholders of the
Company.
"COMPANY SUBSIDIARY" means a Subsidiary of the Company or any of its
Subsidiaries.
"COMPANY WARRANT" means any warrant to purchase Company Shares, other than
the TOPR Warrants.
"COVERED ENTITIES" shall have the meaning set forth in Section 7.6(b).
"COVERED PARTICIPANT" shall have the meaning set forth in Section 7.6(b).
"DAMAGES" means all losses, liabilities, claims, damages, payments, Taxes,
Liens, costs and expenses (including costs and expenses of actions, amounts
paid in connection with any assessments, judgments or settlements relating
thereto, interest and penalties recovered by a third party with respect thereto
and out-of-pocket expenses and reasonable attorneys' fees and expenses
reasonably incurred in defending against any such actions).
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"ENVIRONMENTAL LAWS" shall mean all Laws relating to the protection of the
indoor or outdoor environment (including, without limitation, the quality of
the ambient air, soil, surface water or groundwater, natural resources or human
health or safety).
"ENVIRONMENTAL PERMITS" shall mean all permits, licenses, registrations,
and other authorizations required under applicable Environmental Laws.
"EQUITY INTEREST" means with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock or other
equity interests (including, without limitation, partnership or membership
interests in a partnership or limited liability company or any other interest
or participation that confers on a Person the right to receive a share of the
profits and losses, or distributions of assets, of the issuing Person) whether
outstanding on the date hereof or issued after the date hereof; provided,
however that "Equity Interests" shall not include any right to receive cash
payments under bonus plans of the Company or its Subsidiaries.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"FAIR MARKET VALUE" means, as of any date, the last sales price for a
Company Share on the applicable date as reported on the New York Stock
Exchange.
"GAAP" means United States generally accepted accounting principles,
applied on a consistent basis.
"GOVERNMENTAL ENTITY" means any federal, state, local, international or
foreign governmental authority, any transgovernmental authority or any court,
administrative or regulatory agency or commission or other governmental
authority, agency or body.
"JOINT VENTURE" means, with respect to any Person, any corporation or
other entity (including a division or line of business of such corporation or
other entity) (A) of which such Person and/or any of its Subsidiaries
beneficially owns a portion of the Equity Interests that is insufficient to
make such corporation or other entity a Subsidiary of such Person, and (B) that
is engaged in the same business as such Person or its Subsidiaries or in a
related or complementary business.
"KNOWLEDGE" means, with respect to the matter in question, if any of the
following officers of the Company has actual knowledge of the matter: Andrew
Farkas, Jim Aston, Frank Garrison, Adam Gilbert, Ronald Uretta and Alan
Froggatt.
"LAW" means any federal, state, local, international or foreign law
(including common law), rule, regulation, judgment, code, ruling, statute,
order, directives, decree, injunction or ordinance or other legal requirement.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of an asset.
"MATERIALS OF ENVIRONMENTAL CONCERN" shall mean any hazardous, acutely
hazardous, or toxic substance or waste or any other words of similar import
defined and regulated as such under Environmental Laws (including, without
limitation, the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended, and the federal Resource Conservation and Recovery
Act, as amended) and any other material or organism that would be reasonably
expected to result in liability under any Environmental Law (including, without
limitation, oil, petroleum products, asbestos, polychlorinated biphenyls and
mold).
"NET PROCEEDS" means the aggregate cash proceeds Deemed Received by the
Company (as defined below) on or after the date of this Agreement and prior to
or simultaneously with the Closing from or as a result of (i) all Real Estate
Asset Sales completed prior to or simultaneously with the Closing and (ii) all
Cash Distributions. The amount of cash proceeds "DEEMED RECEIVED BY THE
COMPANY" shall be the amount of cash proceeds that would ultimately be
distributable to the Company (i.e., Insignia Financial Group, Inc.) by its
direct Subsidiaries, assuming repayment in full of all indebtedness of all
Company Subsidiaries in the chain of ownership at or above the level at which
the sale occurred (other than
A-4
indebtedness other under the Senior Credit Agreement and the Senior
Subordinated Credit Agreement), and net of: (a) any Taxes (other than income
Taxes) that are payable by the Company or any of it Subsidiaries as a result of
the transaction or event giving rise to such receipt of cash proceeds, (b) any
liabilities or obligations retained by the Company or any of its Subsidiaries
relating to any Real Estate Investment Asset directly or indirectly sold
pursuant to any Real Estate Asset Sale (including, without limitation, any
liabilities or obligations relating to the underlying Real Estate Investment
Asset that was directly or indirectly sold in such Real Estate Asset Sale), (c)
fees, costs and expenses payable to third parties and incurred in connection
with the transaction or event giving rise to such receipt of cash proceeds
(including, without limitation, any incentive or other bonuses paid to
management of the Company or any Subsidiary), (d) any payments required to be
made by the Company or any of its Subsidiaries in respect of any Participation
Interests in connection with the transaction or event giving rise to such
receipt of cash proceeds and (e) any cash generated by any sale of a Real
Estate Investment Asset on or prior to December 31, 2002. If the buyer in a
Real Estate Asset Sale is willing to assume a retention/severance agreement for
which the Company or its Subsidiaries would otherwise be liable and if the
Parent consents to such assumption, then the amount of such obligations assumed
by the buyer will be considered cash proceeds of the transaction. Net Proceeds
will be determined in good faith by mutual written agreement of Parent and the
Company and certified in writing by Parent and the Company at or prior to
Closing. For the avoidance of doubt, cash proceeds can only be Deemed Received
by the Company if they were actually received prior to or simultaneously with
the Closing by a Subsidiary or a Joint Venture that remains a Subsidiary or a
Joint Venture, respectively, of the Company immediately following Closing
(i.e., such Subsidiary or Joint Venture is not sold in a Real Estate Asset
Sale).
"NON-U.S. COMPETITION LAWS" means all (a) non-U.S. Laws intended to
prohibit, restrict or regulate actions having the purpose or effect of
monopolization or restraint of trade, (b) antitrust Laws by antitrust
authorities outside of the United States and (c) takeover Laws of jurisdictions
outside of the United States.
"NO-RAID AGREEMENT" means the No-Raid Agreement, dated January 19, 2003,
by and between Holding and the Company.
"PARENT BALANCE SHEET" means Holding's consolidated balance sheet included
in the Parent 10-K relating to its fiscal year ended on December 31, 2001.
"PARENT CREDIT AGREEMENT" means the Credit Agreement, dated as of July 20,
2001, among Parent, Holding, the lenders party thereto and CSFB.
"PARENT MATERIAL ADVERSE EFFECT" means any change or effect that would
prevent or materially impair the ability of Holding, Parent or Acquiror to
consummate the Merger and the other transactions contemplated by this
Agreement.
"PARENT SEC DOCUMENTS" means (a) the annual report on Form 10-K of Holding
for the year ended December 31, 2001 (the "PARENT 10-K"), (b) the quarterly
reports on Form 10-Q of Holding for the quarters ended March 31, 2002, June 30,
2002 and September 30, 2002 and (c) all other reports, filings, registration
statements and other documents filed by Holding or Parent with the SEC since
July 20, 2001; in each case including all exhibits, appendices and attachments
thereto, whether filed therewith or incorporated by reference therein.
"PARTICIPATION INTERESTS" shall have the meaning set forth in Section
7.6(b).
"PERMITTED LIENS" means (a) liens for utilities and current Taxes not yet
due and payable, (b) mechanics', carriers', workers', repairers',
materialmen's, warehousemen's and other similar liens arising or incurred in
the ordinary course of business, (c) liens for Taxes being contested in good
faith for which appropriate reserves have been included on the balance sheet of
the applicable Person, (d) easements, restrictions, covenants or rights of way
currently of record against any of the Owned Real Property which do not
interfere with, or increase the cost of operation of, the business of the
Company and its Subsidiaries in any material respect, (e) minor irregularities
of title which do not interfere with, or increase the cost of the business of
the Company and its Subsidiaries in any material respect, and (f) liens under
the Senior Credit Agreement.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust or any other entity or organization, including
any Governmental Entity.
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"PROXY STATEMENT" means the proxy statement to be mailed to the Company
Stockholders in connection with the Company Stockholder Approval, together with
any amendments or supplements thereto.
"REAL ESTATE ASSET SALE" means the sale or assignment of any Real Estate
Investment Asset, provided that with respect to a sale of a Real Estate
Investment Contract, (x) the Company's and its Subsidiaries' entire direct and
indirect interests in the applicable Real Estate Investment Entity are also
sold, (y) such Real Estate Investment Contract has not been materially amended
after the date of this Agreement and (z) Net Proceeds Deemed Received by the
Company in connection with the sale or assignment of such Real Estate
Investment Contract will be reduced by any accrued and unpaid fees and similar
payments due under such contract on the date of sale or assignment.
Notwithstanding the foregoing, in order for a sale or other transaction to
qualify as a Real Estate Asset Sale, (A) the entire direct or indirect interest
of the Company and its Subsidiaries in the relevant Real Estate Investment
Asset must be sold as part of such transaction, (B) all Participation Interests
relating to such Real Estate Investment Asset must either be assumed entirely
by the purchaser or assignee or satisfied in full so that the Company and its
Subsidiaries have no further liability or obligation relating to such
Participation Interests, or the transaction must have been otherwise structured
in such a manner that neither the Company nor any of its Subsidiaries has any
liability or obligation relating to such Participation Interests after the
consummation of the transaction, (C) to the extent that the Company or any of
its Subsidiaries has given any financial, performance or other guarantees with
respect to such Real Estate Investment Asset or an applicable Relevant
Subsidiary or any indebtedness relating thereto, or has any reimbursement or
other obligations relating to any letter of credit, bond or other similar
instrument relating to such Real Estate Investment Asset or Relevant Subsidiary
or any indebtedness relating thereto, either (1) the Company and its
Subsidiaries are fully and unconditionally released from such obligations and
liabilities or (2) the Company and its Subsidiaries are fully indemnified
against all such obligations and liabilities and such indemnity is fully
secured by cash, a letter of credit or other collateral reasonably satisfactory
to Parent, and (D) such sale is on commercially reasonable terms that would not
reasonably be expected to result in the Company or any of its Subsidiaries
incurring any future indemnification or other obligations in respect of such
Real Estate Asset Sale or the assets applicable Real Estate Investment Asset
sold or assigned.
"REAL ESTATE INVESTMENT ASSET" means any: (i) asset owned by a Real Estate
Investment Entity; (ii) direct Equity Interest in or debt obligation of any
Real Estate Investment Entity; (iii) direct Equity Interest in a Company
Subsidiary (a "RELEVANT SUBSIDIARY") that directly or indirectly owns an Equity
Interest in a Real Estate Investment Entity, provided that the only assets of
such Relevant Subsidiary consist of (x) direct or indirect (through one or more
Relevant Subsidiaries) Equity Interests in one or more Real Estate Investment
Entities, (y) debt obligations of one or more Real Estate Investment Entities
or Relevant Subsidiaries and/or (z) cash or cash equivalents that were included
in the net book value of the Real Estate Investment Assets represented to
Parent or represent the proceeds from transactions closing after December 31,
2002 that had they occurred between the date of this Agreement and the Closing
would have been a Real Estate Asset Sale or Cash Distribution; or (iv) Real
Estate Investment Contract.
"REAL ESTATE INVESTMENT CONTRACT" means any asset management, development,
construction, investment management, financial advisory, proceeds, profit
participation or similar agreement or contract relating solely to a Real Estate
Investment Entity and/or the assets of a Real Estate Investment Entity, but
excluding any sale, lease or property management agreements.
"REAL ESTATE INVESTMENT ENTITY" means the Company Subsidiaries and Company
Joint Ventures set forth in Section 1.1(A) of the Company Disclosure Schedule.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SENIOR CREDIT AGREEMENT" means the Senior Credit Agreement, dated as of
May 4, 2001, among the Company, First Union National Bank, Lehman Commercial
Paper Inc., Bank of America, N.A. and the other lenders party thereto, as
amended through the date hereof.
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"SERIES A PREFERRED CERTIFICATE OF DESIGNATION" means the Certificate of
Designation of the Company that was filed with the Secretary of State on June
7, 2002 with respect to the Series A Preferred Stock, as amended, supplemented
or otherwise modified.
"SERIES A PREFERRED STOCK" means the Series A Convertible Preferred Stock,
par value $0.01 per share, the voting powers, designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof were created by resolution
of the Company's Board of Directors adopted on April 25, 2002.
"SERIES B PREFERRED CERTIFICATE OF DESIGNATION" means the Certificate of
Designation of the Company that was filed with the Secretary of State on June
7, 2002 with respect to the Series B Preferred Stock, as amended, supplemented
or otherwise modified.
"SERIES B PREFERRED STOCK" means the Series B Convertible Preferred Stock,
par value $0.01 per share, the voting powers, designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof were created by resolution
of the Company's Board of Directors adopted on April 25, 2002.
"SIGNIFICANT SUBSIDIARY" means a Subsidiary of any Person which generated
at least $15 million in consolidated revenues, determined on an annualized
basis for the year ended December 31, 2002, or had at least $5 million in
consolidated tangible assets, net of associated non-recourse debt, on December
31, 2002.
"SPECIAL COMMITTEE" means the Special Committee of the Company's Board of
Directors appointed by resolution of the Company's Board of Directors adopted
on October 14, 2002.
"SUBSIDIARY" means, with respect to any Person, any corporation, limited
liability company, partnership or other entity (including joint ventures) of
which such Person, directly or indirectly, (a) has the right or ability to
elect, designate or appoint a majority of the board of directors or other
Persons performing similar functions for such entity, whether as a result of
the beneficial ownership of Equity Interests, contractual rights or otherwise
or (b) beneficially owns a majority of the voting Equity Interests (including,
without limitation, general partner Equity Interests).
"SUMMARY OF GRANTS" means the summary table of Participation Interests set
forth in Section 1.1(B) of the Company Disclosure Schedule.
"SUPERIOR PROPOSAL" means any Acquisition Proposal (with all of the
percentages included in the definition of Acquisition Proposal increased to 50%
for purposes of this definition) that a majority of the disinterested members
of the Company's Board of Directors or the Special Committee determines in good
faith, after considering the advice of outside legal counsel and financial
advisors, would result in a transaction, if consummated, that would be more
favorable to the Company Stockholders (taking into account all facts and
circumstances, including all legal, financial, regulatory and other aspects of
the proposal and the identity of the offeror) than the transactions
contemplated hereby and is reasonably capable of being consummated (including,
without limitation, the availability of committed financing, to the extent
needed to complete the transaction).
"TAXES" means all United States federal, state, local or foreign income,
profits, estimated gross receipts, windfall profits, environmental (including
taxes under Section 59A of the Code), severance, property, intangible property,
occupation, production, sales, use, license, excise, emergency excise,
franchise, capital gains, capital stock, employment, withholding, social
security (or similar), disability, transfer, registration, stamp, payroll,
goods and services, value added, alternative or add-on minimum tax, estimated,
or any other tax, custom, duty or governmental fee, or other like assessment or
charge of any kind whatsoever, together with any interest, penalties, fines,
related liabilities or additions to tax that may become payable in respect
therefor imposed by any Governmental Entity, whether disputed or not.
"THIRD PARTY" means a Person (or group of Persons) other than Parent,
Acquiror or any of their Affiliates (excluding the Company and its controlled
Affiliates).
"THRESHOLD AMOUNT" means the sum of (i) $45 million and (ii) the aggregate
amount of all cash, property or other assets directly or indirectly
contributed, loaned (including any draws under a letter of
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credit or a guarantee) or otherwise transferred by the Company or any of its
Subsidiaries to any Real Estate Investment Entity or Relevant Subsidiary (but
only if and to the extent that all or a portion of the Company's and its
Subsidiaries' direct or indirect interest in such Relevant Subsidiary is sold
or otherwise assigned in a Real Estate Asset Sale) between the date hereof and
the Effective Time.
"TOPR WARRANT AGREEMENT" means the Warrant Agreement, dated as of
September 30, 1998, between Insignia/ESG Holdings, Inc. and First Union
National Bank, as amended.
"TOPR WARRANTS" means the 1,196,000 warrants to purchase Company Shares
issued pursuant to the TOPR Warrant Agreement.
"U.K. OVERDRAFT FACILITY" means the (pounds sterling)5,000,000 Overdraft
Credit Facility between Insignia Richard Ellis Group Limited and Barclays Bank
PLC, as amended through the date hereof.
ARTICLE 2
THE MERGER
2.1. THE MERGER.
(a) At the Effective Time, Acquiror shall be merged with and into the
Company (the "MERGER") in accordance with the terms and conditions of this
Agreement and the Delaware General Corporation Law (as amended, the "DGCL"), at
which time the separate corporate existence of Acquiror shall cease and the
Company shall continue its existence. In its capacity as the corporation
surviving the Merger, this Agreement sometimes refers to the Company as the
"SURVIVING CORPORATION."
(b) On the Closing Date, the Company and Acquiror will file a certificate
of merger or other appropriate documents (the "CERTIFICATE OF MERGER") with the
Delaware Secretary of State (the "SECRETARY OF STATE") and make all other
filings or recordings required by the DGCL in connection with the Merger. The
Merger shall become effective at the time when the Certificate of Merger is
duly filed with and accepted by the Secretary of State, or at such later time
as is agreed upon by the parties and specified in the Certificate of Merger
(such time as the Merger becomes effective is referred to herein as the
"EFFECTIVE TIME").
(c) From and after the Effective Time, the Merger shall have the effects
set forth in the DGCL.
(d) The closing of the Merger (the "CLOSING") shall be held at the offices
of Simpson Thacher & Bartlett, 3330 Hillview Avenue, Palo Alto, California
94304 (or such other place as agreed by the parties) on the day on which all of
the conditions set forth in Article 9 are satisfied or waived, unless the
parties hereto agree to another date. The date upon which the Closing occurs is
hereinafter referred to as the "CLOSING DATE".
2.2. ORGANIZATIONAL DOCUMENTS. The Certificate of Merger shall provide
that at the Effective Time (a) the Company's certificate of incorporation in
effect immediately prior to the Effective Time shall be the Surviving
Corporation's certificate of incorporation and (b) the Acquiror's by-laws in
effect immediately prior to the Effective Time shall be the Surviving
Corporation's by-laws, in each case until amended in accordance with applicable
Law.
2.3. DIRECTORS AND OFFICERS. From and after the Effective Time (until such
time as their successors are duly elected or appointed and qualified), (A)
Acquiror's directors at the Effective Time shall be the Surviving Corporation's
directors and (B) the Company's officers immediately prior to the Effective
Time shall be the Surviving Corporation's officers.
ARTICLE 3
CONVERSION OF SECURITIES AND RELATED MATTERS
3.1. CAPITAL STOCK OF ACQUIROR. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any Company Share or
Acquiror Share, each Acquiror Share issued and outstanding immediately prior to
the Effective Time shall be converted into one share of common stock, par value
$0.01 per share, of the Surviving Corporation.
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3.2. CANCELLATION OF TREASURY STOCK AND ACQUIROR-OWNED SHARES. As of the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any Company Share, Company Preferred Share or Acquiror Share,
each Company Share and Preferred Share held by the Company as treasury stock or
owned by Holding, Parent or Acquiror or either of their respective Subsidiaries
immediately prior to the Effective Time shall be canceled and retired, and no
payment shall be made or consideration delivered in respect thereof.
3.3. CONVERSION OF COMPANY SHARES. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any Company
Share, Company Preferred Share or Acquiror Share, each Company Share issued and
outstanding immediately prior to the Effective Time (other than (a) shares to
be cancelled in accordance with Section 3.2, (b) Dissenting Shares and (c)
shares held by any wholly-owned Company Subsidiary, which shall remain
outstanding) shall be converted into the right to receive in cash from
Acquiror, without interest, an amount equal to $11.00, subject to adjustment as
contemplated by Section 7.4(c) and 8.10 (the "COMMON MERGER CONSIDERATION").
3.4. CONVERSION OF COMPANY SERIES A PREFERRED SHARES. As of the Effective
Time, by virtue of the Merger and without any action on the part of the holder
of any Company Share, Company Preferred Share or Acquiror Share, each Company
Series A Preferred Share issued and outstanding immediately prior to the
Effective Time (other than (a) shares to be cancelled in accordance with
Section 3.2 and (b) shares held by any wholly-owned Company Subsidiary, which
shall remain outstanding) shall be converted into the right to receive, without
interest, the amount set forth in Paragraph (e)(1) of the Series A Certificate
of Designation (the "SERIES A PREFERRED MERGER CONSIDERATION").
3.5. CONVERSION OF COMPANY SERIES B PREFERRED SHARES. As of the Effective
Time, by virtue of the Merger and without any action on the part of the holder
of any Company Share, Company Preferred Share or Acquiror Share, each Company
Series B Preferred Share issued and outstanding immediately prior to the
Effective Time (other than (a) shares to be cancelled in accordance with
Section 3.2 and (b) shares held by any wholly-owned Company Subsidiary, which
shall remain outstanding) shall be converted into the right to receive, without
interest, the amount set forth in Paragraph (e)(1) of the Series B Certificate
of Designation (the "SERIES B PREFERRED MERGER CONSIDERATION," and together
with the Common Merger Consideration and the Series A Preferred Merger
Consideration, the "MERGER CONSIDERATION").
3.6. EXCHANGE OF CERTIFICATES.
(a) Promptly after the date hereof, Acquiror shall appoint a bank or trust
company reasonably acceptable to the Company as an agent (the "EXCHANGE AGENT")
for the benefit of holders of Company Shares, Company Series A Preferred Shares
and Company Series B Preferred Shares for the purpose of exchanging, pursuant
to this Article 3, certificates representing the Company Shares, Company Series
A Preferred Shares or Company Series B Preferred Shares (the "CERTIFICATES").
At the Effective Time, Holding will, and will cause Parent and Acquiror to,
make available to and deposit with the Exchange Agent the Merger Consideration
to be paid in respect of Company Shares, Company Series A Preferred Shares and
Company Series B Preferred Shares pursuant to this Article 3 (the "EXCHANGE
FUND"), and except as contemplated by Section 3.6(f) or Section 3.6(g) hereof,
the Exchange Fund shall not be used for any other purpose. The Exchange Agent
shall invest the Merger Consideration as directed by the Acquiror or the
Surviving Corporation, as the case may be, on a daily basis. Any interest and
other income resulting from such investments shall be paid to the Surviving
Corporation. Any net loss resulting from such investments shall be borne by
Holding, Parent and Acquiror and Holding will, or will cause Parent and
Acquiror to, deposit additional funds with the Exchange Agent in an amount
equal to such net loss before the funds are paid by the Exchange Agent to the
Company Stockholders.
(b) As promptly as practicable after the Effective Time, the Surviving
Corporation shall send, or shall cause the Exchange Agent to send, to each
record holder of Certificates a letter of transmittal and instructions (which
shall be in customary form and specify that delivery shall be effected, and
risk of loss and title shall pass, only upon delivery of the Certificates to
the Exchange Agent), for use in the exchange contemplated by this Section 3.6.
Upon surrender of a Certificate to the Exchange Agent, together with a duly
executed letter of transmittal, the holder shall be entitled to receive, in
exchange therefore, the Common Merger Consideration as provided in this Article
3 in respect of the Company Shares
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represented by the Certificate, the Series A Preferred Merger Consideration as
provided in this Article 3 in respect of the Series A Preferred Shares
represented by the Certificate or the Series B Preferred Merger Consideration
as provided in this Article 3 in respect of the Series B Preferred Shares
represented by the Certificate, in each of the foregoing cases, after giving
effect to any required withholding Tax. Until surrendered as contemplated by
this Section 3.6, each Certificate shall be deemed after the Effective Time to
represent only the right to receive the Common Merger Consideration, the Series
A Preferred Merger Consideration or the Series B Preferred Merger
Consideration, as the case may be.
(c) All cash paid upon surrender of Certificates in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to Company Shares, Company Series A Preferred Shares or
Company Series B Preferred Shares represented thereby. From and after the
Effective Time, the holders of Certificates shall cease to have any rights with
respect to Company Shares, Company Series A Preferred Shares or Company Series
B Preferred Shares, except as otherwise provided herein or by Law. As of the
Effective Time, the stock transfer books of the Company shall be closed and
there shall be no further registration of transfers on the Company's stock
transfer books of any Company Shares, Company Series A Preferred Shares or
Company Series B Preferred Shares, other than transfers that occurred before
the Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Section 3.6.
(d) If payment of the Merger Consideration in respect of Company Shares,
Company Series A Preferred Shares or Company Series B Preferred Shares is to be
made to a Person other than the Person in whose name a surrendered Certificate
is registered, it shall be a condition to such payment that the Certificate so
surrendered shall be properly endorsed or shall be otherwise in proper form for
transfer and that the Person requesting such payment shall have paid any
transfer and other Taxes required by reason of such payment in a name other
than that of the registered holder of the Certificate surrendered or shall have
established to the satisfaction of the Surviving Corporation or the Exchange
Agent that such Taxes either have been paid or are not payable.
(e) Upon the request of the Surviving Corporation, the Exchange Agent
shall deliver to the Surviving Corporation any portion of the Merger
Consideration made available to the Exchange Agent pursuant to this Section 3.6
that remains undistributed to holders of Company Shares, Company Series A
Preferred Shares and Company Series B Preferred Shares six (6) months after the
Effective Time. Holders of Certificates who have not complied with this Section
3.6 prior to the demand by the Surviving Corporation shall thereafter look only
to the Surviving Corporation for payment of any claim to the Merger
Consideration.
(f) None of Parent, the Surviving Corporation or the Exchange Agent shall
be liable to any Person in respect of any Company Shares, Company Series A
Preferred Shares or Company Series B Preferred Shares (or dividends or
distributions with respect thereto) for any amounts paid to a public official
pursuant to any applicable abandoned property, escheat or similar Law.
(g) Each of the Surviving Corporation and Acquiror shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable hereunder
to any Person any amounts that it is required to deduct and withhold with
respect to payment under any provision of federal, state, local or foreign
income tax Law and shall make any required filings with tax authorities with
respect to such withholding. To the extent that the Surviving Corporation or
Acquiror withholds those amounts, the withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of Company Shares,
Company Series A Preferred Shares or Company Series B Preferred Shares in
respect of which deduction and withholding was made by the Surviving
Corporation or Acquiror, as the case may be.
(h) If any Certificate has been or is claimed to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
that a Certificate has been lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such Person of a bond, in such reasonable
amount as the Surviving Corporation may direct, as indemnity against any claim
that may be made against it with respect to that Certificate, the Exchange
Agent will deliver to such Person in exchange for such lost, stolen or
destroyed Certificate, the proper amount of the Merger Consideration.
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3.7. COMPANY STOCK OPTIONS AND RESTRICTED SHARES.
(a) Subject to Section 3.7(d), the Company shall terminate each
outstanding Company Option, effective as of the Effective Date and in
accordance with the provisions of Section 4.2(d) of the Company's 1998 Stock
Incentive Plan ("1998 PLAN"), whether or not such Company Option was granted
under the 1998 Plan, by delivering notice of termination to each holder at
least thirty (30) days prior to the Effective Date, in which case during the
period from the date on which such notice of termination is delivered to the
Effective Date, each such holder shall have the right to exercise in full all
of his or her Company Options.
(b) Subject to Section 3.7(d), the Company shall amend each Company Option
to provide that to the extent that each Company Option is not exercised prior
to the Effective Time, the Surviving Company shall purchase each Company
Option, whether vested or unvested, at the Effective Time, and the per share
purchase price shall be in the form of a lump sum cash amount equal to the
excess, if any, of (i) the Common Merger Consideration over (ii) the exercise
price per Company Share subject to such purchased Company Option. Such purchase
price will be paid promptly after the Effective Time.
(c) Notwithstanding any other provision in this Section 3.7, to the extent
applicable (as clarified in the following sentence), at the Effective Time, the
Surviving Company shall purchase Company Options issued under the 1998 Plan for
a lump sum cash amount equal to (i) the product of the Change in Control Price
multiplied by the number of Company Shares subject the such Company Option less
(ii) the aggregate exercise price for such Company Option. The Company only may
purchase Company Options under this Section 3.7(c) to the extent that such
Company Option issued under the 1998 Plan, or a separate written agreement
approved by the Company's Board of Directors that (i) defines the term "Change
in Control," and (ii) provides that the Merger constitutes a "Change in
Control" (as such term is defined in the subject Company Option or separate
written agreement). Such purchase price will be paid promptly after the
Effective Time.
(d) Prior to the Effective Time, the Company shall use its commercially
reasonable efforts to (i) obtain all necessary consents, without payment
therefor, from the holders of Company Options and (ii) take such other actions
(including, without limitation, terminating or amending the terms of any
Company Option or Company Option Plan and any such other stock option or
compensation plans or arrangements applicable to Company Options), necessary to
give effect to the transactions contemplated by Sections 3.7(a)-(c), inclusive.
(e) The Company shall take all requisite action so that, as of the
Effective Time, the Company's 1998 Employee Stock Purchase Plan (the "COMPANY
PURCHASE PLAN") and the Company Option Plans shall be terminated. The Parent
shall receive from the Company evidence that the Company Purchase Plan and the
Company Option Plans have been terminated pursuant to a resolution of the
Company's Board of Directors (the form and substance of such resolution shall
be subject to review and approval of the Parent, which approval shall not be
unreasonably withheld). The rights of participants in the Company Purchase Plan
with respect to any offering period then underway under the Company Purchase
Plan, which commences prior to the Effective Time, shall be determined by
treating the last Business Day prior to the Effective Time as the last day of
such offering period and by making such other pro-rata adjustments as may be
necessary to reflect the shortened offering period but otherwise treating such
shortened offering period as a fully effective and completed offering period
for all purchases under the Company Purchase Plan. Prior to the Effective Time,
the Company shall take all actions (including, if appropriate, amending the
terms of the Company Purchase Plan and the terms of any offering period
commencing prior to the Effective Time) that are necessary to give effect to
the transactions contemplated by this Section 3.7(e).
(f) At the Effective Time, each outstanding restricted stock award for
Company Shares ("RESTRICTED STOCK AWARD") shall be canceled and in
consideration of such cancellation, the Surviving Corporation shall pay to each
holder of a canceled Restricted Stock Award, as soon as practicable following
the Effective Time, an amount per Company Share subject to such canceled
Restricted Stock Award equal to the Common Merger Consideration.
3.8. WARRANTS.
(a) At the Effective Time, each outstanding Company Warrant, whether or
not vested, shall be canceled and in consideration of such cancellation, the
Surviving Corporation shall pay to each holder of
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a canceled Company Warrant, as soon as practicable following the Effective
Time, an amount per Company Share subject to such canceled Company Warrant
equal to the excess, if any, of (i) the Common Merger Consideration over (ii)
the exercise price per Company Share subject to such canceled Company Warrant.
(b) At the Effective Time, each outstanding TOPR Warrant, whether or not
vested, shall remain outstanding pursuant to the terms of the TOPR Warrant
Agreement; provided, however that each such TOPR Warrant shall thereafter be
entitled, pursuant to Section 10.1 of the TOPR Warrant Agreement, to receive
the Common Merger Consideration, in lieu of Company Shares, in the manner and
upon the terms set forth in the TOPR Warrant Agreement.
3.9. SUPPLEMENTAL STOCK PURCHASE AND LOAN PLAN. The Company agrees to
deliver, or cause the custodian designated by the Company with respect to the
Supplemental Stock Purchase and Loan Program (the "SSPLP") to deliver, the
Certificates held by the Company or such custodian to the Exchange Agent
promptly after receipt of a letter of transmittal and instructions from the
owners of the Common Shares represented by the Certificates and promptly after
receipt of the Common Merger Consideration with respect to the Common Shares
represented by such Certificates deliver such Common Merger Consideration to
the participants in the SSPLP, net of the outstanding principal and accrued and
unpaid interest with respect to the promissory notes for which such
Certificates were pledged under the SSPLP.
3.10. DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary,
Company Shares that are outstanding immediately prior to the Effective Time and
which are held by Persons who shall have properly demanded in writing appraisal
for such shares in accordance with Section 262 (or any successor provision) of
the DGCL (the "DISSENTING SHARES") shall not be converted into or represent the
right to receive the Common Merger Consideration as provided hereunder and
shall only be entitled to such rights and consideration as are granted by
Section 262 (or any successor provision) of the DGCL. Such Persons shall be
entitled to receive payment of the appraised value of such Company Shares in
accordance with the provisions of Section 262 (or any successor provision) of
the DGCL, except that all Dissenting Shares held by Persons who shall have
failed to perfect or who effectively shall have withdrawn or lost their right
to appraisal of such shares under Section 262 (or any successor provision) of
the DGCL shall thereupon be deemed to have been converted into the Common
Merger Consideration pursuant to Section 3.3 hereto as of the Effective Time or
the occurrence of such failure, withdrawal or loss, whichever occurs later.
(b) The Company shall give Acquiror (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands and any other
instruments served pursuant to the DGCL and received by the Company and (ii)
the opportunity to participate in all negotiations and proceedings with respect
to demands for appraisal or the payment of the fair cash value of any such
shares under the DGCL. Other than pursuant to a court order, the Company shall
not, except with the prior written consent of Acquiror, make any payment with
respect to any demands for appraisal or the payment of the fair cash value of
any such shares or offer to settle or settle any such demands.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the Company Disclosure Schedule attached hereto,
the Company represents and warrants to Acquiror as set forth below.
4.1. CORPORATE EXISTENCE AND POWER. The Company is a corporation, duly
incorporated, validly existing and in good standing under the Laws of the State
of Delaware, and has all corporate powers and authority required to own, lease
and operate its properties and assets and to carry on its business as now
conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property and assets owned, leased or operated by it or the nature of its
activities makes qualification necessary, except where the failure to be so
qualified would not be reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect.
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4.2. CORPORATE AUTHORIZATION. The execution, delivery and performance by
the Company of this Agreement and the consummation by the Company of the Merger
and the other transactions contemplated hereby are within the Company's
corporate powers and, except for the Company Stockholder Approval, have been
duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby (other
than the Company Stockholder Approval and the filing and recordation of the
Certificate of Merger in accordance with the DGCL). The Board of Directors of
the Company unanimously has approved this Agreement and has resolved to
recommend that the Company Stockholders vote their shares in favor of the
adoption of this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company, and
assuming that this Agreement constitutes the valid and binding obligation of
Holding, Parent and Acquiror, constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
4.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby will not require any consent, approval,
action, order, authorization, or permit of, or registration, declaration or
filing with, any Governmental Entity, other than (a) the filing of (i) the
Certificate of Merger in accordance with the DGCL and (ii) the appropriate
documents with respect to the Company's qualification to do business with the
relevant authorities of other states or jurisdictions in which the Company is
qualified to do business; (b) compliance with any applicable requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT") and
any Non-U.S. Competition Laws; (c) compliance with any applicable requirements
of the Securities Act and the Exchange Act; (d) such as may be required under
any applicable state securities or blue sky Laws; and (e) other consents,
approvals, actions, orders, authorizations, permits, registrations,
declarations and filings which, if not obtained or made, would not be
reasonably likely to have, individually or in the aggregate, a Company Material
Adverse Effect. The consummation of the Merger and the other transactions
contemplated hereby will not result in the lapse of any Permit of the Company
or its Subsidiaries or the breach of any authorization or right to use any
Permit of the Company or its Subsidiaries or other right that the Company or
any of its Subsidiaries has from a Third Party, except where such lapses or
breaches would not be reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect.
4.4. NON-CONTRAVENTION. The execution, delivery and performance by the
Company of this Agreement and the consummation by the Company of the Merger and
the other transactions contemplated hereby do not and will not (a) contravene
or conflict with the Company Charter or the certificate or articles of
incorporation or by-laws (or any equivalent governing or organizational
document) of any Company Subsidiary, (b) assuming compliance with the matters
referred to in Section 4.3, contravene or conflict with or constitute a
violation of any provision of any Law binding upon or applicable to the Company
or its Subsidiaries by which any of their respective properties or assets is
bound or affected, (c) constitute a breach of or default under (or an event
that with notice or lapse of time or both could reasonably be expected to
become a breach or default) or give rise (with or without notice or lapse of
time or both) to a right of termination, amendment, cancellation or
acceleration under any agreement, contract, note, bond, mortgage, indenture,
lease, concession, franchise, Permit or other similar authorization or joint
venture, limited liability or partnership agreement or other instrument binding
upon the Company, any Company Subsidiary or any of their respective properties
or assets, or (d) result in the creation or imposition of any Lien (except as
contemplated by the Commitment Letter) on any asset of the Company or any of
its Subsidiaries, other than, in the case of clauses (b), (c) and (d) taken
together, any items that would not be reasonably likely to have, individually
or in the aggregate, a Company Material Adverse Effect.
4.5. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 80,000,000
Company Shares and 20,000,000 shares of preferred stock, par value $0.01 per
share, of which 296,422 shares have been designated Series A Preferred Stock
and 177,280 shares have been designated Series B Preferred Stock. As of
February 11, 2003, (i) 24,805,930 Company Shares were issued and outstanding
(including 1,502,600 Company Shares held in treasury), all of which have been
duly authorized and validly issued and are fully
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paid and nonassessable and were issued free of preemptive or similar rights,
including 138,663 Company Shares that were collateral for then outstanding
notes receivables delivered to the Company by employees of the Company, whether
pursuant to the Company's Supplemental Stock Purchase and Loan Program or
otherwise (the "LOAN SHARES"), (ii) no Company Shares were held by Company
Subsidiaries, (iii) 91,507 Company Shares were subject to restricted stock
awards then outstanding, of which none were vested (the "RESTRICTED SHARES"),
(iv) 7,081,074 Company Shares were reserved for issuance under Company Option
Plans and 4,462,761 Company Shares were subject to Company Options then
outstanding, (v) 1,785,714 Company Shares were reserved for issuance upon
conversion of the Series A Preferred Stock, (vi) 811,688 Company Shares were
reserved for issuance upon conversion of the Series B Preferred Stock, (vii)
1,492,500 Company Shares were issuable upon the exercise of Company Warrants
then outstanding, (viii) 1,196,000 Company Shares were issuable upon the
exercise of TOPR Warrants then outstanding, (ix) there was outstanding
$15,000,000 aggregate principal amount of indebtedness (the "EXCHANGEABLE
INDEBTEDNESS") under the Senior Subordinated Credit Agreement, dated as of June
7, 2002 (the "SENIOR SUBORDINATED CREDIT AGREEMENT"), between the Company and
Madeleine L.L.C., as lender and administrative agent, which upon the terms, and
subject to the conditions, set forth in the Senior Subordinated Credit
Agreement and the Exchange Agreement, dated as of June 18, 2002 (the "EXCHANGE
AGREEMENT"), between the Company and Madeleine L.L.C. may be exchanged together
with the Series A Preferred Stock and the Series B Preferred Stock, at the
option of the Company, for the Exchange Securities (as defined in the Exchange
Agreement), (x) 250,000 shares of Series A Preferred Stock were issued and
outstanding, each with a Conversion Price (as defined in the Series A
Certificate of Designation) of $14.00 per share, and (xi) 125,000 shares of
Series B Preferred Stock were issued and outstanding, each with a Conversion
Price (as defined in the Series B Certificate of Designation) of $15.40 per
share. The Company has provided to Parent true and complete copies of all
documentation governing the Company Warrants, the TOPR Warrants, the Loan
Shares, the Exchangeable Indebtedness, the Series A Preferred Stock and the
Series B Preferred Stock. From September 30, 2002 until the date of this
Agreement, the Company has not declared or paid any dividend or distribution in
respect of any of its Equity Interests and has not repurchased or redeemed any
shares of its Equity Interests, and its Board of Directors has not resolved to
do any of the foregoing.
(b) Except (i) as set forth in this Section 4.5 and (ii) for changes since
February 11, 2003, resulting from the exercise of Company Options, Company
Warrants and TOPR Warrants or the conversion of, or the payments of dividends
on, Series A Preferred Stock and Series B Preferred Stock, in each case
outstanding on that date, neither the Company nor any Company Subsidiary has
issued, or reserved for issuance, any (x) Equity Interests of the Company, (y)
securities of the Company or any Company Subsidiary convertible into or
exchangeable for Equity Interests of the Company or (z) options, warrants or
other rights to acquire from the Company or any Company Subsidiary, or
obligations of the Company or any Company Subsidiary to issue, any Equity
Interests of the Company or securities convertible into or exchangeable for
Equity Interests of the Company (the items in clauses (x), (y) and (z) being
referred to collectively as the "COMPANY SECURITIES"). There are no outstanding
agreements or other obligations of the Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any Company Securities.
(c) Section 4.5(c) of the Company Disclosure Schedule sets forth a
complete and accurate list of all outstanding Company Options, Company
Warrants, TOPR Warrants, the Restricted Shares and Loan Shares as of February
11, 2003, which list sets forth the name of the holders thereof (which, for
purposes of the TOPR Warrants, shall only need to be the record holder or
holders thereof as of October 12, 2001) and, to the extent applicable, the
exercise price or purchase price thereof, the number of Company Shares subject
thereto, the schedule of vesting (including any acceleration of vesting that
may result from this Agreement or the transactions contemplated hereby), the
governing Company Employee Plan (as defined below) with respect thereto and the
expiration date thereof.
(d) The Company has provided to Acquiror true and complete copies of each
of the documents entered into with respect to each of the following and there
are no other agreements or arrangements (whether written or verbal) between the
Company and the other party to each such document with respect to the
following: (i) the consent of each holder of a Company Series A Preferred Share
to the treatment of such Company Series A Preferred Share set forth in Article
3 hereto, without payment of
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any additional consideration thereon, (ii) the consent of each holder of Series
B Preferred Stock to the treatment of the Series B Preferred Stock set forth in
Article 3 hereto, without payment of any additional consideration thereon, and
(iii) the consent of each of the holders of a Company Warrant set forth on
Section 4.5(d) of the Company Disclosure Schedule to the treatment of such
Company Warrant set forth in Section 3.8 hereto, without payment of any
additional consideration thereon, unless the consent of such holder of a
Company Warrant with respect to such treatment is not required by the terms of
such Company Warrant.
4.6. SUBSIDIARIES.
(a) Each Significant Subsidiary of the Company (i) is a corporation duly
incorporated or an entity duly organized, and is validly existing and in good
standing (except in jurisdictions where such concept does not exist) under the
Laws of its jurisdiction of incorporation or organization, and has all powers
and authority required to own, lease or operate its properties and assets and
to carry on its business as now conducted, and (ii) has all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted and is duly qualified to do business as a foreign
corporation or entity and is in good standing in each jurisdiction where the
character of the property and assets owned, leased or operated by it or the
nature of its activities makes such qualification necessary, in each case in
this clause (ii) with exceptions which would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect.
(b) Section 4.6 of the Company Disclosure Schedule sets forth the name of
all Subsidiaries and Joint Ventures of the Company and, to the extent
applicable, the total number of authorized, issued and outstanding Equity
Interests of each such Subsidiary and Joint Venture as of the date of this
Agreement. All of the outstanding Equity Interests in each Subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive or similar rights. All of the Equity
Interests in each Subsidiary of the Company are beneficially owned, directly or
indirectly, by the Company. Such Equity Interests (i) are owned free and clear
of any Lien (except for liens under the Senior Credit Agreement) and free of
any other limitation or restriction (including any limitation or restriction on
the right to vote, sell or otherwise dispose of the Equity Interests) and (ii)
were issued in compliance with all applicable federal, state and foreign
securities laws, in each case in this clause (ii) without any exception other
than those which would not be reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect. There are no outstanding (x)
securities of the Company or any Company Subsidiary convertible into or
exchangeable or exercisable for Equity Interests in any Company Subsidiary, (y)
options, warrants or other rights to acquire from the Company or any Company
Subsidiary, or obligations of the Company or any Company Subsidiary to issue,
any Equity Interests in, or any securities convertible into or exchangeable or
exercisable for any Equity Interests in, any Company Subsidiary or (z)
agreements, obligations or arrangements of the Company or any Company
Subsidiary to issue, sell, repurchase, redeem or otherwise acquire any Equity
Interests in any Company Subsidiary. The Covered Entities do not own any assets
other than Equity Interests in Real Estate Investment Entities.
(c) None of the Company, any of its Subsidiaries or, to the Knowledge of
the Company, any Company Joint Venture is in violation of any provision of its
articles or certificate of incorporation or bylaws or equivalent organizational
and governing documents, other than violations which would not be reasonably
likely to have, individually or in the aggregate, a Company Material Adverse
Effect. The Company has made available to the Acquiror true and correct copies
of the articles or certificate of incorporation or bylaws or equivalent
organizational and governing documents of each Company Subsidiary and Company
Joint Venture.
4.7. COMPANY SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
(a) The Company has filed all forms, reports, filings, registration
statements and other documents required to be filed by it with the SEC since
January 1, 1999. No Company Subsidiary is required to file any form, report,
registration statement or prospectus or other document with the SEC.
(b) As of its filing date, each Company SEC Document complied as to form
in all material respects with the applicable requirements of the Securities Act
and/or the Exchange Act, as the case may be.
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(c) No Company SEC Document filed since January 1, 1999 pursuant to the
Exchange Act contained, as of its filing date, any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. No Company SEC Document, as amended or supplemented,
if applicable, filed since January 1, 1999 pursuant to the Securities Act
contained, as of the date on which the document or amendment became effective,
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(d) Each of the audited consolidated financial statements and unaudited
consolidated interim financial statements of the Company included in the
Company SEC Documents were prepared in conformity with GAAP (except as may be
indicated in the notes thereto) throughout the periods involved, and each
fairly presents, in all material respects, the consolidated financial position
of the Company and its consolidated Subsidiaries as of the dates thereof and
their consolidated results of operations and changes in financial position for
the periods then ended (subject to normal year-end adjustments in the case of
any unaudited interim financial statements).
(e) Section 4.7 of the Company Disclosure Schedule sets forth the
unaudited consolidated balance sheet and statement of operations of the Company
and its Subsidiaries as of and for the 3-month period ended December 31, 2002
(the "MOST RECENT COMPANY FINANCIAL STATEMENTS"). The financial information
included in the Most Recent Company Financial Statements has been prepared in
accordance with GAAP.
(f) There are no liabilities of the Company or any Company Subsidiary, of
any kind whatsoever, whether accrued, contingent, absolute or otherwise, other
than: (i) liabilities (A) disclosed or provided for in the Company Balance
Sheet or disclosed in the notes thereto or in the Company's consolidated
balance sheet or disclosed in the notes thereto included in the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 2002 or (B)
not required by GAAP to be disclosed or provided for in a consolidated balance
sheet of the Company which would not be reasonably likely to have, individually
or in the aggregate, a Company Material Adverse Effect; (ii) liabilities
incurred after September 30, 2002 (A) in the ordinary course of business
consistent with past practice and (B) outside the ordinary course of business
consistent with past practice that would not reasonably be likely to have,
individually or in the aggregate, a Company Material Adverse Effect and (iii)
liabilities under this Agreement or incurred in connection with the
transactions contemplated hereby.
4.8. [RESERVED].
4.9. ABSENCE OF CERTAIN CHANGES. Since September 30, 2002, except as
otherwise expressly contemplated by this Agreement and the Company Disclosure
Schedule, the Company and each of its Significant Subsidiaries has conducted
its business in the ordinary course consistent with past practice and there has
not been (a) any damage, destruction or other casualty losses (whether or not
covered by insurance) affecting the business, properties or assets of the
Company or any of its Subsidiaries that has had or would be reasonably likely
to have, individually or in the aggregate, a Company Material Adverse Effect;
(b) any amendment or change in the Company Charter, the Company's by-laws or
the certificate or articles of incorporation or by-laws (or equivalent
organizational and governing documents) of any Significant Subsidiary of the
Company; (c) any change by the Company in its accounting methods, principles or
practices (other than changes required by GAAP after September 30, 2002); (d)
other than in the ordinary course of business consistent with past practices,
any sale of a material amount of assets of the Company and its Significant
Subsidiaries; (e) any material Tax election, any change in method of accounting
with respect to Taxes or any compromise or settlement of any proceeding with
respect to any material Tax liability by the Company or any of its
Subsidiaries; or (f) any action, event, occurrence, development or state of
circumstances or facts that has had or would be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect.
4.10. LITIGATION. There is no litigation, action, suit, claim,
investigation, arbitration or proceeding or inquiry, whether civil, criminal or
administrative (each, a "CLAIM"), pending, or to the Knowledge of the Company
threatened, against the Company, any of its Subsidiaries or any of their
respective assets, properties or employees before any arbitrator or
Governmental Entity that would be reasonably likely to have, individually or in
the aggregate, a Company Material Adverse Effect. Set forth on Section 4.10 of
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the Company Disclosure Schedule is a list of all Claims pending, or to the
Knowledge of the Company, threatened, as of the date hereof, against the
Company or any of its Subsidiaries or any of their respective assets,
properties or employees (if such Claim is related to, or arising from, an
employee's actions or omissions on behalf of the Company or any of its
Subsidiaries) before any arbitrator or Governmental Entity in an amount of
$100,000 or more or which are criminal in nature. Neither the Company nor any
of its Subsidiaries nor any of their respective properties, assets or, to the
Knowledge of the Company, employees is or are subject to any order, writ,
judgment, injunction, decree, settlement, determination or award having, or
which would be reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect.
4.11. TAXES.
(a) All Tax returns, statements, reports and forms (collectively, the
"COMPANY RETURNS") required to be filed with any taxing authority by, or with
respect to, the Company and each of its Subsidiaries have been filed in
accordance with all applicable Laws, except when a failure to do so would not
be reasonably likely to have, individually or in the aggregate, a Company
Material Adverse Effect; (b) the Company and each of its Subsidiaries has
timely paid all Taxes due and payable whether or not shown as being due on any
Company Return (other than Taxes which are being contested in good faith and
for which adequate reserves are reflected on the Company Balance Sheet), except
when a failure to make such payments would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect, and, as of
the time of filing, the Company Returns were true, correct and complete in all
material respects; (c) the Company and each of its Subsidiaries has withheld
and paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, except when a failure to make such payments
would not be reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect; (d) there is no action, suit, proceeding,
audit or claim now proposed or pending against the Company or any of its
Subsidiaries in respect of any Taxes, except for such action, suit, proceeding,
audit or claim that would not be reasonably likely to have, individually or in
the aggregate, a Company Material Adverse Effect; (e) neither the Company nor
any of its Subsidiaries is party to, bound by or has any obligation under, any
material tax sharing agreement or similar material contract or arrangement or
any material agreement that obligates them to make any payment computed by
reference to the Taxes, taxable income or taxable losses of any other Person;
(f) there are no Liens (other than Permitted Liens) with respect to Taxes on
any of the assets or properties of the Company or any of its Subsidiaries other
than with respect to Taxes not due and payable, except for such Liens that
would not be reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect; (g) neither the Company nor any of its
Subsidiaries has waived any statute of limitations nor agreed to any extension
of time to assess any U.S. federal income tax or any foreign, state or local
income tax in any jurisdiction in which the Company or its Subsidiaries has
paid for the year or years involved an amount of tax which is material to the
Company and its Subsidiaries, taken as a whole; (h) neither the Company nor any
of its Subsidiaries (i) is, or has been, a member of an affiliated,
consolidated, combined or unitary group, other than one of which the Company
was the common parent and (ii) has any liability for the Taxes of any Person
(other than the Company and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign Law), or as a
transferee or successor, by contract or otherwise, except, in each case of
clauses (h)(i) and (h)(ii) above, as would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect; (i) no
consent under Section 341(f) of the Code has been filed with respect to the
Company or any of its Subsidiaries; (j) neither the Company nor any of its
Subsidiaries has ever entered into a closing agreement pursuant to Section 7121
of the Code that could affect the Company or a Subsidiary of the Company in a
Tax period or portion thereof beginning after the Effective Time; and (k)
neither the Company nor any of its Subsidiaries has agreed to make or is
required to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise, except for such adjustments that
would not be reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect.
4.12. EMPLOYEE BENEFITS.
(a) Section 4.12(a) of the Company Disclosure Schedule contains a true and
complete list of each "employee benefit plan" (within the meaning of Section
3(3) of the Employee Retirement Income
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Security Act of 1974, as amended ("ERISA"), including, without limitation,
multiemployer plans within the meaning of Section 3(37) of ERISA), and all
stock purchase, stock option, severance, employment, change-in-control, fringe
benefit, collective bargaining, bonus, incentive, deferred compensation,
employee loan and all other material employee benefit plans, agreements,
programs or policies, whether or not subject to ERISA (including any funding
mechanism therefor now in effect or required in the future as a result of the
transaction contemplated by this Agreement or otherwise) under which any
current or former employee, director or consultant of the Company or its
Subsidiaries (the "COMPANY EMPLOYEES") has any present or future right to
benefits and which are contributed to, sponsored by or maintained by the
Company or any of its Subsidiaries; provided, however, that any employment
agreement providing for total compensation and benefits with a pre-tax value
that has not in the past exceeded and cannot reasonably be expected in the next
two years to exceed $200,000 per annum need not be listed on Section 4.12(a) of
the Company Disclosure Schedule. All such plans, agreements, programs, policies
and arrangements shall be collectively referred to as the "COMPANY PLANS."
(b) With respect to each Company Plan (other than any multiemployer plan
within the meaning of Section 3(37) of ERISA related to the Company's property
management business), the Company has provided or made available to the Parent
a current, accurate and complete copy thereof and, to the extent applicable:
(i) any related trust agreement or other funding instrument; (ii) the most
recent determination letter, if applicable; (iii) any summary plan description
and other material written communications by the Company or its Subsidiaries to
the Company Employees concerning the extent of the benefits provided; (iv) a
summary of any proposed amendments or changes considered prior to the date
hereof by the Company's Board of Directors or any committee thereof and
anticipated to be made to the Company Plans at any time within the twelve
months immediately following the date hereof, except for such proposed
amendments or changes that are required by applicable Law; and (v) for the
three most recent completed years, if applicable, (A) the Form 5500 and
attached schedules, (B) audited financial statements, and (C) actuarial
valuation reports.
(c) Except with respect to any Foreign Benefit Plan (defined below), or as
would not individually or in the aggregate, when combined with other items of
adverse effect under this Section 4.12, be reasonably likely to have a Company
Material Adverse Effect, or as set forth in Section 4.12(c) of the Company
Disclosure Schedule, (i) each Company Plan (other than a multiemployer plan
within the meaning of Section 3(37) of ERISA) has been established and
administered in accordance with its terms, and in compliance with the
applicable provisions of ERISA, the Code and other applicable laws, rules and
regulations; (ii) each Company Plan (other than a multiemployer plan within the
meaning of Section 3(37) of ERISA) which is intended to be qualified within the
meaning of Section 401(a) of the Code has received a favorable determination
letter as to its qualification, and nothing has occurred, whether by action or
failure to act, that could reasonably be expected to cause the loss of such
qualification; (iii) no event has occurred and no condition exists that could
reasonably be expected to subject the Company or its Subsidiaries, either
directly or by reason of their affiliation with any member of their "Controlled
Group" (defined as any organization which is a member of a controlled group of
organizations within the meaning of Sections 414(b), (c), (m) or (o) of the
Code), to any tax, fine, lien, penalty or other liability imposed by ERISA, the
Code or other applicable laws, rules and regulations; (iv) no "reportable
event" (as such term is defined in Section 4043 of the Code) that could
reasonably be expected to result in liability to the Company or its
Subsidiaries, no "prohibited transaction" (as such term is defined in Section
406 of ERISA and Section 4975 of the Code) that could reasonably be expected to
result in liability to the Company or any of its Subsidiaries or "accumulated
funding deficiency" (as such term is defined in Section 302 of ERISA and
Section 412 of the Code (whether or not waived)) has occurred with respect to
any Company Plan; (v) there is no written proposal to the Company's Board of
Directors that any Company Plan be materially amended, suspended or terminated,
or otherwise modified to alter benefits (or the levels thereof); (vi) no
Company Plan is a collateral assignment split-dollar life insurance program
which covers, or otherwise provides for "personal loans" to, executive officers
(within the meaning of Section 402 of The Sarbanes-Oxley Act of 2002); and
(vii) except as disclosed in the proxy statements for annual meetings prior to
the date hereof, all awards, grants or bonuses made pursuant to any Company
Plan have been, or will be, fully deductible to the Company or its Subsidiaries
notwithstanding Section 162 of the Code. Except as set forth in Section 4.12(c)
of the Company Disclosure Schedule, neither the
A-18
Company nor any of its Subsidiaries has incurred any current or projected
liability in respect of post-employment or post-retirement health, medical or
life insurance benefits for current, former or retired employees of Company or
any of its Subsidiaries, except as required to avoid an excise tax under
Section 4980B of the Code or otherwise except as may be required pursuant to
any other applicable Law.
(d) With respect to each of the Company Plans that is not a multiemployer
plan within the meaning of Section 4001(a)(3) of ERISA but is subject to Title
IV of ERISA, as of the Closing Date, the assets of each such Company Plan are
at least equal in value to the present value of the accrued benefits (vested
and unvested) of the participants in such Company Plan on a termination and
projected benefit obligation basis, based on the actuarial methods (as
applicable) and assumptions indicated in the most recent applicable actuarial
valuation reports.
(e) Except as set forth in Section 4.12(e) of the Company Disclosure
Schedule, with respect to any multiemployer plan (within the meaning of Section
4001(a)(3) of ERISA) to which the Company, its Subsidiaries or any member of
their Controlled Group has any liability or contributes (or has at any time
contributed or had an obligation to contribute): (i) none of the Company, its
Subsidiaries or any member of their Controlled Group has incurred any
withdrawal liability under Title IV of ERISA which remains unsatisfied or would
be subject to such liability if, as of the Closing Date, the Company, its
Subsidiaries or any member of their Controlled Group were to engage in a
complete withdrawal (as defined in Section 4203 of ERISA) or partial withdrawal
(as defined in Section 4205 of ERISA) from any such multiemployer plan; and
(ii) to the Knowledge of the Company, no such multiemployer plan is in
reorganization or insolvent (as those terms are defined in Sections 4241 and
4245 of ERISA, respectively), except, in each case of clauses (i) and (ii)
above, any items that would not be reasonably likely to have, individually or
in the aggregate, when combined with other items of adverse effect under this
Section 4.12, a Company Material Adverse Effect.
(f) Except as set forth in Section 4.12(f) of the Company Disclosure
Schedule, with respect to any Company Plan, (i) no actions, suits or claims
(other than routine claims for benefits in the ordinary course or otherwise
reserved on the Company Balance Sheet) are pending or threatened, (ii) to the
Knowledge of the Company, no facts or circumstances exist that could reasonably
be expected to give rise to any such actions, suits or claims, (iii) no written
or oral communication has been received from the Pension Benefit Guaranty
Corporation (the "PBGC") in respect of any Company Plan subject to Title IV of
ERISA concerning the funded status of any such plan or any transfer of assets
and liabilities from any such plan in connection with the transactions
contemplated herein, and (iv) no administrative investigation, audit or other
administrative proceeding by the Department of Labor, the PBGC, the Internal
Revenue Service or other governmental agencies are pending, threatened or in
progress (including, without limitation, any routine requests for information
from the PBGC), except, in each case of clauses (i) and (iv) above, any items
that would not be reasonably likely to have individually or in the aggregate,
when combined with other items of adverse effect under this Section 4.12, a
Company Material Adverse Effect.
(g) Except as set forth in Section 4.12(g) of the Company Disclosure
Schedule, no Company Plan exists that, as a result of the execution of this
Agreement or the transactions contemplated by this Agreement (whether alone or
in connection with any subsequent event(s), including but not limited to the
termination of a Company Employee's employment), could reasonably be expected
to result in (i) the payment to any Company Employee of any money or other
property, (ii) the provision of any benefits or other rights to any Company
Employee or (iii) the increase, acceleration or provision of any payments,
benefits or other rights to any Company Employee. Except as set forth in
Section 4.12(g) of the Company Disclosure Schedule, the Company's ability to
deduct the payments, rights or benefits set forth in Section 4.12(g) of the
Company Disclosure Schedule is not limited by Section 280G of the Code.
(h) There has been no amendment to, written interpretation of or
announcement (whether or not written) by Company or any of its Subsidiaries
relating to, or any change in employee participation or coverage under, any
Company Plan that materially would increase the expense of maintaining such
Company Plan above the level of the expense provided for in the 2003 Budget.
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(i) Except as set forth in Section 4.12(i) of the Company Disclosure
Schedule, no Company Plan is maintained outside the jurisdiction of the United
States, or covers any employee residing or working outside the United States
(any such Company Plan set forth in Section 4.12(i) of the Company Disclosure
Schedule, "FOREIGN BENEFIT PLANS").
(j) Except as would not individually or in the aggregate, when combined
with other items of adverse effect under this Section 4.12, be reasonably
likely to have a Company Material Adverse Effect, all Foreign Benefit Plans
have been established, maintained and administered in compliance with their
terms and all applicable statutes, laws, ordinances, rules, orders, decrees,
judgments, writs, and regulations of any controlling governmental authority or
instrumentality. No material liability or obligation of the Company or its
Subsidiaries exists with respect to any Foreign Benefit Plan, except as set
forth in the Most Recent Company Financial Statements. Except as set forth in
Section 4.12(j) of the Company Disclosure Schedule, the assets of each Foreign
Benefit Plan that is required to be funded under applicable Law are at least
equal in value to the present value of the accrued benefits (vested and
unvested) of the participants in such Foreign Benefit Plan on a termination and
projected benefit obligation basis, based on the actuarial methods (as
applicable) and assumptions indicated in the most recent applicable actuarial
valuation reports.
4.13. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS.
(a) Neither the Company nor any of its Subsidiaries is in violation of, or
has violated, any applicable provisions of any Laws, except for violations
which would not be reasonably likely to have, individually or in the aggregate,
a Company Material Adverse Effect. To the Knowledge of the Company, neither the
Company nor any of its Subsidiaries is in material violation of, or has
violated in any material respects, the Foreign Corrupt Practices Act of 1977,
as amended.
(b) The Company and each of its Subsidiaries has all permits, licenses,
easements, variances, exemptions, consents, certificates, approvals,
authorizations of and registrations (collectively, "PERMITS") with and under
all Laws, and from all Governmental Entities required by the Company and each
Company Subsidiary to carry on their respective businesses as currently
conducted, except where the failure to have the Permits would not be reasonably
likely to have, individually or in the aggregate, a Company Material Adverse
Effect.
4.14. TITLE TO ASSETS. The Company and each of its Subsidiaries has good
title to, or valid leasehold interests in, all their respective assets, except
for those which are no longer used or useful in the conduct of their businesses
or where the absence thereof would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect. All of
these assets, other than assets in which the Company or any of its Subsidiaries
has leasehold interests, are free and clear of all Liens, except for (a)
Permitted Liens and (b) Liens that would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect.
4.15. INTELLECTUAL PROPERTY. Except as would not be reasonably likely to
have, individually or in the aggregate, a Company Material Adverse Effect, the
Company and each of its Subsidiaries owns or has a valid license or other right
to use each trademark, service mark, trade name, domain name, invention,
patent, trade secret, copyright, know-how (including any registrations or
applications for registration of any of the foregoing) or any other similar
type of proprietary intellectual property right necessary to carry on the
business of the Company and each of its Subsidiaries, taken as a whole, as
currently conducted (collectively, the "COMPANY INTELLECTUAL PROPERTY"). To the
Knowledge of the Company, neither the Company nor any of its Subsidiaries has
received any written notice of infringement of or challenge to, and there are
no claims pending with respect to the rights of others to the use of, any
Company Intellectual Property that would be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect.
4.16. TRANSACTION FEES; OPINIONS OF FINANCIAL ADVISOR.
(a) Except for (i) Bear, Stearns & Co. Inc. ("BEAR STEARNS") and (ii)
non-Affiliates of the Company in connection with Real Estate Asset Sales, if
any, there is no investment banker, financial advisor, broker, finder or other
intermediary which has been retained by, or is authorized to act on behalf of,
the Company or any Company Subsidiary which might be entitled to any fee or
commission from the Company, Parent,
A-20
Acquiror or any of their respective Affiliates upon consummation of the Merger
or the other transactions contemplated by this Agreement. The fees and expenses
of Bear Stearns and third parties in connection with Real Estate Asset Sales,
if any, will be borne by the Company. The Company has heretofore furnished to
the Acquiror complete and correct copies of all agreements between the Company
or its Subsidiaries and Bear Stearns pursuant to which such firm would be
entitled to any payment relating to the Merger and the other transactions
contemplated by this Agreement.
(b) The Board of Directors of the Company and the Special Committee have
received the opinion of Bear Stearns, dated as of the date hereof, to the
effect that, as of such date, and subject to the qualifications stated therein,
the Merger Consideration is fair to the holders of Company Shares from a
financial point of view.
4.17. LABOR MATTERS.
(a) Except as set forth in Section 4.17(a) of the Company Disclosure
Schedule or as otherwise required by Law, each current Company Employee is an
"at will" employee (whose employment may be terminated at any time by the
Company or such employee can be terminated for less than $100,000). Except as
otherwise required by Law, each of the real estate brokers of the Company and
its Subsidiaries ("COMPANY INDEPENDENT CONTRACTORS") may be terminated on no
more than 30 days' notice or can be terminated for less than $100,000. The
Company and its Subsidiaries are and have always been in compliance with all
applicable Laws respecting labor, employment, immigration, fair employment
practices, terms and conditions of employment, workers' compensation,
occupational safety, plant closings, wages and hours, and any other Law
applicable to any of the Company Employees, Company Independent Contractors, or
other persons providing services to the Company or any of its Subsidiaries,
except such failures to comply that would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect. Each of
the Company and its Subsidiaries has withheld all amounts required by
applicable Law or by agreement to be withheld from the wages, salaries and
other payments to Company Employees, and none of the Company and its
Subsidiaries is or has been liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing in any material
respect, except for such failures that would not be reasonably likely to have,
a Company Material Adverse Effect. None of the Company and its Subsidiaries is
or has been liable for any payment to any trust or other fund or to any
Governmental Entity with respect to unemployment compensation benefits, social
security, or other benefits or obligations for Company Employees (other than
routine payments to be made in the ordinary course of business and consistent
with past practice), except such liabilities that would not be reasonably
expected to have, individually or in the aggregate, a Company Material Adverse
Effect.
(b) There are no pending claims against the Company or any of its
Subsidiaries under any Company Plan or under workers' compensation plan or
policy or for long-term disability (other than regular claims for benefits in
accordance with the terms of such Company Plans and policies) except such
claims that would not be reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
(c) The Company and its Subsidiaries are in compliance with all Laws
concerning the classification of employees and independent contractors and have
properly classified all such persons for purposes of participation in the
Company Plans, except in the case that non-compliance would not be reasonably
likely to have, individually or in the aggregate, a Company Material Adverse
Effect.
(d) To the Company's Knowledge, the Company and its Subsidiaries have
provided or made available to Parent copies of all written employment,
consulting, change of control, severance agreements or arrangements which have
been entered into between the Company and any of its Subsidiaries, on the one
hand, and any current Company Employee or current Company Independent
Contractor on the other hand, including any amendments thereto; provided,
however, that any such arrangement providing for compensation and benefits with
a pre-tax value that has not in the past exceeded and cannot reasonably be
expected in the next two years to exceed $200,000 per annum has not been
provided or made available to Parent. To the Company's Knowledge, the Company
and its Subsidiaries have provided or made available to Parent copies of any
agreements or arrangements (including any amendments thereto) with former
Company Employees or former Company Independent Contractors if such agreements
or
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arrangements result in any obligation (absolute or contingent) of the Company
or any of its Subsidiaries to make any payment as a result of the transactions
contemplated hereby; provided, however, that any such arrangement providing for
compensation and benefits with a pre-tax value that has not in the past
exceeded and cannot reasonably be expected in the next two years to exceed
$200,000 per annum has not been provided or made available to Parent. Other
than as expressly set forth in the documents provided to Parent pursuant to the
preceding two sentences or as otherwise provided for in the 2003 Budget, there
have been no changes to the remuneration or benefits of any kind payable or due
to any such Company Employee or such Company Independent Contractor.
(e) Except as set forth in Section 4.17(e) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to a
collective bargaining agreement, contract, or other agreement or understanding
with a labor union that is applicable to Persons employed by the Company or its
Subsidiaries. Other than as a result of the public announcement of discussions
regarding the transactions contemplated by this Agreement, there are no
strikes, slowdowns, work stoppages, lockouts or other material labor
controversies pending or, to the Knowledge of the Company, threatened by or
between the Company or any of its Subsidiaries and any of their respective
Company Employees.
4.18. MATERIAL CONTRACTS.
(a) Section 4.18(a) of the Company Disclosure Schedule sets forth the
following contracts, undertakings, commitments, licenses or agreements, written
or verbal, to which the Company or any of its Subsidiaries is a party or which
are applicable to any of their respective assets or properties, in each case as
of the date hereof (true and complete copies (or written summaries, if verbal)
of which have been made available to Parent prior to the date hereof) (each a
"MATERIAL CONTRACT"):
(i) contracts requiring annual expenditures by or liabilities of any
party thereto in excess of $100,000 which have a remaining term in excess
of ninety (90) days and are not cancelable (without material penalty, cost
or other liability) within ninety (90) days;
(ii) contracts containing covenants limiting the ability of the Company
or any of its Subsidiaries or other Affiliates of the Company (including
Parent and its Affiliates after the Effective Time) to engage in any line
of business or compete with any person, in any market or line of business,
or operate at any geographic location or solicit the employment of any
Person or hire any Person in any market or line of business or in any
geographic location;
(iii) promissory notes, loans, agreements, indentures, evidences of
indebtedness or other instruments and contracts providing for the
borrowing or lending of money, whether as borrower, lender or guarantor,
and any agreements or instruments pursuant to which any cash of the
Company or any of its Subsidiaries is held in escrow or its use by the
Company and its Subsidiaries is otherwise restricted;
(iv) all contracts pursuant to which any material property or assets of
the Company or any of its Subsidiaries is, or may become subject to, a
Lien (other than Permitted Liens);
(v) joint venture, alliance, affiliation or partnership agreements or
joint development or similar agreements pursuant to which any third party
is entitled to develop or market any products or services on behalf of, or
together with, the Company or any of its Significant Subsidiaries or
receive referrals of business from, or provide referrals of business to,
the Company or any of its Significant Subsidiaries;
(vi) contracts for the acquisition or sale, directly or indirectly (by
merger or otherwise) of material assets (whether tangible or intangible)
or the capital stock of another Person, including, without limitation,
contracts for any such completed acquisitions or sales pursuant to which
an "earn out" or similar form of obligation (whether absolute or
contingent) is pending or for which there are any continuing
indemnification or similar obligations, in each case excluding any such
contract entered into prior to January 1, 2000 and with respect to which
there are no remaining obligations on the party of any party (including,
without limitation, any indemnification obligations);
(vii) contracts under which the Company or any of its Subsidiaries has
granted any exclusive rights;
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(viii) any interest rate or currency swaps, caps, floors or option
agreements or any other interest rate or currency risk management
arrangement or foreign exchange contracts;
(ix) all licenses, sublicenses, consent, royalty or other agreements
with any Third Party concerning the trademarks and trade names of the
Company and its Subsidiaries;
(x) contracts with, or commitments to, Affiliates of the Company that
are set forth in Section 4.22 of the Company Disclosure Schedule; and
(xi) contracts with "change of control" or similar provisions which
would be triggered by the Merger or the other transactions contemplated
hereunder.
(b) Neither the Company nor any of its Subsidiaries is, or has received
any notice that any other party is, in breach, default or violation or is
unable to perform in any respect (each a "DEFAULT") under any Material Contract
(and no event has occurred or not occurred through the Company's or any of its
Subsidiaries' action or inaction or, to the Knowledge of the Company, through
the action or inaction of any third parties, which with notice or the lapse of
time or both would constitute or give rise to a Default), except for those
Defaults which would not be reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect. Neither the Company nor any of
its Subsidiaries has received written notice of the termination of, or
intention to terminate, any Material Contract, except for such notices or
terminations that would not be reasonably likely to have, individually or in
the aggregate, a Company Material Adverse Effect. Except as set forth on
Section 4.18(b) of the Company Disclosure Schedule, no Claims for
indemnification under any purchase or sale agreement has been made by or
against the Company or any of its Subsidiaries since January 1, 2000 and there
are no such Claims outstanding or, to the Knowledge of the Company, threatened,
except for any Claims first asserted after the date of this Agreement that
would not reasonably be likely to have, individually or in the aggregate, a
Company Material Adverse Effect.
4.19. REAL ESTATE.
(a) Section 4.19(a) of the Company Disclosure Schedule contains a true and
complete list of all of the leases, licenses, tenancies, subleases and all
other occupancy agreements in which the Company, any of its Significant
Subsidiaries or, if party to or otherwise bound by such an agreement that
requires payment of at least $100,000 per year, any of its other Subsidiaries,
is a tenant, subtenant, landlord or sublandlord (the leased and subleased space
or parcel of real property thereunder being, collectively, the "LEASED
PROPERTY"), together with all amendments and modifications thereto (the
"LEASES"). The Leased Property is the only real property and interests in real
property leased by the Company or any of such Subsidiaries that is used
primarily in their businesses. Except as would not be reasonably likely to
have, individually or in the aggregate, a Company Material Adverse Effect: (i)
the Company (or its applicable Subsidiary) has good and valid title to the
leasehold estate in all the Leased Property, free and clear of any Liens (other
than Permitted Liens), (ii) the Leases are in full force and effect, (iii)
neither the Company (or its applicable Subsidiary), nor to the Knowledge of the
Company, any other party to any Lease, is in default under the Leases, and no
event has occurred which, with notice or lapse of time, would constitute a
breach or default by the Company (or such Subsidiary) under the Leases, (iv)
the Company (or its applicable Subsidiary) has not assigned, transferred,
conveyed, mortgaged, or encumbered any interest in any Leased Property, and (v)
the Company (or its applicable Subsidiary) enjoys peaceful and undisturbed
possession under the Leases.
(b) Section 4.19(b) of the Company Disclosure Schedule contains a true and
complete list of all real property owned by the Company or any of its
Significant Subsidiaries (other than the Real Estate Investment Entities) (the
"OWNED REAL PROPERTY") as of the date hereof, including the address, and a
description suitable to identify the property. The Owned Real Property is the
only real property and interests in real property owned by the Company or any
of its Significant Subsidiaries that is used primarily in their businesses.
Except as would not be reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect: (i) there are no proceedings in
eminent domain, condemnation or other similar proceedings pending or, to the
Knowledge of the Company, threatened, relating to or affecting any portion of
the Owned Real Property, (ii) the current use of the Owned Real Property does
not violate any instrument of record or agreement affecting such Real Property,
(iii) there
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are no violations of any covenants, conditions, restrictions, easements,
agreements or orders of any Governmental Entity having jurisdiction over any of
the Owned Real Property that affect such Owned Real Property or the use or
occupancy thereof, (iv) there are no leases, subleases, licenses, concessions,
or other agreements, written or oral, granting to any party or parties the
right of use or occupancy of any portion of the Owned Real Property, (v) there
are no outstanding options or rights of first refusal to purchase or lease the
Owned Real Property, or any portion thereof or interest therein, (vi) except
under a lease or agreement, there are no parties (other than the Company or any
of its Significant Subsidiary) in possession of any Owned Real Property and
(vi) the Company (or its applicable Significant Subsidiary) has not assigned,
transferred, conveyed, mortgaged, or encumbered any interest in any Owned Real
Property. The Leased Property and the Owned Real Property constitute all real
property necessary to operate the businesses of the Company and its Significant
Subsidiaries as presently conducted.
4.20. ENVIRONMENTAL. Except as would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect: (i) the
Company and each of its Subsidiaries complies, and complied at all prior times,
with all applicable Environmental Laws, and possess and comply with, and
possessed and complied with at all prior times, all applicable Environmental
Permits required under such Environmental Laws; (ii) there are no Materials of
Environmental Concern or conditions in violation of Environmental Laws at or
relating to any Leased Property or Owned Real Property or other facility
currently or previously owned, leased, managed or operated by the Company or
any of its Subsidiaries that would reasonably be expected to result in
liability of the Company or any of its Subsidiaries under any applicable
Environmental Law; (iii) neither the Company nor any of its Subsidiaries has
received a Claim or, to the Knowledge of the Company, is there any threatened
Claim or any written notification alleging that it is liable under any
Environmental Law, or any request for information pursuant to Section 104(e) of
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended, or similar Environmental Law concerning any release or threatened
release of Materials of Environmental Concern at any location; and (iv) none of
the Company and its Subsidiaries has assumed any liability under any
Environmental Law by contract or, to the Knowledge of the Company, by operation
of Law.
4.21. INSURANCE. The Company maintains insurance coverage in such amounts
and covering such risks as is generally in accordance with normal industry
practice for companies engaged in businesses similar to those of the Company
and its Subsidiaries, and has made available to Acquiror true and correct
copies of all insurance policies involving general errors and omissions,
directors and officers coverage or environmental liabilities of the Company or
any of its Subsidiaries in effect on the date hereof. There is no material
claim by the Company or any of its Subsidiaries pending under any of such
insurance as to which coverage has been questioned, denied or disputed by the
underwriters of such insurance. All premiums payable prior to the date of this
Agreement under all such insurance have been paid and the Company and each of
its Subsidiaries is in all material respects in compliance with the terms of
such insurance.
4.22. AFFILIATE TRANSACTIONS. Except (i) as expressly disclosed in the
Company SEC Documents, (ii) for any expense reimbursements and advances in the
ordinary course of business consistent with past practice, (iii) for any
Participation Interests identified in the Summary of Grants, (iv) for any
employment or consulting agreement identified in the Company Disclosure
Schedule, (v) for any benefits pursuant to a Company Plan, (vi) for
transactions with any non-employee member of the Company's Board of Directors
or his or her Affiliates in the ordinary course of business consistent with
past practice or (vii) for any other contract, commitment, agreement,
arrangement or other transaction identified in the Company Disclosure Schedule,
there are no contracts, commitments, agreements, arrangements or other
transactions with more than $100,000 of obligations, commitments or payments
remaining as of the date hereof between the Company or any Company Subsidiary,
on the one hand, and any (x) officer or director of the Company or any Company
Subsidiary or any of their immediate family members (including their spouses),
(y) record or beneficial owner of five percent or more of any class or series
of voting securities of the Company or (z) Affiliate of any such officer,
director, family member or beneficial owner, on the other hand.
4.23. REQUIRED VOTE; BOARD APPROVAL; STATE TAKEOVER STATUTES.
(a) The only vote required of the holders of any class or series of the
Company's Equity Interests necessary to adopt this Agreement and to approve the
Merger and the other transactions contemplated
A-24
hereby is the approval of a majority of the outstanding Company Shares (the
"COMPANY STOCKHOLDER APPROVAL"). For the avoidance of doubt and without
limiting the generality of the foregoing, no vote of the holders of any other
class or series of the Company's Equity Interests is required under Article
Eighth of the Company Charter to adopt this Agreement and to approve the Merger
and the other transactions contemplated hereby.
(b) On or prior to the date hereof, the Company's Board of Directors and
the Special Committee have (i) determined that this Agreement, the Voting
Agreements and the transactions contemplated hereby and thereby, including the
Merger, are in the best interests of the Company and the Company Stockholders,
(ii) approved this Agreement, the Voting Agreements and the transactions
contemplated hereby and thereby, including the Merger, and (iii) resolved to
recommend to the Company Stockholders that they vote in favor of adopting and
approving this Agreement and the Merger in accordance with the terms hereof.
Such approvals by the Company's Board of Directors and the Special Committee
are sufficient to render inapplicable to this Agreement, the Voting Agreements,
the Merger and any of such other transactions contemplated hereby or thereby,
the restrictions on "business combinations" set forth in Section 203 of the
DGCL. To the Knowledge of the Company, no other state takeover statute or
similar statute or regulation applies or purports to apply to the Merger, this
Agreement, the Voting Agreements or any of the transactions contemplated hereby
or thereby and no provision of the Company Charter or the Company's by-laws or
similar governing or organizational instruments of any Company Subsidiary
would, directly or indirectly, restrict or impair the ability of Parent to
vote, or otherwise to exercise the rights of a stockholder with respect to,
shares of the Company and any Company Subsidiary that may be acquired or
controlled by Parent, as a result of the Merger or otherwise.
4.24. INFORMATION TO BE SUPPLIED. The Proxy Statement will not contain, at
the time of the mailing thereof and at the time of the Company Stockholder
Meeting, any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act. Notwithstanding the
foregoing, the Company makes no representation or warranty with respect to any
statements made or incorporated by reference in the Proxy Statement based on
information supplied by Holding or its Affiliates in writing specifically for
inclusion or incorporation by reference therein.
4.25. NO KNOWLEDGE OF BREACH. The Company has no Knowledge as of the date
hereof (and without giving effect to Section 6.5) of any breaches of the
representations or warranties contained in Article 5 hereof such that the
condition in Section 9.2(a)(ii) would not be satisfied.
4.26. DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. The Company does
not make, and has not made, any representations or warranties in connection
with the Merger and the transactions contemplated hereby other than those
expressly set forth herein. Except as expressly set forth herein, no Person has
been authorized by the Company to make any representation or warranty relating
to the Company or any Company Subsidiary or their respective businesses, or
otherwise in connection with the Merger and the transactions contemplated
hereby and, if made, such representation or warranty may not be relied upon as
having been authorized by the Company.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF HOLDING, PARENT AND ACQUIROR
Except as disclosed in the Holding, Parent and Acquiror Disclosure
Schedule attached hereto, Holding, Parent and Acquiror, jointly and severally,
represent and warrant to the Company that:
5.1. CORPORATE EXISTENCE AND POWER. Each of Holding, Parent and Acquiror
is a corporation duly incorporated, validly existing and in good standing under
the Laws of its jurisdiction of incorporation and has all corporate powers and
authority required to own, lease and operate its properties and assets and
carry on its business as now conducted. Each of Holding, Parent and Acquiror is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where the character of the property owned, leased or
operated by it or the nature of its activities makes qualification necessary,
except where the failure to be qualified would not be reasonably likely to
have, individually or in the aggregate, a Parent Material Adverse Effect.
A-25
5.2. CORPORATE AUTHORIZATION. The execution, delivery and performance by
each of Holding, Parent and Acquiror of this Agreement and the consummation by
each of Holding, Parent and Acquiror of the Merger and the other transactions
contemplated hereby are within the corporate powers of each of Holding, Parent
and Acquiror and have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of Holding,
Parent or Acquiror are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Holding, Parent and Acquiror and assuming
that this Agreement constitutes the valid and binding obligation of the
Company, this Agreement constitutes a valid and binding agreement of each of
Holding, Parent and Acquiror, enforceable in accordance with its terms.
5.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by each of Holding, Parent and Acquiror of this Agreement and the consummation
by Holding, Parent and Acquiror of the transactions contemplated hereby will
not require any consent, approval, action, order, authorization, or permit of,
or registration, declaration or filing with, any Governmental Entity by
Holding, Parent or Acquiror other than (a) those set forth in clauses (a)
through (d) of Section 4.3 and (b) other consents, approvals, actions, orders,
authorizations, permits, registrations, declarations and filings which, if not
obtained or made, would not prevent or materially impair the ability of
Holding, Parent or Acquiror to consummate the Merger or the other transactions
contemplated by this Agreement.
5.4. NON-CONTRAVENTION. The execution, delivery and performance by
Holding, Parent and Acquiror of this Agreement and the consummation by Holding,
Parent and Acquiror of the Merger and the other transactions contemplated
hereby do not and will not (a) contravene or conflict with the certificate of
incorporation or by-laws of any of Holding, Parent or Acquiror, (b) assuming
compliance with the matters referred to in Section 5.3, contravene or conflict
with, or constitute a violation of, any provision of Law, binding upon or
applicable to any of Holding, Parent and Acquiror or by which any of their
respective properties or assets is bound or affected, (c) constitute a breach
or default under (or an event that with notice or lapse of time or both could
reasonably become a breach or default) or give rise (with or without notice or
lapse of time or both) to a right of termination, amendment, cancellation or
acceleration under any agreement, contract, note, bond, mortgage, indenture,
lease, license, concession, franchise, joint venture, limited liability or
partnership agreement or other instrument binding upon, any of Holding, Parent
or Acquiror or their respective properties or assets, or (d) result in the
creation or imposition of any Lien (except as contemplated by the Commitment
Letter) on any asset of any of Holding, Parent or Acquiror other than, in the
case of clauses (b), (c) and (d) taken together, any such items that would not
be reasonably likely to have, individually or in the aggregate, a Parent
Material Adverse Effect.
5.5. PARENT SEC DOCUMENTS.
(a) Parent and Holding have filed all forms, reports, filings,
registration statements and other documents required to be filed by it with the
SEC since July 20, 2001.
(b) As of its filing date, each Parent SEC Document complied as to form in
all material respects with the applicable requirements of the Securities Act
and/or the Exchange Act, as the case may be.
(c) No Parent SEC Document filed since July 20, 2001 pursuant to the
Exchange Act contained, as of its filing date, any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. No Parent SEC Document, as amended or supplemented,
if applicable, filed since July 20, 2001 pursuant to the Securities Act
contained, as of the date on which the document or amendment became effective,
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(d) Each of the audited consolidated financial statements and unaudited
consolidated interim financial statements of Parent and Holding included in the
Parent SEC Documents were prepared in conformity with GAAP (except as may be
indicated in the notes thereto) throughout the periods involved, and each
fairly presents, in all material respects, the consolidated financial position
of Holding, Parent and their consolidated Subsidiaries as of the dates thereof
and their consolidated results of
A-26
operations and changes in financial position for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements).
(e) Section 5.5 of the Holding, Parent and Acquiror Disclosure Schedule
sets forth the unaudited consolidated balance sheet and statement of operations
of Holding and its Subsidiaries as of and for the 3-month period ended December
31, 2002 (the "MOST RECENT HOLDING FINANCIAL STATEMENTS"). The financial
information included in the Most Recent Holding Financial Statements has been
prepared in accordance with GAAP.
5.6 [RESERVED].
5.7. FINANCING.
(a) As of the date of this Agreement, Acquiror has received an executed
commitment letter dated as of February 17, 2003 (the "COMMITMENT LETTER") from
Credit Suisse First Boston ("CSFB"), pursuant to which CSFB has committed,
subject to the terms and conditions set forth therein, to provide to Parent the
amount of financing set forth in the Commitment Letter (the "FINANCING"), to
complete the transactions contemplated hereby. A true and complete copy of the
Commitment Letter has been previously provided to the Company. Acquiror has
fully paid any and all commitment fees or other fees required by such
Commitment letter to be paid as of the date hereof (and will duly pay any such
fees that become due after the date hereof). The Commitment Letter is valid and
in full force and effect, does not contain any material misrepresentation by
Parent (other than those resulting from inaccurate information provided by the
Company) and no event has occurred which (with or without notice, lapse of time
or both) would constitute a breach thereunder on the part of Holding, Parent or
Acquiror. It is the good faith belief of Holding, Parent and Acquiror that the
Financing will be obtained.
(b) Parent has entered into a subscription agreement dated as of February
17, 2003 (the "SUBSCRIPTION AGREEMENT") and a commitment letter dated as of
February 17, 2003 (the "BLUM STRATEGIC COMMITMENT LETTER") with certain
existing stockholders of Parent named therein (including Affiliates of Blum
Capital Partners, L.P.), pursuant to which such stockholders (or their
assignees or designees) have committed, subject to the terms and conditions set
forth therein, to provide to Parent not less than $100 million and up to $145
million of financing to complete the transactions contemplated hereby and
satisfy the financing conditions set forth in clauses (a) and (d) of the
section of Exhibit A of the Commitment Letter titled "Acquisition"
(collectively, the "ADDITIONAL FINANCING"). A true and complete copy of each of
the Subscription Agreement and the Blum Strategic Commitment Letter has been
previously provided to the Company. Each of the Subscription Agreement and the
Blum Strategic Commitment Letter is valid and in full force and effect and no
event has occurred which (with or without notice, lapse of time or both) would
constitute a breach thereunder on the part of Holding, Parent or Acquiror. It
is the good faith belief of Holding, Parent and Acquiror that the Additional
Financing will be obtained.
(c) As of the date of this Agreement, there are no outstanding Revolving
Loans (as defined in the Parent Credit Agreement) and approximately $1.3
million of L/C Exposure (as defined in the Parent Credit Agreement) under the
Parent Credit Agreement.
(d) Assuming that the information provided by the Company to Parent in
writing (including in electronic format) with respect to the Company's and its
Subsidiaries' historical costs is true and correct in all respects material to
this representation and warranty and was derived from the books and records of
the Company and its Subsidiaries, the aggregate annualized cost savings
relating to ongoing operations of the Company and its Subsidiaries and Parent
and its Subsidiaries after giving effect to the Merger (as such amount is
calculated for purposes of Section 8 of Exhibit D to the Financial Commitment)
would equal at least the amount set forth in Section 5.7 of the Holding, Parent
and Acquiror Disclosure Schedule.
5.8. INFORMATION TO BE SUPPLIED. The information supplied or to be
supplied by Holding, Parent and Acquiror in writing specifically for inclusion
or incorporation by reference in the Proxy Statement will, at the time of the
mailing thereof and at the time of the Company Stockholder Meeting (if any),
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. Notwithstanding the foregoing, neither Holding, Parent nor
Acquiror
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makes any representation or warranty with respect to any statements made or
incorporated by reference in the Proxy Statement based on information supplied
by the Company for inclusion or incorporation by reference therein.
5.9. DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. Holding, Parent
and Acquiror do not make, and have not made, any representations or warranties
in connection with the Merger and the transactions contemplated hereby other
than those expressly set forth herein. Except as expressly set forth herein, no
Person has been authorized by Holding, Parent or Acquiror to make any
representation or warranty relating to Holding, Parent or Acquiror or their
respective businesses, or otherwise in connection with the Merger and the
transactions contemplated hereby and, if made, such representation or warranty
may not be relied upon as having been authorized by Holding, Parent or
Acquiror.
5.10. NO KNOWLEDGE OF BREACH. Each of the Persons set forth on Section
5.10 of the Parent Disclosure Schedule has reviewed Article 4 of this Agreement
and the Company Disclosure Schedules (as delivered on the date hereof and
without giving effect to Section 6.5) and, based on such review, has no actual
knowledge as of the date hereof of any breaches of the representations or
warranties contained therein such that the condition in Section 9.3(a)(ii)
would not be satisfied.
ARTICLE 6
COVENANTS OF THE COMPANY
The Company agrees as set forth below.
6.1. COMPANY INTERIM OPERATIONS. Except as set forth in the Company
Disclosure Schedule or as otherwise expressly contemplated hereby, without the
prior written consent of Acquiror, from the date hereof until the Effective
Time, the Company shall, and shall cause each Company Subsidiary to, conduct
its business in all material respects in the ordinary course consistent with
past practice, and shall, subject to the other limitations set forth in this
Section 6.1, use commercially reasonable efforts to (i) preserve intact its
present business organization, (ii) maintain in effect all material Permits
that are required for the Company or such Company Subsidiary to carry on its
business, (iii) keep available the services of its present key officers,
employees and independent contractors, and (iv) preserve existing relationships
with its material customers, lenders, suppliers and other Persons having
material business relationships with it. Without limiting the generality of the
foregoing, except as set forth in the Company Disclosure Schedule or as
otherwise expressly contemplated by this Agreement, from the date hereof until
the Effective Time, without the prior written consent of Acquiror (such consent
not to be unreasonably withheld with respect to the immediately following
clauses (e), (g), (i), (k) and (n)), the Company shall not, nor shall it permit
any Company Subsidiary, directly or indirectly, to:
(a) amend the Company Charter, the Company's by-laws or any Company
Subsidiary's certificate of incorporation or by-laws (or equivalent
organizational or governing documents);
(b) (i) split, combine or reclassify any of its Equity Interests or amend
the terms of any rights, warrants or options to acquire its securities, (ii)
except for ordinary course dividends by a Company Subsidiary or by the Company
to holders of Company Preferred Shares, declare, set aside or pay any dividend
or other distribution (whether in cash, stock or property or any combination
thereof) in respect of its Equity Interests or otherwise make any payments to
holders of such Equity Interests in their capacities as such, or (iii) except
with respect to any repurchases entirely for cash of the Company Series A
Preferred Shares and Company Series B Preferred Shares for an amount per share
that is less than or equal to the Series A Preferred Merger Consideration or
the Series B Preferred Merger Consideration, respectively, redeem, repurchase
or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any
of its securities or any rights, warrants or options to acquire its securities;
(c) issue, deliver, sell, exchange, grant, pledge, encumber or transfer or
authorize the issuance, delivery, sale, grant, pledge, encumbrance or transfer
of, any Equity Interests in the Company or any Company Subsidiary or any
securities convertible into or exercisable for, or any rights, warrants or
options to acquire, any Equity Interests in the Company or any Company
Subsidiary, other than the issuance of Company Shares or, in the case of clause
(iv) only, Equity Interests in any Company Subsidiary
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pursuant to (i) the exercise of Company Options granted prior to the date
hereof, (ii) the exercise of Company Warrants and TOPR Warrants issued prior to
the date hereof, (iii) the conversion of, or as a dividend on (if the payment
of a dividend in cash would breach or violate the provisions of the Senior
Credit Agreement), Company Preferred Shares issued prior to the date hereof
(but not the exchange of such Company Preferred Shares pursuant to the Exchange
Agreement), (iv) issuance of Company Shares in connection with the vesting of
Restricted Shares and (v) issuance of Company Shares under the Company Purchase
Plan;
(d) acquire, directly or indirectly (whether pursuant to merger, stock or
asset purchase, joint venture or otherwise), in one transaction or series of
related transactions (i) any Person, any Equity Interests or other securities
in any Person, any division or business of any Person or all or substantially
all of the assets of any Person or (ii) any interest or investment in real
property (except to the extent (A) otherwise obligated pursuant to any binding
agreement as of the date hereof, a copy of which has previously been made
available to Parent or (B) solely among or between the Company and its
Subsidiaries);
(e) sell, lease, encumber or otherwise dispose of any assets, other than
(i) sales in the ordinary course of business consistent with past practice,
(ii) obsolete equipment and property no longer used in the operation of the
Company's business, and (iii) assets which do not have a value of more than
$100,000 individually or $500,000 in the aggregate;
(f) (i) (A) incur any indebtedness for borrowed money, except borrowings
under the terms of the Senior Credit Agreement, the U.K. Overdraft Facility or,
solely to the extent borrowings are then not available under the Senior Credit
Agreement, the Senior Subordinated Credit Agreement, in each case to fund
working capital in the ordinary course consistent with past practice (provided
that no such indebtedness may be incurred with respect to the matters
identified as "Prohibited Borrowings" in Section 6.1(f) of the Company
Disclosure Schedule), (B) issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any Company
Subsidiary, (C) make any loans, advances or capital contributions to, or
investments in, any other Person, other than to the Company or any Company
Subsidiary and other than advancements to brokers and other commission based
Company Employees or Company Independent Contractors in the ordinary course of
business consistent with past practice, or (D) assume, guarantee or endorse, or
otherwise as an accommodation become responsible for, the obligations of any
Person (other than obligations of the Company or any Company Subsidiary and the
endorsements of negotiable instruments for collection in the ordinary course of
business consistent with past practice), or (ii) enter into or materially amend
any contract, agreement, commitment or arrangement to effect any of the
transactions prohibited by this Section 6.1(f);
(g) except with the prior written consent of Parent (which will not be
unreasonably withheld or delayed) or with respect to Material Contracts that
relate solely to capital expenditures that are permitted by Section 6.1(i)
hereto, (i) enter into any contract, agreement or arrangement that if entered
into prior to the date hereof would be a Material Contract (except for all
revenue producing contracts that would otherwise be included within clause (i)
of the definition of Material Contracts and would not otherwise fall within any
of clauses (ii) through (xi) of the definition of Material Contracts), (ii)
amend or modify in any material respect or terminate any Material Contract
(except for all revenue producing contracts that would otherwise be included
within clause (i) of the definition of Material Contracts and would not
otherwise fall within any of clauses (ii) through (xi) of the definition of
Material Contracts) or (iii) otherwise waive, release or assign any material
rights, claims or benefits of the Company or any Company Subsidiary under any
Material Contract;
(h) except as required by applicable Law or the terms of any employment
agreement or Company Plan existing as of the date of this Agreement, (i) unless
provided for in the 2003 Budget, increase the compensation (including, without
limitation, commission rates) or benefits of any present or former director,
officer or employee of the Company or any Company Subsidiaries, (ii) pay a
bonus, whether accrued or unaccrued, to any present or former director, officer
or employee of the Company or any Company Subsidiaries, (iii) grant, or alter
the terms of, any severance or termination pay or benefits to any present or
former director, officer or employee of the Company or its Subsidiaries, (iv)
loan or advance any money or other property to any present or former director,
officer or employee of the Company or any Company Subsidiaries, other than
advancements to brokers and other commission based
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Company Employees or Company Independent Contractors in the ordinary course of
business consistent with past practice, (v) establish, adopt, enter into, amend
or terminate any Company Plan or any plan, agreement, program, policy, trust,
fund or other arrangement that would be a Company Plan if it were in existence
as of the date of this Agreement, (vi) grant any equity or equity-based awards,
other than in the ordinary course consistent with past practice, (vii) enter
into any employment, consulting, independent contractor or similar agreement,
or amend, supplement or modify the terms of any such existing agreements,
(viii) hire, or offer to hire, any new employee or enter into any new
independent contractor relationship, or agree to enter into any new independent
contractor relationship (except (A) to replace employees or independent
contractors departing after the date hereof or that have departed prior to the
date hereof but have not yet been replaced, provided that the compensation and
benefits offered to such replacement do not materially exceed that of the
replaced employee or independent contractor, (B) for new employees who have
aggregate pre-tax compensation (including bonuses and commissions of no greater
than $200,000 per year, (C) with respect to offers of employment that are
outstanding as of the date hereof, (D) for ordinary course hiring of brokers
consistent with past practice in connection with the residential brokerage
business of the Company and its Subsidiaries or (E) employees assigned to
properties managed by the Company or any of its Subsidiaries for which the
compensation and benefits of such employees are fully reimbursed to the Company
and its Subsidiaries) or (ix) terminate any employee or independent contractor
of the Company or its Subsidiaries other than in writing;
(i) except (x) as set forth on the 2003 Budget set forth in Section 6.1(i)
of the Company Disclosure Schedule (the "2003 BUDGET") and (y) for
authorization of ordinary course capital expenditures by Real Estate Investment
Entities (other than with respect to the matters identified as "Prohibited
Expenditures" in Section 6.1(f) of the Company Disclosure Schedule), authorize
or make any single capital expenditure in excess of $50,000 or aggregate
capital expenditures of the Company and the Company Subsidiaries, taken
together, in excess of $250,000;
(j) change the Company's methods of accounting in effect at December 31,
2001, except as required by changes in GAAP or by Regulation S-X of the
Exchange Act or as otherwise specifically disclosed in the Company SEC
Documents filed prior to the date hereof, as concurred in by its independent
public accountants;
(k) (i) except for the payment of any deductible under an existing
insurance policy (or a commercially reasonable substitute for a company engaged
in businesses similar to those of the Company and its Subsidiaries) with
respect to a Claim that is being settled by such insurance company, settle,
pay, compromise or discharge any Claim that is in excess of $250,000 or is
otherwise material to the business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as a whole or
(ii) settle, pay, compromise or discharge any Claim against the Company or any
Company Subsidiary with respect to or arising out of the transactions
contemplated by this Agreement, the Asset Agreements, the Voting Agreements,
the Confidentiality Agreement and the No-Raid Agreement;
(l) other than in the ordinary course of business consistent with past
practice, (i) make any material Tax election or take any position on any
Company Return filed on or after the date of this Agreement or adopt any method
therein that is materially inconsistent with elections made, positions taken or
methods used in preparing or filing similar returns in prior periods, (ii)
enter into any settlement or compromise of any material Tax liability, (iii)
file any amended Company Return with respect to any material Tax, (iv) change
any annual Tax accounting period, (v) enter into any closing agreement relating
to any material Tax or (vi) surrender any right to claim a material Tax refund;
(m) open any office in a new geographical territory, create any new
business division or otherwise enter into any new line of business;
(n) fail to continuously maintain in full force and effect its current
insurance or a commercially reasonable substitute for a company engaged in
businesses similar to those of the Company and its Subsidiaries;
(o) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company or any Company Subsidiary (other than the Merger);
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(p) willfully take any action that would result in a material breach of
any provision of this Agreement or the inability of the Company to satisfy the
conditions precedent set forth in Section 9.3(a) hereto;
(q) except for (i) expense reimbursements and advances in the ordinary
course of business consistent with past practice, (ii) revenue producing
agreements entered into with Real Estate Investment Entities in the ordinary
course of business consistent with past practice having terms consistent with
past practice and (iii) transactions with any non-employee member of the
Company's Board of Directors or his or her Affiliates in the ordinary course of
business consistent with past practice, enter into any contract, commitment or
agreement with any Affiliate of the Company or its Subsidiaries or any of their
immediate family members (including their spouses);
(r) except as specifically contemplated by this Agreement and the Company
Disclosure Schedules (without giving effect to Section 6.5), enter into any
agreement not in existence as of the date hereof that would provide for the
making of any payment or result in any adverse change in rights or obligations
of the Company and its Subsidiaries as a result of the Merger, the Financing or
the Additional Financing; and
(s) authorize, agree or commit, verbally or in writing, to do any of the
foregoing.
provided, however that the conduct of business by each of Insignia Opportunity
Trust and Insignia Opportunity Partners, L.P. (collectively, "IOP") and
Insignia Opportunity Partners II, L.P. ("IOP II") shall not be subject to the
foregoing clauses (a) through (s) to the extent such conduct is in the ordinary
course of business consistent with past practice; provided, further that the
conduct of business of Octane Ventures, LLC shall not be subject to the
foregoing clauses (a) through (s).
6.2. STOCKHOLDER MEETING. Subject to Section 6.3 hereto, the Company shall
cause a meeting of its Stockholders (the "COMPANY STOCKHOLDER MEETING") to be
duly called and held as promptly as reasonably practicable after the date
hereof for the purpose of obtaining the Company Stockholder Approval. Subject
to Section 6.3 hereto, the Company's Board of Directors and the Special
Committee shall recommend approval and adoption by the Company Stockholders of
this Agreement and the transactions contemplated hereby, including the Merger
(the "COMPANY RECOMMENDATION"), and the Company shall take all other reasonable
lawful action to solicit and secure the Company Stockholder Approval. Subject
to Section 6.3 hereto, the Company Recommendation, together with a copy of the
opinion referred to in Section 4.16(b), shall be included in the Proxy
Statement. Parent and Acquiror or their agents shall have the right to solicit
from the Company Stockholders proxies in favor of adoption of this Agreement
and the transactions contemplated hereby.
6.3. ACQUISITION PROPOSALS; BOARD RECOMMENDATION.
(a) The Company agrees that it shall not, nor shall it permit any Company
Subsidiary to, nor shall it authorize or knowingly permit any officer,
director, employee, investment banker, attorney, accountant, agent or other
advisor or representative of the Company or any Company Subsidiary, directly or
indirectly, to (i) solicit, initiate or otherwise knowingly encourage the
submission of any Acquisition Proposal, (ii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action knowingly to facilitate any inquiries or the
making of any proposal that constitutes, or that would reasonably be expected
to lead to, any Acquisition Proposal, (iii) grant any waiver or release under
any standstill or similar agreement with respect to any class or series of the
Company's equity securities to the extent such waiver or release would permit
the other party or parties to such agreement to actually acquire such
securities or approve any matter for purposes of Section 203 of the DGCL with
respect to any Third Party (for the avoidance of doubt, a waiver or release
under such agreement that solely permits a proposal or offer, including,
without limitation, an Acquisition Proposal, would not violate this clause
(iii)) or (iv) enter into any agreement with respect to any Acquisition
Proposal; provided, however, that if the Company receives an unsolicited
Acquisition Proposal from a Third Party that the Company's Board of Directors
or the Special Committee determines in good faith is or could reasonably be
expected to lead to the delivery of a Superior Proposal from that Third Party,
the Company may, subject to compliance with all the other provisions of this
Section 6.3, furnish information to and engage in discussions and negotiations
with such Third Party with respect to its Acquisition Proposal ("PERMITTED
ACTIONS") if and only to the extent that, the Board of Directors or the Special
Committee, by majority vote, concludes in good faith, after consultation with
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outside financial advisors and legal advisors, that, as a result of such
Acquisition Proposal, such Permitted Action is necessary for the Board of
Directors or the Special Committee to act in a manner consistent with their
respective fiduciary duties under applicable Law. The Board of Directors of the
Company or the Special Committee shall provide Acquiror with prompt notice (but
in no event later than the next day) of its engaging in any Permitted Actions.
(b) Except as permitted by this Section 6.3(b), neither the Board of
Directors of the Company nor the Special Committee or any other committee
thereof shall amend, withdraw, modify, change, condition or qualify in any
manner adverse to Acquiror, the Company Recommendation (it being understood and
agreed that a communication by the Board of Directors of the Company to the
Company Stockholders pursuant to Rule 14d-9(f) of the Exchange Act, or any
similar communication to the Company Stockholders in connection with the making
or amendment of a tender offer or exchange offer by any Person other than the
Company or any Company Subsidiary, shall not be deemed to constitute a
withdrawal, modification, amendment, condition or qualification of the Company
Recommendation for purposes of this Section 6.3). Notwithstanding the
foregoing, the Board of Directors of the Company or the Special Committee may
withdraw or modify the Company Recommendation in a manner adverse to Acquiror
if (i) the Company has complied in all material respects with this Section 6.3,
(ii) the Company shall have notified Parent at least two Business Days in
advance of its intention to effect such withdrawal or modification of the
Company Recommendation and (iii) the Board of Directors or the Special
Committee, by majority vote, concludes in good faith, after consultation with
outside financial advisors and legal advisors, that such withdrawal or
modification is necessary for the Board of Directors or the Special Committee
to act in a manner consistent with their respective fiduciary duties under
applicable Law.
(c) Unless the Company's Board of Directors or the Special Committee has
previously withdrawn, or is concurrently therewith withdrawing, the Company
Recommendation in accordance with this Section 6.3, neither the Company's Board
of Directors nor the Special Committee or any other committee thereof shall
recommend any Acquisition Proposal to the Company Stockholders. Nothing
contained in this Section 6.3 or elsewhere in this Agreement shall (i) prevent
the Company's Board of Directors or the Special Committee from complying with
Rule 14e-2 under the Exchange Act with respect to any Acquisition Proposal or
making any disclosure required by applicable Law or (ii) prohibit accurate
disclosure of factual information regarding the business, financial condition
or results of operations of the Company, or the fact that an Acquisition
Proposal has been made, the identity of the party making such Acquisition
Proposal or the material terms of such Acquisition Proposal to the extent such
information, facts, identity or terms are required to be disclosed under
applicable Law.
(d) Notwithstanding anything in this Section 6.3 to the contrary, at any
time prior to obtaining the Company Stockholder Approval, the Board of
Directors of the Company or the Special Committee may, in response to a
Superior Proposal that was unsolicited and that did not otherwise result from a
breach of this Section 6.3, cause the Company to terminate this Agreement
pursuant to Section 10.1(c)(ii) and concurrently enter into an agreement
regarding such Superior Proposal; provided, however, that the Company shall not
terminate this Agreement pursuant to Section 10.1(c)(ii), and any purported
termination pursuant to Section 10.1(c)(ii) shall be void and of no force or
effect (and the Company may not enter into such agreement regarding such
Superior Proposal), unless the Company shall have complied in all material
respects with all the provisions of this Section 6.3, including the
notification provisions in this Section 6.3, and with all applicable
requirements of Sections 10.2(b) (including the payment of the Termination Fee
(as defined in Section 10.2(b)) prior to or concurrently with such termination)
in connection with such Superior Proposal; and provided further, however, that
the Company shall not exercise its right to terminate this Agreement pursuant
to Section 10.1(c)(ii) until after the second Business Day following Parent's
receipt of written notice (a "NOTICE OF SUPERIOR PROPOSAL") from the Company
advising Parent that the Board of Directors of the Company or the Special
Committee has received a Superior Proposal, specifying the material terms and
conditions of the Superior Proposal, identifying the person making such
Superior Proposal and stating that the Board of Directors of the Company or the
Special Committee intends to exercise its right to terminate this Agreement
pursuant to Section 10.1(c)(ii) (it being understood and agreed that, prior to
any such termination taking effect, any amendment to the price or any other
material term of a Superior Proposal (such amended Superior
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Proposal, a "MODIFIED SUPERIOR PROPOSAL") shall require a new Notice of
Superior Proposal and a new two Business Day period with respect to such
Modified Superior Proposal).
(e) The Company shall notify Acquiror promptly (but in no event later than
the next Business Day) after receipt by the Company of any Acquisition Proposal
or any request for information relating to the Company or any Company
Subsidiary in connection with an Acquisition Proposal or for access to the
properties, books or records of the Company or any Company Subsidiary or any
request for a waiver or release under any standstill or similar agreement by
any Person that has made, or informs the Board of Directors or the Special
Committee of the Company or such Company Subsidiary that it is considering
making, an Acquisition Proposal; provided, however, that prior to participating
in any discussions or negotiations or furnishing any such information, the
Company shall receive from such Person an executed confidentiality agreement on
terms that are not materially less favorable to the Company than the
Confidentiality Agreement, dated as of October 14, 2002 (the "CONFIDENTIALITY
AGREEMENT"), between Holding and the Company. The notice shall indicate the
material terms and conditions of the proposal or request and the identity of
the Person making it, and the Company will promptly notify Acquiror of any
material modification of or material amendment to any Acquisition Proposal (and
the terms of such modification or amendment); provided, however, that, without
limiting what changes may be material, any change in the form, amount, timing
or other aspects of the consideration to be paid with respect to the
Acquisition Proposal shall be deemed to be a material modification or a
material amendment. The Company shall keep Acquiror informed, on a reasonably
current basis, of the status of any negotiations, discussions and documents
with respect to such Acquisition Proposal or request.
(f) The Company shall immediately cease, and shall cause any Person acting
on its behalf to cease, and cause to be terminated any existing discussions or
negotiations with any Third Party conducted heretofore with respect to any of
the foregoing and shall request any such parties in possession of confidential
information about the Company or any Company Subsidiary that was furnished by
or on behalf of the Company or any such Subsidiary to return or destroy all
such information in the possession of any such party or the agent or advisor of
any such party.
6.4. FRENCH WARRANTS. The Company shall, or shall cause its Subsidiaries
to, exercise any call rights or other rights the Company or such Subsidiaries
have to purchase or acquire the outstanding Warrants (solely for purposes of
this Section 6.4, as defined in the Share Purchase Agreement, dated November
30, 2001, among the Company, Insignia France SARL, Jean Claude Bourdais and the
other parties thereto) for cash or, solely to the extent payment in cash would
breach or violate the provisions of the Senior Credit Agreement, Company
Shares.
6.5. SUPPLEMENTAL COMPANY DISCLOSURE SCHEDULE. Subject to the provisions
of the following sentence, the Company shall have the right to make additions
(each such addition, a "SUPPLEMENTAL EXCEPTION") to the Company Disclosure
Schedule by delivering a single supplement thereto (the "SUPPLEMENTAL
DISCLOSURE SCHEDULE"), which Supplemental Disclosure Schedule must be delivered
to Parent no later than eleven (11) Business Days after the date hereof and may
contain Supplemental Exceptions solely with respect to the following provisions
of Article 4 (it being understood that any disclosure provided in the
Supplemental Disclosure Schedule will be deemed to apply solely to the
following Sections of Article 4 (and not any other Sections of Article 4)
notwithstanding anything to the contrary in the Company Disclosure Schedule or
the Supplemental Disclosure Schedule): the second sentence of Section 4.1,
Section 4.4(b), Section 4.4(c), Section 4.6(a), Section 4.6(c), Section 4.7(f),
Section 4.9, Section 4.11, Section 4.12 (excluding the last sentence of Section
4.12(g)), Section 4.13, Section 4.14, Section 4.15, Section 4.17, Section 4.18
(excluding the last sentence of Section 4.18 (b)), Section 4.19, Section 4.20,
Section 4.21 and Section 4.22. With respect to the Supplemental Disclosure
Schedule, (i) each Supplemental Exception included in the Supplemental
Disclosure Schedule must be a fact, event, circumstance or other matter that
existed as of the date hereof, and the Supplemental Disclosure Schedule cannot
include any facts, events, circumstances or other matters arising only after
the date of this Agreement, (ii) each Supplemental Exception can refer only to
specific facts, events, circumstances or other matters (e.g. identification of
a contract by date and names of the parties thereto), and the Supplemental
Disclosure Schedule cannot include general statements or exceptions (e.g.
references to general categories of contracts), (iii) the Supplemental
Disclosure Schedule cannot include any agreement, contract or transaction to
which any Person named in the definition of "Knowledge" is a party
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and (iv) each Supplemental Disclosure must contain only such information as the
Company in good faith believes is required to be included on the Company
Disclosure Schedule. Copies of all documents referred to in any Supplemental
Disclosure Schedule must be made available to Parent on or prior to the date of
delivery of such Supplemental Disclosure Schedule. In addition, the Company
agrees to deliver promptly (but in no event later than two Business Days after
a request by Parent) to Parent all information reasonably requested by Parent
relating to any Supplemental Exceptions disclosed in the Supplemental
Disclosure Schedule. In the event the Supplemental Exceptions included in the
Supplemental Disclosure Schedule could reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect, then
Parent shall have the right to terminate this Agreement no later than five (5)
Business Days after receipt of the Supplemental Disclosure Schedule, or, if
later, two (2) Business Days after receipt by Parent of the documents and
information referred to in the two immediately preceding sentences but in no
event later than ten (10) Business Days after delivery of the Supplemental
Disclosure Schedule. All Supplemental Exceptions included in the Supplemental
Disclosure Schedule in accordance with this Section 6.5 will be deemed to have
been included in the Company Disclosure Schedule from and after the date of
this Agreement.
6.6. PRE-CLOSING TERMINATIONS. No later than 30 days prior to the Closing
Date Parent will deliver to the Company a list of all employees and independent
contractors that Parent wishes to have terminated prior to the Closing (the
"SECTION 6.6 LIST"). After the satisfaction or waiver of all conditions
precedent set forth in Article 9 but prior to the Closing, subject to
compliance with applicable Law, the Company shall, and shall cause all of its
Subsidiaries to, terminate (effective prior to the Closing) the employment or
independent contractor relations, as applicable, of all employees and
independent contractors listed on the Section 6.6 List.
ARTICLE 7
COVENANTS OF HOLDING, PARENT AND ACQUIROR
Each of Holding, Parent and Acquiror agrees as set forth below.
7.1. DIRECTOR AND OFFICER LIABILITY.
(a) Holding, Parent, Acquiror and the Surviving Corporation agree that the
Surviving Corporation shall adopt on or prior to the Effective Time, in its
certificate of incorporation and by-laws, the same indemnification, limitation
of or exculpation from liability and expense advancement provisions as those
set forth in the Company's certificate of incorporation and by-laws, in each
case as of the date of this Agreement, and that such provisions shall not be
amended, repealed, revoked or otherwise modified for a period of six (6) years
and one (1) month after the Effective Time in any manner that would adversely
affect the rights thereunder of the individuals who on or prior to the
Effective Time were directors, officers, employees or agents of the Company or
any Company Subsidiary or are otherwise entitled to the benefit of such
provisions, unless such modification is required after the Effective Time by
applicable Law.
(b) To the fullest extent permitted under applicable Law, commencing at
the Effective Time and continuing for six (6) years (or for such longer period
provided for in any applicable statute of limitations) and one (1) month
thereafter, Parent or the Surviving Corporation shall, and if Parent and the
Surviving Corporation do not promptly do so, Holding shall, indemnify, defend
and hold harmless, each present and former director, officer or employee of the
Company and each Company Subsidiary and their respective estates, heirs,
personal representatives, successors and assigns (collectively, the
"INDEMNIFIED PARTIES") against all costs and expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
settlement amounts paid in connection with any Claim (whether asserted prior
to, at or after, the Effective Time) arising out of or pertaining to any action
or omission in their capacity as director or officer of the Company or any
Company Subsidiary or their serving at the request of the Company or any
Company Subsidiary as director, officer, trustee, partner or fiduciary of
another Person, pension or other employee benefit plan or enterprise in each
case occurring on or before the Effective Time (including the transactions
contemplated by this Agreement); provided, however, that in the event any Claim
or Claims for indemnification are made within such six-year (or within such
longer period provided for in any applicable statute of limitations) and
one-month period, all rights to indemnification
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in respect of any such Claim or Claims shall continue until the final
disposition of any and all such Claims. Without limiting the foregoing, in the
event of any Claim, (i) Parent or the Surviving Corporation shall, and if
Parent and the Surviving Corporation do not promptly do so, Holding shall (x)
periodically advance reasonable fees and expenses (including attorneys fees)
with respect to the foregoing and pay the reasonable fees and expenses of
counsel selected by each Indemnified Party, promptly after statements therefor
are received, provided that the Indemnified Party to whom fees and expenses are
advanced or for which fees and expenses of counsel are paid provides an
undertaking to repay such advances and payments if it is ultimately determined
that such Indemnified Party is not entitled to indemnification, and (y)
vigorously assist each Indemnified Party in such defense, and (ii) subject to
the terms of this Section 7.1, Holding, Parent and the Surviving Corporation
shall cooperate in the defense of any matter. If any Claim is commenced as to
which an Indemnified Party desires to receive indemnification, such Indemnified
Party shall notify the Surviving Corporation with reasonable promptness;
provided, however, that failure to give reasonably prompt notice to the
Surviving Corporation shall not affect the indemnification obligations of
Holding, Parent or the Surviving Corporation hereunder except to the extent
that the failure to so notify has prejudiced the Surviving Corporation in such
Claim. The Indemnified Party shall have the right to retain counsel of such
Indemnified Party's own choice to represent such person; and such counsel
shall, to the extent consistent with its professional responsibilities,
cooperate with Holding, Parent and the Surviving Corporation and any counsel
designated by any of Holding, Parent or the Surviving Corporation. Holding,
Parent and the Surviving Corporation shall be liable only for any settlement of
any Claim against an Indemnified Party made with Parent or the Surviving
Corporation written consent. Holding, Parent and the Surviving Corporation
shall not, without the prior written consent of an Indemnified Party, settle or
compromise any Claim, or permit a default or consent to the entry of any
judgment in respect thereof, unless such settlement, compromise or consent
includes, as an unconditional term thereof, the giving by the claimant to such
Indemnified Party of an unconditional release from all liability in respect of
such claim.
(c) For six (6) years and one (1) month from the Effective Time, the
Surviving Corporation shall, and Holding and Parent shall cause the Surviving
Corporation to, provide to the present and former directors and officers of the
Company and each Company Subsidiary liability and fiduciary liability insurance
protection with the same coverage and in the same amount, and on terms no less
favorable to the directors and officers than that provided by the Company's
directors' and officers' liability insurance policies in effect on the date
hereof and listed on Section 7.1(c) of the Company Disclosure Schedule;
provided, however, that the Surviving Corporation shall not be obligated to
make premium payments for such insurance to the extent such annual premiums
exceed 300% of the annual premiums paid as of the date hereof by the Company
for such insurance; and provided, further, that if the premiums with respect to
such insurance exceed 300% of the annual premiums paid as of the date hereof by
the Company for such insurance, the Surviving Corporation shall be obligated to
obtain such insurance with the maximum coverage as can be obtained at an annual
premium equal to 300% of the annual premiums paid by the Company as of the date
hereof.
(d) All rights to indemnification and/or advancement of expenses contained
in any agreement with any Indemnified Parties as in effect on the date hereof
with respect to matters occurring on or prior to the Effective Time (including
the transactions contemplated hereby) shall survive the Merger and continue in
full force and effect.
(e) This Section 7.1 shall survive the consummation of the Merger and is
intended to be for the benefit of, and shall be enforceable by, the Indemnified
Parties referred to herein, their heirs and personal representatives and shall
be binding on Holding, Parent and the Surviving Corporation and their
respective successors and assigns and the covenants and agreements contained
herein shall not be deemed exclusive of any other rights to which an
Indemnified Party is entitled, whether pursuant to Law, contract or otherwise.
(f) If Holding, Parent or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
Person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each case, to the
extent necessary, proper provision shall be made
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so that the successors and assigns of Holding, Parent or the Surviving
Corporation, as the case may be, shall assume the obligations set forth in this
Section 7.1.
(g) Nothing in this Agreement is intended to, shall be construed to or
shall release, waive or impair any rights to directors' and officers' insurance
claims under any policy that is or has been in existence with respect to the
Company or any of its officers, directors or employees, it being understood and
agreed that the indemnification provided for in this Section 7.1 is not prior
to or in substitution for any such claims under such policies.
7.2. EMPLOYEE BENEFITS.
(a) The Surviving Corporation shall, and Holding and Parent shall cause
the Surviving Corporation to, provide to individuals who are employees of the
Company and each Company Subsidiary immediately prior to the Effective Time and
who subsequently become employees of the Surviving Corporation (the "CONTINUING
EMPLOYEES"), with employee benefits that, in the aggregate, are substantially
equivalent to the employee benefits provided by Parent or its Subsidiaries to
their own similarly situated current employees.
(b) For purposes of determining eligibility to participate and the vesting
of benefits under plans maintained or contributed to by Holding, Parent or its
Subsidiaries for the benefit of the Continuing Employees and for each of the
Persons set forth in Section 7.2 of the Company Disclosure Schedule (the
"PURCHASER PLANS"), including, but not limited to, any pension, severance,
401(k), vacation and sick pay plan, and for purposes of calculating benefits
under any severance, sick leave or vacation plans, Holding, Parent or its
Subsidiaries shall give credit for years of service with the Company, as if
they were years of service with Holding, Parent or its Subsidiaries. Holding,
Parent and its Subsidiaries shall recognize such service for purposes of
satisfying any waiting period, evidence of insurability requirements or the
application of any preexisting condition limitation. Holding, Parent and its
Subsidiaries shall also give the Continuing Employees and such Persons set
forth in Section 7.2 of the Company Disclosure Schedule credit for amounts paid
under a corresponding Company Plan during the same period for purposes of
applying deductibles, co-payments and out-of-pocket maximums as though such
amounts had been paid in accordance with the terms and conditions of the
benefit plan sponsored or maintained by Holding, Parent or any of its
Subsidiaries.
(c) Effective as of the day immediately preceding the Effective Date, the
Company shall terminate the Insignia Financial Group, Inc. 401(k) Retirement
Savings Plan and any other 401(k) plan(s) that Company or its Affiliates
sponsor for the benefit of Company Employees (the "COMPANY 401(k) PLANS"),
subject to and conditioned upon the occurrence of the Effective Time, unless
Parent provides notice to the Company at least 15 days prior to the Effective
Time that the Company 401(k) Plans shall not be terminated. The Parent shall
receive from the Company evidence that the Company 401(k) Plans have been
terminated pursuant to a resolution of the Company's Board of Directors (the
form and substance of such resolution shall be subject to review and approval
of the Parent, which approval shall not be unreasonably withheld).
Notwithstanding anything herein to the contrary, as promptly as possible
following the Effective Time, the Parent shall permit Continuing Employees to
participate in a tax-qualified defined contribution plan established or
maintained by the Parent or its Affiliate (the "PARENT 401(k) PLAN") and, to
the extent permitted by the Parent 401(k) Plan, to rollover (whether by direct
or indirect rollover, as selected by such participant) his or her "eligible
rollover distribution" (as defined under Section 402(c)(4) of the Code) from
the Company 401(k) Plans. No loan shall be placed into default or declared in
default, and the Parent shall consider, in good faith, permitting participants
in the Company 401(k) Plans to transfer his or her account balance under the
Company 401(k) Plans, together with the promissory note evidencing the plan
loan and the applicable loan documentation, to the Parent 401(k) Plan through a
direct rollover. In such case, the loan shall be assumed and continued by the
Parent 401(k) Plan in a manner substantially similar to the Company 401(k)
Plans.
7.3. CONDUCT OF HOLDING, PARENT AND ACQUIROR. Holding and Parent each
will, and will take all action necessary to cause Acquiror to, perform its
obligations under this Agreement to consummate the Merger on the terms and
subject to conditions set forth in this Agreement.
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7.4. TRANSFER TAXES AND OTHER TAX MATTERS.
(a) The parties shall cooperate in the preparation, execution and filing
of all returns, questionnaires, applications or other documents regarding all
state, local and foreign real property transfer or gains, sales, use, transfer,
value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or similar Taxes ("TRANSFER TAXES") which become
payable in connection with the transactions contemplated by this Agreement that
are required to be filed on or before the Effective Time. All Transfer Taxes
(including any interest or penalties with respect thereto) attributable to the
Merger shall be timely paid by Holding, Parent, Acquiror or the Surviving
Corporation.
(b) Any liability arising out of New York State or New York City Real
Property Transfer Taxes with respect to interests in real property owned,
directly or indirectly, by the Company or any of its Subsidiaries immediately
prior to the Effective Time, if applicable and due in connection with the
Merger, shall be borne by Holding, Parent or the Surviving Corporation and
expressly shall not be a liability of the Company Stockholders.
(c) If legislation is enacted prior to the Effective Time that the Company
and Parent in good faith mutually agree reduces or eliminates the federal
income tax on dividend income that would be payable by U.S. individuals as a
result of a cash dividend on the Common Shares, then the Company shall have the
right to declare a cash dividend on the Common Shares prior to the Effective
Time if the distribution of such dividend would result in tax savings to
holders of the Common Shares. If such a dividend is declared, the Common Merger
Consideration shall be reduced by the amount of such dividend per share.
Notwithstanding the foregoing, no dividend shall be declared under this Section
7.4(c) if, in the good faith judgment of Parent, the payment of the dividend
and the related reduction of the Common Merger Consideration increases the
aggregate cost of the transactions contemplated by this Agreement to Acquiror
or otherwise adversely affects Acquiror or its direct or indirect stockholders.
7.5. FINANCING ARRANGEMENTS.
(a) Holding and Parent each hereby agrees to use commercially reasonable
efforts to arrange and obtain the Financing on the terms set forth in the
Commitment Letter and the Additional Financing on the terms set forth in the
Subscription Agreement and the Blum Strategic Commitment Letter. Holding and
Parent will keep the Company informed on a reasonably current basis in
reasonable detail of the status of their efforts to arrange the Financing and
the Additional Financing, and shall not permit any amendment or modification to
be made to, or any waiver of any provision or remedy under, the Commitment
Letter, the Subscription Agreement or the Blum Strategic Commitment Letter
without the prior written consent of the Company. Holding and Parent will be
under no obligation under any circumstances to obtain more than $100.0 million
(plus the amount, if any, required by the Blum Strategic Commitment Letter) of
equity financing for the Merger and related matters. In the event that Holding
or Parent is unable to obtain the Financing or the Additional Financing,
Holding and Parent shall use commercially reasonable efforts to obtain
alternative financing with overall pricing, cost, timing and maturity terms
that are no less favorable, and other terms that are no less favorable in any
material respect, to Holding and Parent than those contained in the Commitment
Letter or the Subscription Agreement and Blum Strategic Commitment Letter, as
the case may be.
(b) Each of Holding, Parent and Acquiror agrees that it will not take any
action, and it will not permit any of its Subsidiaries to take any action, that
would violate clause (e) of the eighth paragraph of the Commitment Letter.
7.6. CERTAIN EXISTING OBLIGATIONS.
(a) Parent shall, and shall cause the Surviving Corporation to, honor all
the obligations of the Company under the employment agreements and
indemnification agreements listed in Section 7.6 of the Company Disclosure
Schedule.
(b) Holding, Parent and Acquiror acknowledge that certain employees of and
consultants to (and former employees of and consultants to) the Company or one
or more of its Subsidiaries (and assignees of such employees and consultants)
(each, a "COVERED PARTICIPANT") (i) own direct Equity Interests in, or are
assignees of economic interests associated with direct Equity Interests in, the
Covered Entities (as
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defined below) and/or (ii) are the beneficiaries of contractual grants pursuant
to letter agreements of rights to certain proceeds received by certain
Subsidiaries of the Company that own direct or indirect Equity Interests in or
hold debt obligations of one or more Real Estate Investment Entities (the
interests of the Covered Participants described in the foregoing clauses (i)
and (ii) that exist as of the date of this Agreement, a summary of which has
been provided to Parent, as well as any such additional interests that may be
granted or issued as permitted by Section 6.1 of this Agreement, are
collectively referred to herein as "PARTICIPATION INTERESTS"). As soon as
reasonably practicable after the date hereof, but no later than immediately
prior to the Closing, the Company shall, if and to the extent applicable, cause
the relevant governing and organizational documents of each Relevant Subsidiary
that is a Covered Entity to be amended to provide that, effective upon the
Closing: (x) the Relevant Subsidiary that is a Covered Entity may not
voluntarily sell, transfer or otherwise dispose of any material assets directly
held by it (it being understood this will not restrict the sale or other
disposition of the underlying Real Estate Asset(s) held by the applicable Real
Estate Investment Entity, nor will it prevent the direct or indirect sale of
any Equity Interest in the Relevant Subsidiary that is a Covered Entity)
without the approval of at least one-third in interest of the Covered
Participants who directly or indirectly own Equity Interests in such Covered
Entity; and (y) such provisions may not be amended without the approval of at
least one-third in interest of the Covered Participants who own Equity
Interests in such Relevant Subsidiary that is a Covered Entity. In addition,
Holding, Parent and Acquirer hereby expressly acknowledge the validity and
existence of the obligations of the Surviving Corporation and its Subsidiaries
with respect to the Participation Interests, and agree to cause the Surviving
Corporation and its Subsidiaries (or any successor thereto that is a Subsidiary
of Holding, Parent or the Surviving Corporation) to use all commercially
reasonable efforts to provide for the Participation Interests to be cashed out
only when the underlying Real Estate Asset(s) are sold (rather than on a sale
by the Company or its Subsidiary of its interest in a Real Estate Investment
Entity or a Relevant Subsidiary). The holders of Participation Interests are
express, intended third party beneficiaries of this Section 7.6(b). "COVERED
ENTITY" means any Subsidiary of the Company (i) that owns a direct or indirect
Equity Interest in or holds a debt obligation of a Real Estate Investment
Entity, and (ii) in which one or more employees of or consultants to (or former
employees of or consultants to) the Company or any of its Subsidiaries (or an
assignee of any such employee or consultant) holds an Equity Interest (either
directly or pursuant to an assignment of an economic interest by a direct
holder of an Equity Interest in such Subsidiary), and (iii) in which the direct
or indirect holders of Equity Interests do not include any Person other than
(x) the Company or a Subsidiary of the Company or (y) an employee of or
consultant to (or former employee of or consultant to) the Company or any of
its Subsidiaries (or an assignee of any such employee or consultant).
ARTICLE 8
COVENANTS OF HOLDING, PARENT, ACQUIROR AND THE COMPANY
The parties hereto agree as set forth below.
8.1. EFFORTS AND ASSISTANCE.
(a) Subject to the terms and conditions hereof, each party will use
commercially reasonable efforts to take, or cause to be taken, all actions, to
file, or cause to be filed, all documents and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement as promptly as practicable,
including, without limitation, obtaining all necessary consents, waivers,
approvals, estoppels, authorizations, Permits or orders from all Governmental
Entities or other Third Parties. The Company, Holding, Parent and Acquiror
shall furnish all information required to be included in any application or
other filing to be made pursuant to the rules and regulations of any
Governmental Entity in connection with the transactions contemplated by this
Agreement. Holding, Parent, Acquiror and the Company shall have the right to
review in advance and comment thereon, and to the extent reasonably practicable
each will consult the other on, all the information relating to the other and
each of their respective Subsidiaries, that appear in any filing made with, or
written materials submitted to, any third party or any Governmental Entity in
connection with the Merger.
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(b) Each of the Company, Holding and Parent shall make, and shall cause
their respective ultimate parents, if any, to make, an appropriate filing of a
notification and report form pursuant to the HSR Act with respect to the
transactions contemplated hereby promptly and shall promptly respond to any
request for additional information pursuant to the HSR Act and supply such
information. In addition, the Company, Holding and Parent shall each promptly
make any other filing that is required under any Non-U.S. Competition Law and
shall promptly respond to any request for additional information pursuant to
such Non-U.S. Competition Law and supply such information. Holding, Parent,
Acquiror and the Company shall each use their commercially reasonable efforts
to resolve objections, if any, as may be asserted by any Governmental Entity
with respect to the Merger under any antitrust, trade, competition or takeover
Laws of any Governmental Entity, and neither the Company nor any Company
Subsidiary shall agree to do any of the actions set forth in the foregoing
clause without the prior written consent of Acquiror. Holding, Parent and
Acquiror shall reasonably consult with the Company and, subject to being
permitted to do so by the Governmental Entity, the Company shall have the right
to attend and participate in any telephone calls or meetings that Holding,
Parent or Acquiror has with any Governmental Entity with regard to this
Agreement and the transactions contemplated hereby.
(c) The Company shall provide, and will cause each Company Subsidiary and
their respective officers and employees to provide, all commercially reasonable
cooperation in connection with the arrangement and obtaining of the Financing
as may be reasonably requested by Parent, including, without limitation,
facilitating customary due diligence and arranging senior officers, as selected
by Parent, assisting in the preparation of ratings agency presentations,
offering memoranda, private placement memoranda and similar documents, meeting
with prospective lenders and investors in customary "road show" presentations,
executing and delivering commitment and financing letters, underwriting,
purchase or placement agreements, pledge and security documents, other
definitive financing documents, or other requested certificates or documents
and comfort letters and consents of accountants as may be reasonably requested
by Parent, provided, however that in no event will the Company or any Company
Subsidiary be required to enter into any agreement relating to such Financing
that could impose any liability on the Company or any Company Subsidiary prior
to the Closing. In addition, in conjunction with the obtaining of the
Financing, the Company agrees, at the reasonable request of Parent or Acquiror,
to call conditionally for prepayment or redemption, or to prepay, redeem and/or
renegotiate, as the case may be, any then existing indebtedness of the Company;
provided, however that no such prepayment or redemption shall themselves
actually be made until contemporaneously with or after the Closing.
(d) Each of Holding, Parent, Acquiror and the Company shall use its best
efforts to obtain the consents, approvals, actions, orders, authorizations,
registrations, declarations, announcements and filings set forth on Section
8.1(d) of the Company Disclosure Schedule.
8.2. PROXY STATEMENT. As soon as practicable and in any event no later
than 30 days after execution of this Agreement, the Company shall prepare and
file the Proxy Statement with the SEC under the Exchange Act. The Company will
use commercially reasonable efforts to have the Proxy Statement cleared by the
SEC. Holding, Parent, Acquiror and the Company shall cooperate with each other
in the preparation of the Proxy Statement, and the Company shall notify
Acquiror of the receipt of any comments of the SEC with respect to the Proxy
Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information and shall provide to Acquiror promptly
copies of all correspondence between the Company or any representative of the
Company and the SEC. The Company shall give Acquiror and its counsel the
opportunity to review and comment on the Proxy Statement and any other
documents filed with the SEC or mailed to the Company Stockholders prior to
their being filed with, or sent to, the SEC or mailed to its Stockholders and
shall give Acquiror and its counsel the opportunity to review and comment on
all amendments and supplements to the Proxy Statement and any other documents
filed with, or sent to, the SEC or mailed to the Company Stockholders and all
responses to requests for additional information and replies to comments prior
to their being filed with, or sent to, the SEC or mailed to its Stockholders.
Each of the Company, Holding, Parent and Acquiror agrees to use its
commercially reasonable efforts, after consultation with the other parties
hereto, to respond promptly to all such comments of and requests by the SEC. As
promptly as practicable after the Proxy Statement has been cleared by the SEC,
the Company shall mail the Proxy Statement to the Stockholders. Each of the
Company, Holding, Parent and Acquiror promptly shall
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correct any information provided by it and used in the Proxy Statement that
shall have become false or misleading in any material respect, and the Company
shall take all steps necessary to file with the SEC and have cleared by the SEC
any amendment or supplement to the Proxy Statement as to correct the same and
to cause the Proxy Statement as so corrected to be disseminated to the Company
Stockholders, in each case to the extent required by applicable Law.
8.3. PUBLIC ANNOUNCEMENTS. On the date of the signing of this Agreement,
the parties shall issue a joint press release substantially in the form
attached hereto as Exhibit B. The parties shall cooperate with each other in
the development and distribution of, and consult with each other before
issuing, any other press release or making any public statement with respect to
this Agreement and the transactions contemplated hereby and shall not issue any
such press release or make any such public statement without the prior consent
of the other parties (which shall not be unreasonably withheld or delayed),
except as may be required by applicable Law or any listing agreement with any
national securities exchange.
8.4. ACCESS TO INFORMATION; NOTIFICATION OF CERTAIN MATTERS.
(a) From the date hereof until the Effective Time and subject to
applicable Law, the Company and each Company Subsidiary shall, upon reasonable
advance notice, (i) give to Parent and Acquiror, their counsel, financial
advisors, auditors and other authorized representatives reasonable access to
its offices, properties, books and records; (ii) furnish or make available to
Parent and Acquiror, their counsel, financial advisors, auditors and other
authorized representatives any financial and operating data and other
information as those Persons may reasonably request; and (iii) instruct its
employees, counsel, financial advisors, auditors and other authorized
representatives to cooperate with the reasonable requests of Parent and
Acquiror in connection with such matters. Any access pursuant to this Section
shall be conducted in a manner which will not interfere unreasonably with the
conduct of the business of the Company and its Subsidiaries and shall be in
accordance with any other existing agreements or obligations binding on the
Company or any of its Subsidiaries. Unless otherwise required by Law or as
otherwise provided in this Agreement, each of Parent and Acquiror will hold,
and will cause its respective officers, employees, counsel, financial advisors,
auditors and other authorized representatives to hold any nonpublic information
obtained in any investigation in confidence in accordance with and agrees to be
bound by, the terms of the Confidentiality Agreement, provided that Parent and
Acquiror will have the right to provide all such information to any potential
purchaser in connection with a Real Estate Asset Sale and such potential
purchaser's officers, employees, counsel, financial advisors, auditors and
other authorized representatives as long as such persons agree to keep such
information confidential and agree not to hire or solicit the employees of the
Company and its Subsidiaries, in each case in writing reasonably satisfactory
to the Company. No access pursuant to this Section 8.4(a) shall affect any
representations or warranties of the parties herein or the conditions to the
obligations of the parties hereto. From the date hereof until the Effective
Time, the Company shall, and shall cause its Subsidiaries to, provide Parent
and its Subsidiaries with reasonable access, upon reasonable prior notice to
Adam Gilbert, the General Counsel of the Company or any Person designated by
him to receive such notices, to employees and consultants of the Company and
its Subsidiaries for the purpose of enabling Parent or its Subsidiaries to meet
with and make offers of employment or service to one or more of said
individuals and to discuss integration and other transition matters with
respect to the transactions contemplated hereby; provided, however that the
Company shall have the right to have a representative attend each such meeting.
(b) The Company shall give prompt notice to Parent and Acquiror, and
Parent and Acquiror shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would reasonably be expected to cause any representation or warranty of
such party contained in this Agreement to be untrue or inaccurate in any
material respect; (ii) any failure of the Company or Parent and Acquiror, as
the case may be, to materially comply with or satisfy, or the occurrence or
nonoccurrence of any event, the occurrence or nonoccurrence of which would
reasonably be expected to cause the failure by such party to materially comply
with or satisfy, any covenant, condition or agreement to be complied with or
satisfied by it hereunder; (iii) any notice or other communication from any
Third Party alleging that the consent of such Third Party is or may be required
in connection with the transactions contemplated by this Agreement; and (iv)
the occurrence of any event, development or circumstance which has had or would
be reasonably likely to result in a Company or Parent Material Adverse Effect;
provided, however, that the delivery of any notice pursuant to this Section
8.4(b) shall not
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limit or otherwise affect (x) the representations, warranties, covenants or
agreements of the parties hereto or (y) the remedies available hereunder to the
party giving or receiving such notice.
8.5. FURTHER ASSURANCES. Upon the terms and subject to the conditions of
this Agreement, each of the parties hereto shall use their respective
reasonable best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
waivers, consents and approvals and to effect all necessary registrations and
filings, and otherwise to satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement. Without the prior written
consent of Parent, the Company will not intentionally amend or waive any term
or rights it has under the consent letter received from the holder of the
Company Preferred Shares. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Acquiror, any deeds, bills
of sale, assignments or assurances and to take and do, in the name and on
behalf of the Company or Acquiror, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger.
8.6. DISPOSITION OF LITIGATION. The Company will consult with Parent with
respect to any action by any Third Party to restrain or prohibit or otherwise
oppose the Merger or the other transactions contemplated by this Agreement or
any Voting Agreement and, subject to Section 6.3, will resist any such effort
to restrain or prohibit or otherwise oppose the Merger or the other
transactions contemplated by this Agreement or any Voting Agreement. Parent may
participate in (but not control) the defense of any stockholder litigation
against the Company and its directors relating to the transactions contemplated
by this Agreement or any Voting Agreement at Parent's sole cost and expense. In
addition, subject to Section 6.3, the Company will not voluntarily cooperate
with any Third Party which has sought or may hereafter seek to restrain or
prohibit or otherwise oppose the Merger or the other transactions contemplated
by this Agreement or any Voting Agreement and will cooperate with Parent to
resist any such effort to restrain or prohibit or otherwise oppose the Merger
or the other transactions contemplated by this Agreement or any Voting
Agreement.
8.7. CONFIDENTIALITY AND NO-RAID AGREEMENTS. Subject to Section 10.2(c)
hereto, the parties acknowledge that the Company and Holding entered into the
Confidentiality Agreement and the No-Raid Agreement, which agreements shall
continue in full force and effect in accordance with their respective terms
until the earlier of (a) the Effective Time or (b) the expiration of each such
agreement according to its terms. Subject to Section 6.3 hereto, without the
prior written consent of Acquiror, neither the Company nor any Company
Subsidiary will waive or fail to enforce any provision of any confidentiality
or similar agreement which the Company or any Company Subsidiary has entered
into in connection with any completed or proposed business combination relating
to the Company or such Company Subsidiary.
8.8. RESIGNATION OF DIRECTORS. Prior to the Effective Time, the Company
shall use its commercially reasonable efforts to deliver to Acquiror evidence
satisfactory to Acquiror of the resignation of all directors of the Company,
effective at the Effective Time.
8.9. SALES OF REAL ESTATE INVESTMENT ASSETS.
(a) From the date of this Agreement through the Closing Date, the Company
will have the right, but not the obligation, to market for sale to third
parties at or prior to the Closing any or all of the Real Estate Investment
Assets. To the extent the Company engages in any such marketing and sales
activities, the Board of Directors of the Company will instruct the current
President of Insignia Financial Services, Inc. ("IFS") to keep (and to instruct
his direct and indirect reports to keep) Parent reasonably informed of such
marketing and sale activities (including, without limitation, providing a
telephonic update at least once per week regarding such activities), to provide
Parent with a reasonable advance review of any agreements regarding the sale of
Real Estate Investment Assets (it being understood that such review shall not
obligate the Company to accept any comments of Parent with respect to such
agreements) and to consider in good faith the views of Parent (it being
understood that the obligations under this Section
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8.9(a) are limited to requiring the Company's Board of Directors to provide
such instruction and do not impose any obligations on the Company as with
respect to the current President of IFS or his report(s) or the consequences of
their actions or inactions).
(b) Holding shall have the right to require that, after the satisfaction
or waiver of all conditions precedent set forth in Article 9 but at or
immediately prior to the Closing, all or any of the Real Estate Investment
Assets that have not been sold prior to the Closing Date to be sold and
transferred to Holding or one or more of its Subsidiaries for such
consideration and in such terms as Holding shall determine, provided that in no
event shall any such terms or conditions have any force or effect until
immediately prior to the Closing, and provided, further that this Section
8.9(b) shall not obligate the Company or its Subsidiaries to obtain any third
party or governmental approval and such sale and transfer shall not be required
if the sale or transfer could cause a failure of a condition precedent to this
Agreement or if it would violate applicable Law.
(c) Prior to the Closing, the Company (or its appropriate Subsidiaries)
will enter into a definitive agreement to sell on or after the Closing Date the
investment set forth in Section 8.9(c) of the Company Disclosure Schedule to a
Third Party on such terms as the Company shall be able to sell it, provided
that prior to entering into any such agreement the Company will provide Parent
with a copy of all agreements relating to such sale and Parent will have two
Business Days to approve or reject such terms in writing and provided, further
that the Closing may be a condition precedent to the closing of any such
agreement. If Parent rejects such terms in writing, then the Company will not
enter into such Agreement and all obligations of the Company under this Section
8.9(c) will immediately terminate. The parties acknowledge that the closing of
any such sale shall be subject to certain governmental approvals.
8.10. TREATMENT OF NET PROCEEDS. In the event the amount of Net Proceeds
Deemed Received by the Company exceeds the Threshold Amount (which Net
Proceeds, for the avoidance of doubt, shall not include any contingent rights
to future cash payments or any amounts of cash held in escrow) (the amount of
Net Proceeds in excess of the Threshold Amount is referred to herein as the
"EXCESS NET PROCEEDS AMOUNT"), each of Holding, Parent, Acquiror and the
Company shall increase the Common Merger Consideration such that the additional
amounts payable to holders of the Company Shares pursuant to Section 3.3 hereto
(assuming (a) no Common Shares are held by any of Holding, Parent, Acquiror or
any wholly-owned Company Subsidiary and (b) no Dissenting Shares), holders of
Company Options pursuant to Section 3.7 hereto (assuming all Company Options
are terminated thereunder) and holders of Company Warrants (assuming all
Company Warrants are canceled thereunder), in the aggregate, shall equal the
Excess Net Proceeds Amount; provided, however that in no event shall the Common
Merger Consideration exceed $12.00 per share, subject to adjustment as
contemplated by Section 7.4(c). Each of Holding, Parent and Acquiror agree to
take all necessary actions to effect the provisions of the immediately
foregoing sentence, if applicable.
8.11. 401(k) RESTORATION PLAN. The Company shall, and Holding and Parent
shall cause the Surviving Corporation to, pay to each participant in the
Company's 401(k) Restoration Plan (the "RESTORATION PLAN") whose employment
with the Company terminates the amount owing to him under the Restoration Plan
as of the date of termination. Such payment shall be made in accordance with
the terms of the Restoration Plan.
ARTICLE 9
CONDITIONS TO MERGER
9.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of the
Company, Parent and Acquiror to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) the Company Stockholder Approval shall have been obtained;
(b) any applicable waiting period or required approval under the HSR Act,
Non-U.S. Competition Law or any other similar applicable Law required prior to
the completion of the Merger shall have expired or been earlier terminated or
received; and
(c) no Governmental Entity of competent authority or jurisdiction shall
have issued any Law, decision or taken any other action then in effect, which
restrains, enjoins or otherwise prohibits or makes
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illegal the consummation of the Merger; provided, however, that the parties
hereto shall use their commercially reasonable efforts to have any such
restraint, injunction or prohibition removed or vacated.
9.2. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the
Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(a) (i) each of Holding, Parent and Acquiror shall have performed in all
material respects all of its obligations hereunder required to be performed by
it at or prior to the Effective Time, (ii) (A) the representations and
warranties of Holding, Parent and Acquiror contained in this Agreement that are
qualified by reference to a Parent Material Adverse Effect or materiality shall
be true and correct when made and at and as of the Effective Time, as if made
at and as of such time (except for those representations and warranties that
speak as of a specified time, which shall be true and correct as of such
specified time), and (B) all other representations and warranties of Holding,
Parent and Acquiror shall have been true and correct when made and at and as of
the Effective Time, as if made at and as of such time (except for those
representations and warranties that speak as of a specified time, which shall
be true and correct as of such specified time), except such representations and
warranties of Holding, Parent and Acquiror which if incorrect would not be
reasonably likely to have, individually or in the aggregate, a Parent Material
Adverse Effect, and (iii) the Company shall have received a certificate signed
by the Chief Executive Officer or President of each of Holding, Parent and
Acquiror to the foregoing effect.
9.3. CONDITIONS TO THE OBLIGATIONS OF HOLDING, PARENT AND ACQUIROR. The
obligations of Holding, Parent and Acquiror to consummate the Merger are
subject to the satisfaction of the following further conditions:
(a) (i) the Company shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) except to the extent waived in writing by Parent or any
disposition of assets after the date of this Agreement that is permitted
pursuant to this Agreement (A) the representations and warranties of the
Company contained in this Agreement that are qualified by reference to a
Company Material Adverse Effect or materiality shall be true and correct when
made (subject to Section 6.5) and at and as of the Effective Time, as if made
at and as of such time (except for those representations and warranties that
speak as of a specified time, which shall be true and correct as of such
specified time), (B) the representations and warranties set forth in Sections
4.1, 4.2, 4.5, 4.6(b), 4.16, 4.22 and 4.23 that are not qualified by
materiality or Material Adverse Effect shall be true and correct in all
material respects when made (subject to Section 6.5) and at and as of the
Effective Time, as if made at and as of such time (except for those
representations and warranties that speak as of a specified time, which shall
be true and correct as of such specified time), and (C) all other
representations and warranties of the Company shall have been true and correct
when made and at and as of the time of the Effective Time, as if made as of
such time (except for those representations and warranties that speak as of a
specified time, which shall be true and correct as of such specified time),
except for such failures to be true or correct that would not be reasonably
likely to have, individually or in the aggregate, a Company Material Adverse
Effect, provided, however that even if a condition set forth in clause (A), (B)
or (C) of clause (ii) is not satisfied, the condition to the obligations of
Holdings, Parent and Acquiror to consummate the Merger contained in clause (ii)
shall be deemed satisfied if the aggregate Damages to Holding, Parent, the
Surviving Corporation and/or the Company Subsidiaries from all breaches of
representations and warranties (after giving effect to Section 6.5 but without
giving effect to any Material Adverse Effect or materiality qualifications but
excluding any breach that is waived in writing by Parent and any disposition of
assets after the date of this Agreement that is permitted pursuant to this
Agreement) would not be reasonably likely to exceed, individually or in the
aggregate, $20 million, and (iii) Acquiror shall have received a certificate
signed by the Chief Executive Officer or Chief Financial Officer of the Company
to the foregoing effect. The $20 million threshold contained in clause (ii)
shall not be considered evidence either for or against any assertion that a
Material Adverse Effect has occurred.
(b) all consents, approvals, actions, orders, authorizations,
registrations, declarations, announcements and filings set forth on Section
8.1(d) of the Company Disclosure Schedule shall have been obtained or made; and
(c) (i) Holding or Parent shall have received (A) the proceeds of the
Financing on the terms contemplated by the Commitment Letter or (B) an
aggregate of at least $610,000,000 of debt financing on
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terms contemplated by the last sentence of Section 7.5(a) hereto and (ii) in
the event that any Financing or debt financing is placed into escrow and the
Company has approved the terms of such escrow (which approval will not be
unreasonably withheld or delayed), the conditions to the release of such escrow
shall have been satisfied.
ARTICLE 10
TERMINATION
10.1. TERMINATION. This Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time by written notice, whether
before or after the Company Stockholder Approval shall have been obtained:
(a) by mutual written agreement of Holding, Parent, Acquiror and the
Company, in each case duly authorized by the Boards of Directors or a duly
authorized committee thereof;
(b) by either Acquiror or the Company, if
(i) the Merger shall not have been consummated by July 14, 2003 (the
"END DATE"); provided, however, that the right to terminate this Agreement
under this Section 10.1(b)(i) shall not be available to any party whose
breach of any provision of this Agreement has resulted in the failure of
the Merger to occur on or before the date the Merger Agreement is sought
to be terminated pursuant to this clause (i);
(ii) there shall be any Law that makes consummation of the Merger
illegal or otherwise prohibited or any judgment, injunction, order or
decree of any Governmental Entity having competent jurisdiction enjoining
the Company or Acquiror from consummating the Merger is entered and the
injunction, judgment, order or decree shall have become final and
nonappealable and, prior to that termination, the parties shall have used
reasonable best efforts to resist, resolve or lift, as applicable, the
Law, judgment, injunction, order or decree; or
(iii) (A) the Company Stockholder Meeting has been convened and
concluded and (B) the Company Stockholder Approval shall not have been
obtained;
(c) by the Company,
(i) if a breach of or failure to perform in any material respect any
representation, warranty, covenant or agreement on the part of Holding,
Parent or Acquiror set forth in this Agreement shall have occurred which
would cause any of the conditions set forth in Sections 9.1(b) or 9.2(a)
not to be satisfied, and such condition shall be incapable of being
satisfied by the End Date; or
(ii) as contemplated by Section 6.3(d), provided, however that
termination of this Agreement pursuant to this Section 10.1(c)(ii) shall
not be effective until the Termination Fee has been paid to Acquiror in
accordance with Section 10.2(b); or
(d) by Acquiror, if:
(i) a breach of or failure to perform in any material respect any
representation, warranty, covenant or agreement on the part of the Company
set forth in this Agreement shall have occurred which would cause any of
the conditions set forth in Sections 9.1(b) or 9.3(a) not to be satisfied,
and such condition is incapable of being satisfied by the End Date;
(ii) (A) the Board of Directors of the Company, the Special Committee
or any other duly authorized committee of the Board of Directors shall (1)
amend, withdraw, modify, change, condition or qualify the Company
Recommendation in a manner adverse to Holding, Parent and Acquiror; (2)
approve or recommend to the Company Stockholders an Acquisition Proposal
(other than by Holding, Parent, Acquiror or their Affiliates); (3) approve
or recommend that the Company Stockholders tender, or otherwise fail to
recommend the Company Stockholders not to tender, their Company Shares in
any tender or exchange offer that is an Acquisition Proposal (other than
by Holding, Parent, Acquiror or their Affiliates); or (4) approve a
resolution or agree to do any of the
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matters set forth in the immediately foregoing clauses (1) through (3); or
(B) after the third Business Day following Parent's receipt of a Notice of
Superior Proposal unless prior to such termination (x) a new Notice of
Superior Proposal has been delivered with respect to an Acquisition
Proposal by a different Third Party than the prior Notice of Superior
Proposal (in which event, such new Notice of Superior Proposal shall then
be subject to this Section 10.1(d)(ii)(B)), (y) a new Notice of Superior
Proposal has been delivered with respect to a Modified Superior Proposal
(in which event, such new Notice of Superior Proposal shall then be subject
to this Section 10.1(d)(ii)(B)) or (z) the Company shall have irrevocably
withdrawn such Notice of Superior Proposal and terminated all discussions
and negotiations with such Third Party regarding any Acquisition Proposal;
(iii) any Person or group (other than Holding, Parent, Acquiror or
their Affiliates) acquires beneficial ownership of a majority of the
outstanding Company Shares; or
(iv) as contemplated by Section 6.5.
10.2. EFFECT OF TERMINATION.
(a) If this Agreement is terminated pursuant to Section 10.1 (except as
provided in Section 10.2(b) and Section 10.2(c)), there shall be no liability
or obligation on the part of Holding, Parent, Acquiror, the Company or any of
their respective officers, directors, stockholders, agents or Affiliates,
except no such termination shall relieve any party hereto of any liability or
damages resulting from any willful breach of this Agreement; provided that the
provisions of Sections 8.3, 8.7, 10.2, 10.3, 10.4 and Article 11 of this
Agreement shall remain in full force and effect and survive any termination of
this Agreement.
(b) In the event that:
(i) this Agreement is terminated by Acquiror pursuant to Section
10.1(d)(ii)(A)(1) (but only if, prior to the time the Board of Directors,
Special Committee or other committee amended, withdrew, modified, changed,
conditioned or qualified the Company Recommendation, the Company had
received or there had been any public announcement or disclosure of an
Acquisition Proposal), Section 10.1(d)(ii)(A)(2), (3) or (4), Section
10.1(d)(ii)(B), or Section 10.1(d)(iii), the Company shall pay to Parent
(in immediately available funds to an account designated by Parent) on the
next Business Day following such termination a cash amount equal to the
$7,000,000 (the "TERMINATION FEE");
(ii) this Agreement is terminated by the Company pursuant to Section
10.1(c)(ii), then simultaneous with such termination, the Company shall
pay to Acquiror (in immediately available funds to an account designated
by Parent) a cash amount equal to the Termination Fee; or
(iii) (A) this Agreement is terminated pursuant to Section 10.1(b)(i)
(provided that at the time of such termination pursuant to Section
10.1(b)(i), the condition precedent in Section 9.1(b) shall have been
satisfied and the reason for the Closing not having previously occurred
shall not be the failure to satisfy the condition precedent set forth in
Section 9.2(a) or Section 9.3(c)), Section 10.1(b)(iii) or Section
10.1(d)(i) (but only if such termination pursuant to Section 10.1(d)(i)
relates to the breach of or failure to perform in any material respect a
covenant or agreement of the Company), (B) an Acquisition Proposal (with
all percentages included in the definition of Acquisition Proposal
increased to 30% for purposes of this definition) has been made prior to
such termination and (C) a transaction contemplated by an Acquisition
Proposal (with all percentages included in the definition of Acquisition
Proposal increased to 30% for purposes of this definition) is completed or
a definitive agreement is executed by the parties thereto with respect to
an Acquisition Proposal (with all percentages included in the definition of
Acquisition Proposal increased to 30% for purposes of this definition)
within twelve (12) months from the date this Agreement is terminated, the
Company shall pay to Parent (in immediately available funds to an account
designated by Parent) on the next Business Day following the earlier of the
closing of the transaction contemplated by such Acquisition Proposal or the
Company entering into a definitive agreement contemplating such Acquisition
Proposal, a cash amount equal to the Termination Fee. Subject to Section
11.8, in the event that the Termination Fee is paid pursuant to this
Section 10.2(b)(iii), such payment will constitute liquidated damages and
be in lieu of all other damages otherwise receivable by Holding, Parent or
Acquiror and, upon receipt, will be the sole and exclusive remedy for the
matters giving rise thereto.
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(c) If and only if this Agreement is terminated pursuant to Section
10.1(c)(i) or 10.1(b)(i) (but, in the case of Section 10.1(b)(i), only if the
sole reason(s) for termination is the failure of a condition precedent set
forth in Section 9.1(b) and/or 9.3(c)), the parties acknowledge and agree that,
effective immediately upon such termination, the No-Raid Agreement shall be
amended and restated in its entirety, without any action by the parties
thereto, to read as set forth in Section 10.2(c) of the Holding, Parent and
Acquiror Disclosure Schedule.
(d) If and only if all of the conditions precedent in Article 9 have been
satisfied other than those in Section 9.3(c) and the sole reason for the
failure of such condition precedent is the breach of the Subscription Agreement
and/or the Blum Strategic Commitment Letter by the Investors (as defined
therein), Holding hereby assigns to the Company, effective as of such time, all
of its rights to enforce the Subscription Agreement and the Blum Strategic
Commitment Letter.
10.3. FEES AND EXPENSES. Except as otherwise specifically provided herein,
all fees and expenses incurred in connection herewith and the transactions
contemplated hereby shall be paid by the party incurring expenses, whether or
not the Merger is consummated.
10.4. INDEMNIFICATION.
(a) In the event of the termination of this Agreement prior to the
Effective Time (i) pursuant to Section 10.1(c)(i) or (ii) pursuant to Section
10.1(a) or 10.1(b)(i) due solely to the failure of the condition(s) set forth
in Section 9.1(b) and/or or 9.3(c) to be satisfied (in case of a termination
under either Section 10.1(a) or 10.1(b)(i)), then Parent, Holdings and Acquiror
shall, jointly and severally, indemnify and hold the Company and its
Subsidiaries (collectively, "COMPANY INDEMNIFIED PARTIES") harmless from and
against any and all damages incurred by any Company Indemnified Party
(hereinafter "COMPANY LOSSES"), which are caused by (1) the termination or
delivery of notice of termination, during the Covered Period (as defined
below), by any person that is a commercial real estate services broker or
independent contractor of the Company or its Subsidiaries as of February 7,
2003 of his or her employment or independent contractor relationship with the
Company or its Subsidiaries or (2) the termination or substantial diminution,
or notice thereof during the Covered Period, by any Person that is a client of
the Company or its Subsidiaries as of February 7, 2003 of its commercial real
estate services client relationship with the Company or its Subsidiaries,
including early termination of third-party management, tenant representation
and/or brokerage contracts, in each case under clause (1) and clause (2) if
(and only if) such termination or substantial diminution (x) results from the
announcement of discussions among the parties hereto regarding the transactions
contemplated hereby or the announcement of this Agreement or the transactions
contemplated hereby and (y) does not result from the Company's breach of this
Agreement, provided that the maximum aggregate amount of Company Losses for
which the Company Indemnified Parties may be indemnified pursuant to this
Section 10.4 is $50,000,000 and none of Parent, Holdings or Acquiror will be
liable for any Company Losses in excess of such $50,000,000. For the avoidance
of doubt, "Company Losses" shall not include any matters arising out of or
resulting from (x) conditions generally affecting the business or industry in
which the Company or any of its Subsidiaries operate, (y) U.S., U.K., French or
global general economic or political conditions or financial markets in general
or (z) any outbreak or escalation of hostilities (including, without
limitation, any declaration of war by the U.S. Congress) or acts of terrorism.
Company Losses shall not include any reduction in market price or value of the
Company Shares or any other securities of the Company or any of its
Subsidiaries nor shall any such reduction in market price or value be used as
evidence of, or otherwise be deemed relevant to, the determination of any
amount of damages incurred. The amount of Company Losses as a result of an
event specified in clause (1) will be the cost (including any signing bonus) of
replacing the relevant broker or independent contractor with a comparable
broker or independent contractor plus the lost profits of the Company or its
Subsidiaries as a result of any lost revenue. "COVERED PERIOD" means the period
from February 7, 2003 through the date this Agreement is terminated (it being
understood that the period for which damages may arise is not limited to the
Covered Period).
(b) Subject to Section 10.2(c) and Section 11.8, the indemnity provided in
this Section 10.4 shall be the sole and exclusive remedy of the Company
Indemnified Parties against Parent, Holdings or Acquiror at law or equity for
any matter covered by Section 10.4(a).
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ARTICLE 11
MISCELLANEOUS
11.1. NOTICES. All notices, requests and other communications to any party
hereunder shall be in writing (including facsimile or similar writing) and
shall be given,
if to Holding, Parent or Acquiror, to:
CB Richard Ellis Services, Inc.
335 S. Grand Avenue, Suite 3100
Los Angeles, California 90071
Attention: Raymond Wirta
Facsimile Number: (213) 613-3100
with a copy to (which copy shall not be deemed to be notice to Holding,
Parent or Acquiror):
Simpson Thacher & Bartlett
3330 Hillview Avenue
Palo Alto, California 94304
Attention: Richard Capelouto
Facsimile Number: (650) 251-5002
if to the Company, to:
Insignia Financial Group, Inc.
200 Park Avenue
New York, New York 10166
Attention: Adam Gilbert
Facsimile Number: (212) 984-6655
with a copy to (which copy shall not be deemed to be notice to the
Company):
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attention: Arnold S. Jacobs
Facsimile Number: (212) 969-2900
with a copy to (which copy shall not be deemed to be notice to the
Company):
Dechert LLP
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attention: G. Daniel O'Donnell
Facsimile Number: (215) 994-2222
or such other address or facsimile number as a party may hereafter specify for
the purpose by notice to the other parties hereto. Each notice, request or
other communication shall be effective only (a) if given by facsimile, when the
facsimile is transmitted to the facsimile number specified in this Section and
the appropriate facsimile confirmation is received or (b) if given by overnight
courier or personal delivery when delivered at the address specified in this
Section.
11.2. SURVIVAL. The representations and warranties contained herein and in
any certificate or other writing delivered pursuant hereto shall not survive
the Effective Time or the termination of this Agreement. The covenants
contained in Articles 2, 3, 7, and 11 and in Section 8.7 shall survive the
Effective Time.
11.3. AMENDMENTS; NO WAIVERS.
(a) Any provision of this Agreement may be amended or waived prior to the
Effective Time, if, and only if, the amendment or waiver is in writing and
signed, in the case of an amendment, by the Company,
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a member of the Special Committee on behalf of the Special Committee, Parent
and Acquiror or in the case of a waiver, by the party against whom the waiver
is to be effective (if such party is the Company, such waiver shall be signed
also by a member of the Special Committee on behalf of the Special Committee).
(b) At any time prior to the Effective Time, any party hereto may with
respect to any other party hereto (i) extend the time for the performance of
any of the obligations or other acts of such party and (ii) waive any
inaccuracies in the representations and warranties of such party contained
herein or in any document delivered pursuant hereto. No such extension or
waiver shall be deemed or construed as a continuing extension or waiver on any
occasion other than the one on which such extension or waiver was granted or as
an extension or waiver with respect to any provision of this Agreement not
expressly identified in such extension or waiver on the same or any other
occasion. No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by Law.
11.4. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that all or any of the
rights or obligations of Parent or Acquiror may be assigned to any direct or
indirect wholly-owned Subsidiary of such party (which assignment shall not
relieve such assigning party of its obligations hereunder); provided, further,
that other than with respect to the foregoing proviso, no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto. Any purported
assignment in violation hereof shall be null and void.
11.5. COUNTERPARTS; EFFECTIVENESS; THIRD PARTY BENEFICIARIES. This
Agreement may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement shall become effective when each party
hereto shall have received counterparts hereof signed by all of the other
parties hereto. Except as set forth in Sections 7.1 and 7.6, no provision of
this Agreement is intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
11.6. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the internal Laws of the State of Delaware applicable to
contracts executed and fully performed within the state of Delaware.
11.7. JURISDICTION. Except as otherwise expressly provided in this
Agreement, the parties hereto agree that any suit, action or proceeding seeking
to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby shall
be brought in the United States District Court for the District of Delaware or,
if such court does not have jurisdiction over the subject matter of such
proceeding or if such jurisdiction is not available, in the Court of Chancery
of the State of Delaware, County of New Castle, and each of the parties hereby
consents to the exclusive jurisdiction of those courts (and of the appropriate
appellate courts therefrom) in any suit, action or proceeding and irrevocably
waives, to the fullest extent permitted by Law, any objection which it may now
or hereafter have to the laying of the venue of any suit, action or proceeding
in any of those courts or that any suit, action or proceeding which is brought
in any of those courts has been brought in an inconvenient forum. Process in
any suit, action or proceeding may be served on any party anywhere in the
world, whether within or without the jurisdiction of any of the named courts.
Without limiting the foregoing, each party agrees that service of process on it
by notice as provided in Section 11.1 shall be deemed effective service of
process.
11.8. ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at Law or in equity.
11.9. ENTIRE AGREEMENT. This Agreement (together with the exhibits and
schedules hereto), the Voting Agreements, the No-Raid Agreement and the
Confidentiality Agreement constitute the entire
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agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof.
11.10. AUTHORSHIP. The parties agree that the terms and language of this
Agreement were the result of negotiations between the parties and, as a result,
there shall be no presumption that any ambiguities in this Agreement shall be
resolved against any party. Any controversy over construction of this Agreement
shall be decided without regard to events of authorship.
11.11. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of Law or public
policy, all other terms and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon a determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
11.12. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
11.13. HEADINGS; CONSTRUCTION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement (a) words denoting the
singular include the plural and vice versa, (b) "it" or "its" or words denoting
any gender include all genders, (c) the word "including" shall mean "including
without limitation," whether or not expressed, (d) any reference herein to a
Section, Article, Paragraph, Clause or Schedule refers to a Section, Article,
Paragraph or Clause of or a Schedule to this Agreement, unless otherwise
stated, and (e) when calculating the period of time within or following which
any act is to be done or steps taken, the date which is the reference day in
calculating such period shall be excluded and if the last day of such period is
not a Business Day, then the period shall end on the next day which is a
Business Day.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
INSIGNIA FINANCIAL GROUP, INC.
By: /s/ Frank M. Garrison
---------------------
Frank M. Garrison
Office of the Chairman
CBRE HOLDING, INC.
By: /s/ Raymond E. Wirta
---------------------
Raymond E. Wirta
Chief Executive Officer
CB RICHARD ELLIS SERVICES, INC.
By: /s/ Raymond E. Wirta
---------------------
Raymond E. Wirta
Chief Executive Officer
APPLE ACQUISITION CORP.
By: /s/ Raymond E. Wirta
---------------------
Raymond E. Wirta
President
APPENDIX B
OPINION OF
BEAR, STEARNS & CO. INC.
B-1
BEAR STEARNS Bear, Stearns & Co. Inc.
383 Madison Avenue
New York, New York 10179
Tel 212.272.2000
www.bearstearns. com
As of February 17, 2003
Board of Directors and the Special Committee of the Board of Directors
Insignia Financial Group, Inc.
200 Park Avenue
New York, NY 10166
Ladies and Gentlemen:
We understand that Insignia Financial Group, Inc. ("IFG"), CBRE Holding, Inc.,
CB Richard Ellis Services, Inc. ("CBRE") and a subsidiary of CBRE ("Acquisition
Corp.") have entered into an Agreement and Plan of Merger dated February 17,
2003 (the "Agreement"), pursuant to which Acquisition Corp. will merge (the
"Merger") into IFG and holders of IFG common stock will receive $11.00 per
share (the "Purchase Price"), subject to upward adjustment not to exceed $1.00
per share should certain real estate assets be sold for more than a specified
amount of net cash proceeds (generally $45 million net of expenses) plus any
amounts contributed or transferred to the entities holding these assets between
February 17, 2003 and the closing of the Merger. Following consummation of the
Merger, IFG will become a wholly owned subsidiary of CBRE, which is a wholly
owned subsidiary of CBRE Holding, Inc. (the "Transaction").
You have asked us to render our opinion as to whether the Purchase Price is
fair, from a financial point of view, to the shareholders of IFG.
In the course of performing our review and analyses for rendering this opinion,
we have:
o reviewed the Agreement;
o reviewed IFG's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended December 31, 2000 through 2001, its Quarterly
Reports on Form 10-Q for the periods ended March 31, June 30 and
September 30, 2002, and its Reports on Form 8-K for the two years ended
the date hereof;
o reviewed certain operating and financial information relating to IFG's
business and prospects, including estimates for the year ending December
31, 2002 and the budget for the year ending December 31, 2003, provided
to us by IFG management;
o reviewed asset sales projections prepared by IFG's management for
certain development and co-investment projects;
o reviewed projections prepared by IFG's management for the West Village
Houses housing complex ("West Village Houses") as it is currently
operated and projections prepared by IFG's management assuming a variety
of scenarios including some under which the property exits the
Mitchell-Lama Law program, a program for low and moderate income housing
(the "Mitchell-Lama Program");
o reviewed assets held by certain mortgage-backed securities funds, and
reviewed estimated market values for such funds as provided by IFG
management dated as of December 31, 2002 and December 5, 2002, and by a
third party investment bank as of January 31, 2003;
o reviewed an appraisal received in connection with IFG's acquisition of
St. Thomas, USVI dock front and submerged property ("Nautica") in July
2002 (the "Nautica Appraisal");
o met with certain members of IFG's senior management to discuss IFG's
business, operations, historical and projected financial results, future
prospects and the development plans for certain real estate assets;
o reviewed the historical prices, trading multiples and trading volume of
the common stock of IFG;
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o reviewed publicly available financial data, stock market performance
data and trading multiples of companies which we deemed generally
comparable to IFG;
o reviewed the terms of recent mergers and acquisitions of companies which
we deemed generally comparable to IFG and the Transaction;
o discussed with management the letter of intent dated February 6, 2003
between the Company and Prudential Long Island Realty regarding the
purchase of Insignia Residential Group, Inc. (owner of Insignia Douglas
Elliman LLC);
o performed discounted cash flow analyses based on the real estate
investment projections furnished to us by IFG; and
o conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In arriving at our opinion, we have not performed or obtained any independent
appraisal of the assets or liabilities (contingent or otherwise) of IFG, nor
have we been furnished with any such appraisals, other than the Nautica
Appraisal. We have been informed that the Company does not have current
appraisals for any of its investments or interests in real estate or real
estate owning entities (other than the Nautica Appraisal). Bear Stearns does
not appraise real estate and, accordingly, our opinion is necessarily limited
in that respect. We have assumed that the Transaction will be consummated in a
timely manner and in accordance with the terms of the Agreement without any
limitations, restrictions, conditions, amendments or modifications, regulatory
or otherwise, that collectively would have a material effect on IFG.
We have relied upon and assumed, without independent verification, the accuracy
and completeness of the financial and other information, including without
limitation the projections provided to us by IFG. With respect to IFG's
projected financial results we have relied on representations that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of IFG as to the expected
future performance of IFG. With respect to the estimates of market value for
the mortgage-backed securities funds we assumed that they have been reasonably
prepared on bases reflecting the best then available estimates and judgments of
the investment banker from which inquiry was made or the senior management of
IFG, as the case may be, as to the then current market value of such funds.
With respect to the projections for the anticipated asset sales, we have relied
on management's representations that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
senior management of IFG as to the expected future proceeds (and timing
thereof) from such sales. With respect to the West Village Houses projections,
at your direction and because of the speculative nature of the plan for exiting
the Mitchell-Lama Program and achieving the forecasted projections, we have not
assigned any particular weighting to the likelihood of any particular set of
projections. With respect to the Nautica Appraisal, we have assumed that the
appraisal was reasonably prepared on bases reflecting the best then available
estimates and judgments of the appraiser as to the value of Nautica. We have
not assumed any responsibility for the independent verification of any such
information or of the projections provided to us, and we have further relied
upon the assurances of the senior management of IFG that they are unaware of
any facts that would make the information, projections or appraisal provided to
us incomplete or misleading.
We do not express any opinion as to the price or range of prices at which the
shares of common stock of IFG may trade subsequent to the announcement of the
Transaction.
We have acted as a financial advisor to IFG in connection with the Transaction
and will receive a customary fee for such services, a substantial portion of
which is contingent on successful consummation of the Transaction. In the
ordinary course of business, Bear Stearns and its affiliates may actively trade
the equity and debt securities and/or bank debt of IFG for our own account and
for the account of our customers and, accordingly, may at any time hold a long
or short position in such securities or bank debt.
It is understood that this letter is intended for the benefit and use of the
Special Committee and the Board of Directors of IFG and does not constitute a
recommendation to the Special Committee or the Board of Directors of IFG or any
holders of IFG common stock as to how to vote in connection with the
Transaction. This opinion does not address IFG's underlying business decision
to pursue the Transaction, the relative merits of the Transaction as compared
to any alternative business strategies that might exist
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for IFG or the effects of any other transaction in which IFG might engage. This
letter is not to be used for any other purpose, or be reproduced, disseminated,
quoted from or referred to at any time, in whole or in part, without our prior
written consent; provided, however, that this letter may be included in its
entirety in any proxy statement to be distributed to the holders of IFG common
stock in connection with the Transaction. Our opinion is subject to the
assumptions and conditions contained herein and is necessarily based on
economic, market and other conditions, and the information made available to
us, as of the date hereof. We assume no responsibility for updating or revising
our opinion based on circumstances or events occurring after the date hereof.
Based on and subject to the foregoing, it is our opinion that, as of the date
hereof, the Purchase Price is fair, from a financial point of view, to the
shareholders of IFG.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: /s/ Charles S. Edelman
-------------------------
Senior Managing Director
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APPENDIX C
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to Section 228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or more
shares or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251 (g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Section 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
(a) Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
(b) Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
(c) Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
(d) Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a, b, and c, of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the time of the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsections (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days
after the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holders' shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class series of stock of such constituent corporation that
are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger
or consolidation, the record date shall
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be such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the da y next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceeding as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) the Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or
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compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
of the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or together distributions on the stock (except dividends
or other distributions payable to stockholders of record at a date which is
prior to the effective date of the merger or consolidation); provided, however;
that if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX D
CBRE HOLDING'S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF CBRE HOLDING, INC. AND FINANCIAL STATEMENT SCHEDULE
PAGE
-----
Independent Auditors' Report .......................................................... D-2
Report of Independent Public Accountants .............................................. D-3
Consolidated Balance Sheets at December 31, 2002 and 2001 ............................. D-4
Consolidated Statements of Operations for the twelve months ended December 31, 2002,
for the period from February 20, 2001 (inception) through December 31, 2001, for the
period from January 1, 2001 through July 20, 2001 and for the twelve months ended
December 31, 2000 .................................................................... D-5
Consolidated Statements of Cash Flows for the twelve months ended December 31, 2002,
for the period from February 20, 2001 (inception) through December 31, 2001, for the
period from January 1, 2001 through July 20, 2001 and for the twelve months ended
December 31, 2000 .................................................................... D-6
Consolidated Statements of Stockholders' Equity for the twelve months ended December
31, 2002, for the period from February 20, 2001 (inception) through December 31, 2001,
for the period from January 1, 2001 through July 20, 2001 and for the twelve months
ended December 31, 2000 .............................................................. D-7
Consolidated Statements of Comprehensive (Loss) Income for the twelve months ended
December 31, 2002, for the period from February 20, 2001 (inception) through December
31, 2001, for the period from January 1, 2001 through July 20, 2001 and for the twelve
months ended December 31, 2000 ....................................................... D-9
Notes to Consolidated Financial Statements ............................................ D-10
Quarterly Results of Operations (Unaudited) ........................................... D-51
FINANCIAL STATEMENT SCHEDULE:
Schedule II -Valuation and Qualifying Accounts ........................................
All other schedules are omitted because they are either not applicable, not
required or the information required is included in the Consolidated Financial
Statements, including the notes thereto.
D-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CBRE Holding, Inc.:
We have audited the accompanying consolidated balance sheet of CBRE
Holding, Inc., a Delaware corporation, and subsidiaries (the "Company") as of
December 31, 2002 and the related consolidated statements of operations, cash
flows, stockholders' equity and comprehensive income (loss) for the twelve
months then ended. Our audit also included the 2002 financial statement
schedule listed in the Index to Consolidated Financial Statements and Financial
Statement Schedule at Item 8. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 2002 financial statements and
the financial statement schedule based on our audit. The consolidated financial
statements and the financial statement schedule of the Company as of December
31, 2001 and for the period from February 20, 2001 (inception) through December
31, 2001 and the consolidated financial statements and financial statement
schedules of CB Richard Ellis Services, Inc. (the "Predecessor") for the period
from January 1, 2001 through July 20, 2001 and for the twelve months ended
December 31, 2000 were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements
and stated that such 2001 and 2000 financial statement schedules, when
considered in relation to the 2001 and 2000 basic financial statements taken as
a whole, presented fairly, in all material respects, the information set forth
therein, in their report dated February 26, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and the results of their operations and their cash flows for
the twelve months then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
2002 financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 8 to the Consolidated Financial Statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002 to conform to Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142").
As discussed above, the consolidated financial statements of the Company
as of December 31, 2001 and for the period from February 20, 2001 (inception)
through December 31, 2001 and the financial statements of the Predecessor for
the period from January 1, 2001 through July 20, 2001 and for the twelve months
ended December 31, 2000, were audited by other auditors who have ceased
operations. As described in Note 8, these consolidated financial statements
have been revised to include the transitional disclosures required by SFAS 142,
which was adopted by the Company as of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 8 with respect to 2001 and 2000
included (i) comparing the previously reported net income (loss) to the
previously issued consolidated financial statements and the adjustments to
reported net income (loss) representing amortization expense (including any
related tax effects) recognized in those periods relating to goodwill that is
no longer being amortized as a result of applying SFAS 142 to the Company's and
the Predecessor's underlying analysis obtained from management, and (ii)
testing the mathematical accuracy of the reconciliation of adjusted net income
(loss) to reported net income (loss), and the related earnings (loss)-per-share
amounts. In our opinion, the disclosures for 2001 and 2000 in Note 8 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 consolidated financial statements of the
Company and the Predecessor other than with respect to such disclosures, and
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 19, 2003
D-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of CBRE Holding, Inc.:
We have audited the accompanying consolidated balance sheet of CBRE
Holding, Inc., a Delaware corporation, (the Company) as of December 31, 2001
and related consolidated statements of operations, cash flows, stockholders'
equity and comprehensive income for the period from February 20, 2001
(inception) through December 31, 2001. We have also audited the accompanying
consolidated balance sheet of CB Richard Ellis Services, Inc. (Predecessor) as
of December 31, 2000, and the related consolidated statements of operations,
cash flows, stockholders' equity and comprehensive (loss) income for the period
from January 1, 2001 to July 20, 2001, and the twelve months ended December 31,
2000 and 1999. These financial statements and the schedule referred to below
are the responsibility of the Company's and the Predecessor's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CBRE Holding, Inc. as of
December 31, 2001 and the results of their operations and their cash flows for
the period from February 20, 2001 (inception) through December 31, 2001 and the
financial position of CB Richard Ellis Services, Inc. (the Predecessor) as of
December, 31 2000 and the results of their operations and their cash flows for
the period from January 1, 2001 to July 20, 2001, and the twelve months ended
December 31, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 26, 2002
NOTE: The report of Arthur Andersen LLP presented above is a copy of a
previously issued Arthur Andersen LLP report. This report has not been reissued
by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent to the
inclusion of its report in this Form 10-K.
NOTE: The consolidated financial statements as of December 31, 2000 and for the
period from February 20, 2001 (inception) through December 31, 2001, the period
from January 1, 2001 through July 20, 2001 and for the twelve months ended
December 31, 2000 have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (see Note 8). The report of Arthur Andersen LLP
presented above does not extend to these revisions.
D-3
CBRE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
-----------------------------
2002 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................................. $ 79,701 $ 57,450
Receivables, less allowance for doubtful accounts of $10,892 and $11,748 at
December 31, 2002 and 2001, respectively ............................................. 166,213 156,434
Warehouse receivable .................................................................. 63,140 106,790
Prepaid expenses ...................................................................... 9,748 8,325
Deferred tax assets, net .............................................................. 18,723 32,155
Other current assets .................................................................. 8,415 8,493
---------- ----------
Total current assets ............................................................... 345,940 369,647
Property and equipment, net ............................................................. 66,634 68,451
Goodwill ................................................................................ 577,137 609,543
Other intangible assets, net of accumulated amortization of $7,739 and $3,153 at
December 31, 2002 and 2001, respectively ............................................... 91,082 38,117
Cash surrender value of insurance policies, deferred compensation plan .................. 63,642 69,385
Investments in and advances to unconsolidated subsidiaries .............................. 50,208 42,535
Deferred tax assets, net ................................................................ 36,376 54,002
Other assets ............................................................................ 93,857 102,832
---------- ----------
Total assets .......................................................................... $1,324,876 $1,354,512
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................................................. $ 102,415 $ 82,982
Compensation and employee benefits payable ............................................ 63,734 68,118
Accrued bonus and profit sharing ...................................................... 103,858 85,188
Income taxes payable .................................................................. 15,451 21,736
Short-term borrowings:
Warehouse line of credit ............................................................. 63,140 106,790
Other ................................................................................ 47,925 48,828
---------- ----------
Total short-term borrowings .......................................................... 111,065 155,618
Current maturities of long-term debt .................................................... 10,711 10,223
---------- ----------
Total current liabilities .......................................................... 407,234 423,865
Long-Term Debt:
11 1/4% senior subordinated notes, net of unamortized discount of $3,057 and $3,263 at
December 31, 2002 and 2001, respectively ............................................. 225,943 225,737
Senior secured term loans ............................................................. 211,000 220,975
16% senior notes, net of unamortized discount of $5,107 and $5,344 at
December 31, 2002 and 2001, respectively ............................................. 61,863 59,656
Other long-term debt .................................................................. 12,327 15,695
---------- ----------
Total long-term debt ............................................................... 511,133 522,063
Deferred compensation liability ......................................................... 106,252 105,104
Other liabilities ....................................................................... 43,301 46,661
---------- ----------
Total liabilities .................................................................. 1,067,920 1,097,693
Minority interest ....................................................................... 5,615 4,296
Commitments and contingencies
Stockholders' Equity:
Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,793,254 and
1,755,601 shares issued and outstanding (including treasury shares) at December 31,
2002 and 2001, respectively .......................................................... 17 17
Class B common stock; $0.01 par value; 25,000,000 shares authorized; 12,624,813 shares
issued and outstanding at December 31, 2002 and 2001 ................................. 127 127
Additional paid-in capital ............................................................ 240,574 240,541
Notes receivable from sale of stock ................................................... (4,800) (5,884)
Accumulated earnings .................................................................. 36,153 17,426
Accumulated other comprehensive (loss) income ......................................... (18,998) 296
Treasury stock at cost, 110,174 shares at December 31, 2002 ........................... (1,732) --
---------- ----------
Total stockholders' equity ......................................................... 251,341 252,523
---------- ----------
Total liabilities and stockholders' equity ......................................... $1,324,876 $1,354,512
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
D-4
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMPANY COMPANY PREDECESSOR PREDECESSOR
-------------- -------------- ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
-------------- -------------- ----------------- ----------------
FEBRUARY 20,
TWELVE 2001 TWELVE
MONTHS (INCEPTION) PERIOD FROM MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
-------------- -------------- ----------------- ----------------
Revenue ......................................... $1,170,277 $ 562,828 $ 607,934 $1,323,604
Costs and expenses:
Commissions, fees and other incentives ......... 554,942 266,764 280,813 628,097
Operating, administrative and other ............ 493,949 216,246 296,386 551,528
Depreciation and amortization .................. 24,614 12,198 25,656 43,199
Equity income from unconsolidated
subsidiaries ................................. (9,326) (1,554) (2,874) (6,505)
Merger-related and other nonrecurring
charges ...................................... 36 6,442 22,127 --
----------- ---------- ----------- -----------
Operating income (loss) ......................... 106,062 62,732 (14,174) 107,285
Interest income ................................. 3,272 2,427 1,567 2,554
Interest expense ................................ 60,501 29,717 20,303 41,700
----------- ---------- ----------- -----------
Income (loss) before provision for income taxes 48,833 35,442 (32,910) 68,139
Provision for income taxes ...................... 30,106 18,016 1,110 34,751
----------- ---------- ----------- -----------
Net income (loss) ............................... $ 18,727 $ 17,426 $ (34,020) $ 33,388
=========== ========== =========== ===========
Basic earnings (loss) per share ................. $ 1.25 $ 2.22 $ (1.60) $ 1.60
=========== ========== =========== ===========
Weighted average shares outstanding for basic
earnings (loss) per share ...................... 15,025,308 7,845,004 21,306,584 20,931,111
=========== ========== =========== ===========
Diluted earnings (loss) per share ............... $ 1.23 $ 2.20 $ (1.60) $ 1.58
=========== ========== =========== ===========
Weighted average shares outstanding for diluted
earnings (loss) per share ...................... 15,222,111 7,909,797 21,306,584 21,097,240
=========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
D-5
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
COMPANY COMPANY
-------------- --------------
CBRE CBRE
HOLDING, HOLDING,
INC. INC.
-------------- --------------
FEBRUARY 20,
TWELVE 2001
MONTHS (INCEPTION)
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 18,727 $ 17,426
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 24,614 12,198
Amortization of deferred financing costs .............................. 3,322 1,316
Deferred compensation deferrals ....................................... 15,925 16,151
Gain on sale of properties, businesses and servicing rights ........... (6,287) (2,868)
Equity income from unconsolidated subsidiaries ........................ (9,326) (1,554)
Provision for litigation, doubtful accounts and other ................. 7,649 2,714
Deferred income tax provision (benefit) ............................... 5,158 (1,948)
(Increase) decrease in receivables ..................................... (4,770) (18,379)
Decrease (increase) in cash surrender value of insurance policies,
deferred compensation plan ............................................ 5,743 (4,517)
Increase (decrease) in accounts payable and accrued expenses ........... 3,678 (5,835)
Increase (decrease) in compensation and employee benefits
payable and accrued bonus and profit sharing .......................... 17,541 64,677
Increase (decrease) in income taxes payable ............................ 3,225 13,578
Decrease in other liabilities .......................................... (15,203) (9,260)
Other operating activities, net ........................................ (5,114) 7,635
---------- -----------
Net cash provided by (used in) operating activities ................... 64,882 91,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions received ...................... (14,266) (6,501)
Proceeds from sale of properties, businesses and servicing rights ...... 6,378 2,108
Purchases of investments ............................................... (1,012) (1,081)
Investment in property held for sale ................................... -- (40,174)
Acquisition of businesses including net assets acquired, intangibles
and goodwill .......................................................... (14,811) (214,702)
Other investing activities, net ........................................ (419) (1,043)
---------- -----------
Net cash used in investing activities ................................. (24,130) (261,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit facility ................... 238,000 113,750
Repayment of revolver and swingline credit facility .................... (238,000) (113,750)
(Repayment of) proceeds from senior notes and other loans, net ......... (8,205) (1,188)
Proceeds from senior secured term loans ................................ -- 235,000
Repayment of senior secured term loans ................................. (9,351) (4,675)
Proceeds from non-recourse debt related to property held for sale ...... -- 37,179
Repayment of 8 7/8% senior subordinated notes .......................... -- (175,000)
Proceeds from 11 1/4% senior subordinated notes ........................ -- 225,629
Proceeds from 16% senior notes ......................................... -- 65,000
Proceeds from revolving credit facility ................................ -- --
Repayment of revolving credit facility ................................. -- (235,000)
Payment of deferred financing fees ..................................... (443) (21,750)
Proceeds from issuance of common stock ................................. 180 92,156
Other financing activities, net ........................................ (19) (3,520)
---------- -----------
Net cash (used in) provided by financing activities ................... (17,838) 213,831
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 22,914 43,772
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD ...................... 57,450 13,662
Effect of currency exchange rate changes on cash ...................... (663) 16
---------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ............................ $ 79,701 $ 57,450
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ................................. $ 52,647 $ 26,126
========== ===========
Income taxes, net of refunds ......................................... $ 19,142 $ 5,061
========== ===========
Non-cash investing and financing activities:
Fair value of assets acquired ........................................ $ -- $ (492,220)
Fair value of liabilities assumed .................................... -- 719,829
Issuance of stock .................................................... -- 148,641
Goodwill ............................................................. (14,811) (590,952)
---------- -----------
Net cash paid for acquisitions ....................................... $ (14,811) $ (214,702)
========== ===========
PREDECESSOR PREDECESSOR
----------------- ----------------
CB RICHARD CB RICHARD
ELLIS SERVICES, ELLIS SERVICES,
INC. INC.
----------------- ----------------
TWELVE
PERIOD FROM MONTHS
JANUARY 1, 2001 ENDED
THROUGH DECEMBER 31,
JULY 20, 2001 2000
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (34,020) $ 33,388
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 25,656 43,199
Amortization of deferred financing costs .............................. 1,152 2,069
Deferred compensation deferrals ....................................... 16,447 43,557
Gain on sale of properties, businesses and servicing rights ........... (10,009) (10,184)
Equity income from unconsolidated subsidiaries ........................ (2,874) (6,505)
Provision for litigation, doubtful accounts and other ................. 3,872 5,125
Deferred income tax provision (benefit) ............................... (1,569) (4,083)
(Increase) decrease in receivables ..................................... 26,970 (12,545)
Decrease (increase) in cash surrender value of insurance policies,
deferred compensation plan ............................................ (11,665) (32,761)
Increase (decrease) in accounts payable and accrued expenses ........... (5,491) (3,201)
Increase (decrease) in compensation and employee benefits
payable and accrued bonus and profit sharing .......................... (101,312) 24,418
Increase (decrease) in income taxes payable ............................ (16,357) 11,074
Decrease in other liabilities .......................................... (11,305) (12,806)
Other operating activities, net ........................................ 275 114
--------- ----------
Net cash provided by (used in) operating activities ................... (120,230) 80,859
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions received ...................... (14,814) (23,668)
Proceeds from sale of properties, businesses and servicing rights ...... 9,544 17,495
Purchases of investments ............................................... (3,202) (23,413)
Investment in property held for sale ................................... (2,282) --
Acquisition of businesses including net assets acquired, intangibles
and goodwill .......................................................... (1,924) (6,561)
Other investing activities, net ........................................ 539 3,678
--------- ----------
Net cash used in investing activities ................................. (12,139) (32,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit facility ................... -- --
Repayment of revolver and swingline credit facility .................... -- --
(Repayment of) proceeds from senior notes and other loans, net ......... 446 588
Proceeds from senior secured term loans ................................ -- --
Repayment of senior secured term loans ................................. -- --
Proceeds from non-recourse debt related to property held for sale ...... -- --
Repayment of 8 7/8% senior subordinated notes .......................... -- --
Proceeds from 11 1/4% senior subordinated notes ........................ -- --
Proceeds from 16% senior notes ......................................... -- --
Proceeds from revolving credit facility ................................ 195,000 179,000
Repayment of revolving credit facility ................................. (70,000) (229,000)
Payment of deferred financing fees ..................................... (8) (120)
Proceeds from issuance of common stock ................................. -- --
Other financing activities, net ........................................ 792 (3,991)
----------- ----------
Net cash (used in) provided by financing activities ................... 126,230 (53,523)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (6,139) (5,133)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD ...................... 20,854 27,844
Effect of currency exchange rate changes on cash ...................... (1,053) (1,857)
----------- ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ............................ $ 13,662 $ 20,854
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ................................. $ 18,457 $ 38,352
=========== ==========
Income taxes, net of refunds ......................................... $ 19,083 $ 27,607
=========== ==========
Non-cash investing and financing activities:
Fair value of assets acquired ........................................ $ (105) $ (2,287)
Fair value of liabilities assumed .................................... -- 41
Issuance of stock .................................................... -- --
Goodwill ............................................................. (1,819) (4,315)
----------- ----------
Net cash paid for acquisitions ....................................... $ (1,924) $ (6,561)
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
D-6
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMPANY
--------------------------------------------
CBRE HOLDING, INC.
--------------------------------------------
NOTES
CLASS A CLASS B ADDITIONAL RECEIVABLE
COMMON COMMON PAID-IN FROM SALE
STOCK STOCK CAPITAL OF STOCK
--------- --------- ------------ -----------
Balance, February 20, 2001 .... $-- $ -- $ -- $ $--
Net income .................... -- -- -- --
Contribution of deferred
compensation plan stock
fund units ................... -- -- 18,771 --
Contribution of shares by
certain shareholders of
CB Richard Ellis Services,
Inc .......................... -- 80 121,732 --
Net issuance of Class A
common stock ................. 17 -- 27,672 --
Issuance of Class B common
stock ........................ -- 47 72,366 --
Notes receivable from sale of
stock ........................ -- -- -- (5,884)
Foreign currency translation
gain ......................... -- -- -- --
--- ---- -------- --------
Balance, December 31, 2001 .... 17 127 240,541 (5,884)
Net income .................... -- -- -- --
Issuance of Class A common
stock ........................ -- -- 460 (180)
Net cancellation of deferred
compensation stock fund
units ........................ -- -- (427) --
Net collection on notes
receivable from sale of
stock ........................ -- -- -- 1,264
Purchase of common stock ...... -- -- -- --
Minimum pension liability
adjustment, net of tax ....... -- -- -- --
Foreign currency translation
loss ......................... -- -- -- --
--- ---- -------- --------
Balance, December 31, 2002 .... $17 $127 $240,574 $ (4,800)
=== ==== ======== ========
COMPANY
------------------------------------------------------------------
CBRE HOLDING, INC.
-----------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
---------------------------
MINIMUM FOREIGN
ACCUMULATED PENSION CURRENCY TREASURY
EARNINGS LIABILITY TRANSLATION STOCK TOTAL
------------- ------------- ------------- ----------- -----------
Balance, February 20, 2001 .... $ -- $ -- $ -- $ --
Net income .................... 17,426 -- -- -- 17,426
Contribution of deferred
compensation plan stock
fund units ................... -- -- -- -- 18,771
Contribution of shares by
certain shareholders of
CB Richard Ellis Services,
Inc .......................... -- -- -- -- 121,812
Net issuance of Class A
common stock ................. -- -- -- -- 27,689
Issuance of Class B common
stock ........................ -- -- -- -- 72,413
Notes receivable from sale of
stock ........................ -- -- -- -- (5,884)
Foreign currency translation
gain ......................... -- -- 296 -- 296
------- --------- -------- -------- -------
Balance, December 31, 2001 .... 17,426 -- 296 -- 252,523
Net income .................... 18,727 -- -- -- 18,727
Issuance of Class A common
stock ........................ -- -- -- -- 280
Net cancellation of deferred
compensation stock fund
units ........................ -- -- -- -- (427)
Net collection on notes
receivable from sale of
stock ........................ -- -- -- -- 1,264
Purchase of common stock ...... -- -- -- (1,732) (1,732)
Minimum pension liability
adjustment, net of tax ....... -- (17,039) -- -- (17,039)
Foreign currency translation
loss ......................... -- $ -- (2,255) -- (2,255)
------- --------- -------- -------- -------
Balance, December 31, 2002 .... $36,153 $ (17,039) $ (1,959) $ (1,732) $ 251,341
======= ========= ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
D-7
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR
------------------------------------
CB RICHARD ELLIS SERVICES, INC.
------------------------------------
NOTES
ADDITIONAL RECEIVABLE
COMMON PAID-IN FROM SALE
STOCK CAPITAL OF STOCK
--------- ------------- ------------
Balance, December 31, 1999 ................. $ 213 $ 355,893 $ (8,087)
Net income ................................. -- -- --
Common stock issued for incentive
plans ..................................... 4 4,310 (4,310)
Contributions, deferred compensation
plan ...................................... -- 2,729 --
Deferred compensation plan co-match ........ -- 907 --
Net collection on notes receivable from
sale of stock ............................. -- (550) 550
Amortization of cheap and restricted
stock ..................................... -- 342 --
Tax deduction from issuance of stock ....... -- 580 --
Foreign currency translation loss .......... -- -- --
Purchase of common stock ................... -- (43) --
------- ----------- ---------
Balance, December 31, 2000 ................. 217 364,168 (11,847)
Net loss ................................... -- -- --
Common stock issued for incentive
plans ..................................... -- 360 --
Contributions, deferred compensation
plan ...................................... -- 1,004 --
Deferred compensation plan co-match ........ -- 492 --
Net collection on notes receivable from
sale of stock ............................. -- (742) 1,001
Amortization of cheap and restricted
stock ..................................... 1 210 --
Tax deduction from issuance of stock ....... -- 1,479 --
Foreign currency translation loss .......... -- -- --
Cancellation of common stock ............... -- (54) --
Cancellation of common stock and
elimination of historical equity due to
the merger ................................ (218) (366,917) 10,846
------- ----------- ---------
Balance, July 20, 2001 ..................... $ -- $ -- $ --
======= =========== =========
PREDECESSOR
---------------------------------------------------------
CB RICHARD ELLIS SERVICES, INC.
---------------------------------------------------------
ACCUMULATED
ACCUMULATED OTHER
(DEFICIT) COMPREHENSIVE TREASURY
EARNINGS LOSS STOCK TOTAL
------------- --------------- ------------- -------------
Balance, December 31, 1999 ................. $ (122,485) $ (1,928) $ (13,869) $ 209,737
Net income ................................. 33,388 -- -- 33,388
Common stock issued for incentive
plans ..................................... -- -- -- 4
Contributions, deferred compensation
plan ...................................... -- -- -- 2,729
Deferred compensation plan co-match ........ -- -- -- 907
Net collection on notes receivable from
sale of stock ............................. -- -- -- --
Amortization of cheap and restricted
stock ..................................... -- -- 342
Tax deduction from issuance of stock ....... -- -- -- 580
Foreign currency translation loss .......... -- (10,330) -- (10,330)
Purchase of common stock ................... -- -- (1,975) (2,018)
---------- --------- --------- -----------
Balance, December 31, 2000 ................. (89,097) (12,258) (15,844) 235,339
Net loss ................................... (34,020) -- -- (34,020)
Common stock issued for incentive
plans ..................................... -- -- -- 360
Contributions, deferred compensation
plan ...................................... -- -- -- 1,004
Deferred compensation plan co-match ........ -- -- -- 492
Net collection on notes receivable from
sale of stock ............................. -- -- -- 259
Amortization of cheap and restricted
stock ..................................... -- -- -- 211
Tax deduction from issuance of stock ....... -- -- -- 1,479
Foreign currency translation loss .......... -- (7,106) -- (7,106)
Cancellation of common stock ............... -- -- -- (54)
Cancellation of common stock and
elimination of historical equity due to
the merger ................................ 123,117 19,364 15,844 (197,964)
---------- --------- --------- -----------
Balance, July 20, 2001 ..................... $ -- $ -- $ -- $ --
========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
D-8
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(DOLLARS IN THOUSANDS)
COMPANY COMPANY PREDECESSOR PREDECESSOR
------------------- ------------------- ------------------ ------------------
CBRE CBRE CB RICHARD ELLIS CB RICHARD ELLIS
HOLDING, INC. HOLDING, INC. SERVICES, INC. SERVICES, INC.
------------------- ------------------- ------------------ ------------------
FEBRUARY 20, 2001 PERIOD FROM
TWELVE (INCEPTION) JANUARY 1, 2001 TWELVE
MONTHS ENDED THROUGH THROUGH MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 JULY 20, 2001 DECEMBER 31, 2000
------------------- ------------------- ------------------ ------------------
Net income (loss) ......................... $ 18,727 $17,426 $ (34,020) $ 33,388
Other comprehensive (loss) income:
Foreign currency translation (loss) gain . (2,255) 296 (7,106) (10,330)
Minimum pension liability adjustment, net
of tax ................................. (17,039) -- -- --
--------- ------- --------- ---------
Total other comprehensive (loss) income ... (19,294) 296 (7,106) (10,330)
--------- ------- --------- ---------
Comprehensive (loss) income ............... $ (567) $17,722 $ (41,126) $ 23,058
========= ======= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
D-9
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
CBRE Holding, Inc., a Delaware corporation, was incorporated on February
20, 2001 as Blum CB Holding Corporation. On March 26, 2001, Blum CB Holding
Corporation changed its name to CBRE Holding, Inc. (the Company). The Company
and its former wholly owned subsidiary, Blum CB Corporation (Blum CB), a
Delaware corporation, were created to acquire all of the outstanding shares of
CB Richard Ellis Services, Inc. (CBRE), an international real estate services
firm. Prior to July 20, 2001, the Company was a wholly owned subsidiary of RCBA
Strategic Partners, LP (RCBA Strategic), which is an affiliate of Richard C.
Blum, a director of the Company and CBRE.
On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to
an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among
the Company, CBRE and Blum CB. Blum CB was merged with and into CBRE, with CBRE
being the surviving corporation. The operations of the Company after the 2001
Merger are substantially the same as the operations of CBRE prior to the 2001
Merger. In addition, the Company has no substantive operations other than its
investment in CBRE.
CBRE Holding, Inc. is a holding company that conducts its operations
primarily through direct and indirect operating subsidiaries. In the United
States (US), the Company operates through CB Richard Ellis, Inc. and L.J.
Melody, in the United Kingdom (UK) through CB Hillier Parker and in Canada
through CB Richard Ellis Limited. CB Richard Ellis Investors, LLC (CBRE
Investors) and its foreign affiliates conduct business in the US, Europe and
Asia. The Company operates in 47 countries through various subsidiaries and
pursuant to cooperation agreements. Approximately 73% of the Company's revenue
is generated from the US and 27% is generated from the rest of the world.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and majority-owned and controlled subsidiaries. Additionally, the
consolidated financial statements include the accounts of CBRE prior to the
2001 Merger as CBRE is considered the predecessor to the Company for purposes
of Regulation S-X. The equity attributable to minority shareholders' interests
in subsidiaries is shown separately in the accompanying consolidated balance
sheets. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company's investments in unconsolidated subsidiaries in which it has
the ability to exercise significant influence over operating and financial
policies, but does not control, are accounted for under the equity method.
Accordingly, the Company's share of the earnings of these equity-method basis
companies is included in consolidated net income. All other investments held on
a long-term basis are valued at cost less any impairment in value.
Use of Estimates
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America, which require management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results may
differ from these estimates. Management believes that these estimates provide a
reasonable basis for the fair presentation of its financial condition and
results of operations.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash and highly liquid
investments with an original maturity of less than three months. The Company
controls certain cash and cash equivalents as an agent for its investment and
property management clients. These amounts are not included in the consolidated
balance sheets (See Note 17).
D-10
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation,
or in the case of capitalized leases, at the present value of the future
minimum lease payments. Depreciation and amortization of property and equipment
is computed primarily using the straight-line method over estimated useful
lives ranging up to ten years. Leasehold improvements are amortized over the
term of the respective leases, excluding options to renew. The Company
capitalizes expenditures that materially increase the life of the related
assets and expenses the cost of maintenance and repairs.
The Company periodically reviews property and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If any of the significant assumptions
inherent in this assessment materially change due to market, economic, and/or
other factors, the recoverability is assessed based on the revised assumptions.
If this analysis indicates that such assets are considered to be impaired, the
impairment is recognized in the period the changes occur and represents the
amount by which the carrying value exceeds the fair value of the asset.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid by the Company
over the fair value of the tangible and intangible assets and liabilities of
CBRE at July 20, 2001, the date of the 2001 Merger. Other intangible assets
include a trademark, which was separately identified as a result of the 2001
Merger, is not being amortized and has an indefinite estimated life. The
remaining other intangible assets represent management contracts and loan
servicing rights and are amortized on a straight-line basis over estimated
useful lives ranging up to ten years.
The Company fully adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. This statement requires the Company to
perform at least an annual assessment of impairment of goodwill and other
intangible assets deemed to have indefinite useful lives based on assumptions
and estimates of fair value and future cash flow information. In June 2002, the
Company completed the first step of the transitional goodwill impairment test
and determined that no impairment existed as of January 1, 2002. The Company
also completed its required annual impairment test as of October 1, 2002 and
determined that no impairment existed as of that date. An independent
third-party valuation firm was engaged to perform all of the impairment tests
(See Note 8).
Deferred Financing Costs
Costs incurred in connection with financing activities are deferred and
amortized using the straight-line method over the terms of the related debt
agreements ranging up to 10 years. Amortization of these costs is charged to
interest expense in the accompanying consolidated statements of operations.
Total deferred costs, net of accumulated amortization, included in other assets
in the accompanying consolidated balance sheets were $20.5 million and $23.3
million, as of December 31, 2002 and 2001, respectively.
Revenue Recognition
Real estate commissions on sales are recorded as income upon close of
escrow or upon transfer of title. Real estate commissions on leases are
generally recorded as income once the Company satisfies all obligations under
the commission agreement. A typical commission agreement provides that the
Company earns a portion of the lease commission upon the execution of the lease
agreement by the tenant, while the remaining portion(s) of the lease commission
is earned at a later date, usually upon tenant occupancy. The existence of any
significant future contingencies will result in the delay of recognition of
revenue until such contingencies are satisfied. For example, if the Company
does not earn all or a portion of the lease commission until the tenant pays
their first month's rent and the lease agreement provides the tenant with a
free rent period, the Company delays revenue recognition until cash rent is
paid by the tenant. Investment management and property management fees are
recognized when
D-11
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earned under the provisions of the related agreements. Appraisal fees are
recorded after services have been rendered. Loan origination fees are
recognized at the time the loan closes and the Company has no significant
remaining obligations for performance in connection with the transaction, while
loan servicing fees are recorded to revenue as monthly principal and interest
payments are collected from mortgagors. Other commissions, consulting fees and
referral fees are recorded as income at the time the related services have been
performed unless significant future contingencies exist.
In establishing the appropriate provisions for trade receivables, the
Company makes assumptions with respect to their future collectibility. The
Company's assumptions are based on an individual assessment of a customer's
credit quality as well as subjective factors and trends, including the aging of
receivables balances. In addition to these individual assessments, in general,
outstanding trade accounts receivable amounts that are greater than 180 days
are fully provided for.
Business Promotion and Advertising Costs
The costs of business promotion and advertising are expensed as incurred
in accordance with Statement of Position 93-7, "Reporting on Advertising
Costs." Business promotion and advertising costs of $42.4 million, $17.0
million, $30.4 million and $57.0 million were included in operating,
administrative and other expenses for the twelve months ended December 31,
2002, the period from February 20, 2001 (inception) through December 31, 2001,
the period from January 1, 2001 through July 20, 2001 and the twelve months
ended December 31, 2000.
Foreign Currencies
The financial statements of subsidiaries located outside the US are
generally measured using the local currency as the functional currency. The
assets and liabilities of these subsidiaries are translated at the rates of
exchange at the balance sheet date and income and expenses are translated at
the average monthly rate. The resulting translation adjustments are included in
the accumulated other comprehensive (loss) income component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in the results of operations. The aggregate transaction gains and
losses included in the accompanying consolidated statements of operations are a
$6.4 million gain, a $0.2 million loss, a $0.3 million gain, and a $3.1 million
loss for the twelve months ended December 31, 2002, the period February 20,
2001 (inception) through December 31, 2001, the period from January 1, 2001
through July 20, 2001 and the twelve months ended December 31, 2000,
respectively.
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net income (loss) and other
comprehensive (loss) income. Accumulated other comprehensive (loss) income
consists of foreign currency translation adjustments and a minimum pension
liability adjustment. Foreign currency translation adjustments exclude income
tax expense (benefit) given that earnings of non-US subsidiaries are deemed to
be reinvested for an indefinite period of time. The income tax benefit
associated with the minimum pension liability adjustment is $7.3 million for
the twelve months ended December 31, 2002.
Accounting for Transfers and Servicing
The Company follows SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" in accounting for loan
sales and acquisition of servicing rights. SFAS No. 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
the approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred
at fair value. Servicing assets are amortized over the period of estimated
servicing income with write-off required when control is surrendered. The
Company's recording of servicing rights at their fair value resulted in gains,
which have been reflected in the accompanying consolidated statements of
operations. Corresponding
D-12
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
servicing assets of approximately $2.1 million and $1.8 million, at December
31, 2002 and 2001, respectively, are included in other intangible assets
reflected in the accompanying consolidated balance sheets.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures about the effect on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Finally,
SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. For
entities that voluntarily change to the fair value based method of accounting
for stock-based employee compensation, the transition and the disclosure
provisions are effective for fiscal years ending after December 15, 2002. The
amendments to APB No. 28 are effective for interim periods beginning after
December 15, 2002. The Company will adopt the interim disclosure provisions of
SFAS No. 148 for the quarter ended March 31, 2003.
However, the Company continues to account for stock-based compensation
under the recognition and measurement principles of APB Opinion No. 25 and does
not plan to voluntarily change to the fair value based method of accounting for
stock-based compensation. Under this method, the Company does not recognize
compensation expense for options that were granted at or above the market price
of the underlying stock on the date of grant. Had compensation expense been
determined consistent with SFAS No. 123, the Company's net income (loss) and
per share information would have been reduced to the following pro forma
amounts (dollars in thousands, except per share data):
COMPANY COMPANY PREDECESSOR PREDECESSOR
-------------- -------------- ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
-------------- -------------- ----------------- ----------------
FEBRUARY 20,
TWELVE 2001 TWELVE
MONTHS (INCEPTION) PERIOD FROM MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
-------------- -------------- ----------------- ----------------
Net Income (Loss):
As Reported ......... $ 18,727 $ 17,426 $ (34,020) $ 33,388
Pro Forma ........... 18,204 17,154 (36,778) 30,393
Basic EPS:
As Reported ......... 1.25 2.22 (1.60) 1.60
Pro Forma ........... 1.21 2.19 (1.73) 1.45
Diluted EPS:
As Reported ......... 1.23 2.20 (1.60) 1.58
Pro Forma ........... 1.20 2.17 (1.73) 1.44
These pro forma amounts may not be representative of future pro forma
results.
The weighted average fair value of options and warrants granted was $2.33
for the twelve months ended December 31, 2002, $1.86 for the period from
February 20, 2001 (inception) through December 31, 2001 and $6.72 for the
twelve months ended December 31, 2000. There were no stock options or warrants
granted by CBRE for the period from January 1, 2001 through July 20, 2001.
Dividend yield is excluded from the calculation since it is the present
intention of the Company to retain all earnings. The fair value
D-13
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of each option grant and warrant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
COMPANY COMPANY PREDECESSOR
-------------- -------------- ----------------
CBRE CBRE CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES,
INC. INC. INC.
-------------- -------------- ----------------
FEBRUARY 20,
TWELVE 2001 TWELVE
MONTHS (INCEPTION) MONTHS
ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
-------------- -------------- ----------------
Risk-free interest rate ......... 4.06% 4.69% 6.52%
Expected volatility ............. 0.00% 0.00% 58.06%
Expected life ................... 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the Black-Scholes model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each period.
The computation of diluted earnings (loss) per share further assumes the
dilutive effect of stock options, stock warrants, contingently issuable shares
and other stock-based compensation programs. Contingently issuable shares
represent unvested stock fund units in the deferred compensation plan. In
accordance with SFAS No. 128, "Earnings Per Share" these shares are included in
the dilutive earnings per share calculation under the treasury stock method
(see Note 15).
Income Taxes
Income taxes are accounted for under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities are determined based on temporary differences between
the financial reporting and the tax basis of assets and liabilities and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured by applying enacted tax rates and laws to taxable
income in the years in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement applies
to legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and (or) the
normal operation of a long-lived asset, except for certain obligations of
lessees. The statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of its fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Adoption of this statement is not
expected to have any material impact on the Company's financial position or
results of operations.
D-14
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds the following pronouncements:
o SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
o SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
o SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements"
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions.
The provisions of this statement related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions
of this statement related to SFAS No. 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this statement shall be
effective for financial statements issued on or after May 15, 2002. Adoption of
this statement has not had and is not expected to have any material effect on
the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan
and supersedes Emerging Issues Task Force Issue No. 94.3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." SFAS No. 146 is to be applied prospectively to exit or disposal
plan activities initiated after December 31, 2002. The Company will account for
such costs, if any, under SFAS No. 146 on a prospective basis.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No.
5, "Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures" and
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." This
interpretation also rescinds FIN 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others." FIN 45 expands the disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the fair
value of an obligation assumed under certain guarantees. The disclosure
requirements of FIN 45 are effective as of December 31, 2002 and require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 has not had and is not expected to have a material
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which is an interpretation of Accounting Research Bulletin
(ARB) No. 51, "Consolidated Financial Statements." This interpretation
addresses consolidation of entities that are not controllable through voting
interests or in which the equity investors do not bear the residual economic
risks. The objective of this interpretation is to provide guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests and results of operations of a VIE need
to be consolidated with its primary beneficiary. A company that holds variable
interests in an entity will need to consolidate the entity if the company's
interest in the VIE is such that the company will absorb a majority of the
VIE's expected losses and/or receive a majority of the VIE's expected residual
returns or if the VIE does not have sufficient equity at risk to finance its
activities without additional subordinated
D-15
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
financial support from other parties. For VIEs in which a significant (but not
majority) variable interest is held, certain disclosures are required. The
consolidation requirements of FIN 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to existing VIEs in the
first fiscal year or interim period beginning after June 15, 2003. Certain
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the VIE was established. The adoption of this
interpretation is not expected to have a material impact on the Company's
financial position or results of operations.
Reclassifications
Certain reclassifications, which do not have an effect on net income, have
been made to the 2001 and 2000 financial statements to conform to the 2002
presentation.
3. 2001 MERGER
On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to
an Amended and Restated Agreement and Plan of Merger dated May 31, 2001 (the
2001 Merger Agreement) among the Company, CBRE and Blum CB. Blum CB was merged
with and into CBRE, with CBRE being the surviving corporation. The operations
of the Company after the 2001 Merger are substantially the same as the
operations of CBRE prior to the 2001 Merger. In addition, the Company has no
substantive operations other than its investment in CBRE. As such, CBRE is
considered the predecessor to the Company for purposes of Regulation S-X.
At the effective time of the 2001 Merger, CBRE became a wholly owned
subsidiary of the Company. Pursuant to the terms of the 2001 Merger Agreement,
each issued and outstanding share of common stock of CBRE was converted into
the right to receive $16.00 in cash, except for: (i) shares of common stock of
CBRE owned by the Company and Blum CB immediately prior to the 2001 Merger,
totaling 7,967,774 shares, which were cancelled, (ii) treasury shares and
shares of common stock of CBRE owned by any of its subsidiaries, which were
cancelled and (iii) shares of CBRE held by stockholders who perfected appraisal
rights for such shares in accordance with Delaware law. All shares of common
stock of CBRE outstanding prior to the 2001 Merger were acquired by the Company
and subsequently cancelled. Immediately prior to the 2001 Merger, the
following, collectively referred to as the buying group, contributed to the
Company all the shares of CBRE's common stock that he or it directly owned in
exchange for an equal number of shares of Class B common stock of the Company:
Blum Strategic Partners, L.P. (Blum Strategic), formerly known as RCBA
Strategic Partners, L.P., FS Equity Partners III, L.P. (FSEP III), a Delaware
limited partnership, FS Equity Partners International, L.P. (FSEP
International), a Delaware limited partnership, The Koll Holding Company, a
California corporation, Frederic V. Malek, a director of the Company and CBRE,
Raymond E. Wirta, the Chief Executive Officer and a director of the Company and
CBRE, and Brett White, the President and a director of the Company and CBRE.
Such shares of common stock of CBRE, which totaled 7,967,774 shares of common
stock, were then cancelled. In addition, the Company offered to purchase for
cash, options outstanding to acquire common stock of CBRE at a purchase price
per option equal to the greater of the amount by which $16.00 exceeded the
exercise price of the option, if at all, or $1.00. In connection with the 2001
Merger, CBRE purchased its outstanding options on behalf of the Company, which
were recorded as merger-related and other nonrecurring charges by CBRE in the
period from January 1, 2001 to July 20, 2001.
The funding to complete the 2001 Merger, as well as the refinancing of
substantially all of the outstanding indebtedness of CBRE, was obtained
through: (i) the cash contribution of $74.8 million from the sale of Class B
common stock of the Company for $16.00 per share, (ii) the sale of shares of
Class A common stock of the Company for $16.00 per share to employees and
independent contractors of CBRE, (iii) the sale of 625,000 shares of Class A
common stock of the Company to the California Public Employees' Retirement
System for $16.00 per share, (iv) the issuance and sale by the Company of
65,000 units for $65.0 million to DLJ Investment Funding, Inc. and other
purchasers, which units consist of $65.0
D-16
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million in aggregate principal amount of 16% Senior Notes due July 20, 2011 and
339,820 shares of Class A common stock of the Company, (v) the issuance and
sale by Blum CB of $229.0 million in aggregate principal amount of 11 1/4%
Senior Subordinated Notes due June 15, 2011 for $225.6 million (which were
assumed by CBRE in connection with the 2001 Merger) and (vi) borrowings by CBRE
under a new $325.0 million senior credit facility with Credit Suisse First
Boston (CSFB) and other lenders.
Following the 2001 Merger, the common stock of CBRE was delisted from the
New York Stock Exchange. CBRE also successfully completed a tender offer and
consent solicitation for all of the outstanding principal amount of its 8 7/8%
Senior Subordinated Notes due 2006 (the Subordinated Notes). The Subordinated
Notes were purchased at $1,079.14 for each $1,000 principal amount of
Subordinated Notes, which included a consent payment of $30.00 per $1,000
principal amount of Subordinated Notes. The Company also repaid the outstanding
balance of CBRE's existing revolving credit facility. The Company entered into
the 2001 Merger in order to enhance the flexibility to operate CBRE's existing
businesses and to develop new ones.
4. PURCHASE ACCOUNTING
The aggregate finalized purchase price for the acquisition of CBRE was
approximately $399.5 million, which included: (1) shares of the Company's Class
B common stock, valued at $16.00 per share, and warrants to acquire shares of
the Company's Class B common stock issued to members of the buying group in
exchange for shares of common stock of CBRE contributed to the Company
immediately prior to the 2001 Merger and the cancellation of warrants to
acquire common stock of CBRE; (2) $16.00 per share in cash paid to owners of
common stock of CBRE, excluding shares owned by members of the buying group
discussed above; (3) allocations in CBRE's deferred compensation plan (the DCP)
from vested stock fund units, each of which was valued at $16.00 and which was
entitled to one underlying share of CBRE common stock upon distribution from
the DCP prior to the 2001 Merger, to other investment alternatives available
under the DCP, in each case at the election of the applicable participant; (4)
vested stock fund units held in the DCP, each of which was valued at $16.00 and
which was converted to the right to receive one underlying share of the
Company's Class A common stock upon distribution from the DCP after the 2001
Merger, that participants elected to continue to hold after the 2001 Merger;
(5) unvested stock fund units held in the DCP, each of which was valued at
$16.00 and which were automatically converted to the right to receive one
underlying share of the Company's Class A common stock upon distribution from
the DCP after the 2001 Merger and (6) direct costs incurred in connection with
the 2001 Merger.
The 2001 Merger was accounted for as a purchase by the Company. Prior to
the 2001 Merger, no single member of the buying group, nor any combination
thereof, controlled CBRE. After the completion of the 2001 Merger, Blum
Strategic has control of CBRE. The shares of common stock of CBRE directly
owned by Blum Strategic prior to the 2001 Merger, which were included in the
shares owned by the buying group contributed to the Company, were valued at
Blum Strategic's book value in the determination of the purchase price. All
other shares of common stock of CBRE acquired by the Company were accounted for
at a fair value of $16.00 per share in the determination of the purchase price.
As such, the 2001 Merger was accounted for as a step purchase acquisition in
accordance with SFAS No. 141, "Business Combinations," and the net assets of
CBRE acquired by the Company were adjusted to 86.5% of their estimated fair
value.
The preliminary purchase accounting adjustments of the Company were
recorded in 2001 in the accompanying consolidated financial statements as of
and for any periods subsequent to July 20, 2001. During 2002, the Company
finalized the purchase price allocation, which included finalizing the fair
values of all assets acquired and liabilities assumed as of the 2001 Merger
date. The excess of the purchase price paid by the Company over the finalized
fair value of the assets and liabilities of CBRE at the date of the 2001 Merger
was approximately $594.9 million and is included in goodwill in the
accompanying consolidated balance sheet as of December 31, 2002. This
represents a $28.3 million reduction to what was
D-17
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
originally estimated and reported at December 31, 2001. This net decrease was
mainly due to the adjustment, net of the related tax impact, of certain
intangible assets to their estimated fair values as of the acquisition date,
which were finalized based on independent third party appraisals during 2002
(See Note 8 for additional information).
5. BASIS OF PREPARATION
The accompanying consolidated balance sheets as of December 31, 2002 and
2001, and the consolidated statements of operations, cash flows and
stockholders' equity for the twelve months ended December 31, 2002 and for the
period from February 20, 2001 (inception) through December 31, 2001, reflect
the consolidated balance sheets, results of operations, cash flows and
stockholders' equity of the Company from inception and also include the
consolidated financial statements of CBRE from the date of the 2001 Merger,
including all material adjustments required under the purchase method of
accounting. For purposes of Regulation S-X, CBRE is considered the predecessor
to the Company. As such, the historical financial statements of CBRE prior to
the 2001 Merger are included in the accompanying consolidated financial
statements, including the consolidated statements of operations, cash flows and
stockholders' equity for the period from January 1, 2001 through July 20, 2001
and for the twelve months ended December 31, 2000 (collectively "Predecessor
financial statements"). The Predecessor financial statements have not been
adjusted to reflect the acquisition of CBRE by the Company. As such, the
consolidated financial statements of the Company after the 2001 Merger are not
directly comparable to the Predecessor financial statements prior to the 2001
Merger.
Unaudited pro forma results of the Company, assuming the 2001 Merger had
occurred as of January 1, 2001, are presented below. These pro forma results
have been prepared for comparative purposes only and include certain
adjustments, such as increased interest expense as a result of debt acquired to
finance the 2001 Merger. The 2001 proforma information excludes $18.3 million
of merger-related and other nonrecurring charges. These pro forma results do
not purport to be indicative of what operating results would have been and may
not be indicative of future operating results (dollars in thousands, except
share data):
TWELVE MONTHS
ENDED
DECEMBER 31,
2001
--------------
Revenue ................................................................. $ 1,170,762
Operating income ........................................................ $ 76,496
Net loss ................................................................ $ (1,640)
Basic and diluted loss per share ........................................ $ (0.11)
Weighted average shares outstanding for basic and diluted loss per share 15,025,308
6. ACQUISITIONS AND DISPOSITIONS
During 2001, the Company acquired a professional real estate services firm
in Mexico for an aggregate purchase price of approximately $1.7 million in
cash. The Company also purchased the remaining ownership interests that it did
not already own in CB Richard Ellis/Hampshire, L.L.C. for a purchase price of
approximately $1.8 million in cash.
During 2000, the Company acquired five companies with an aggregate
purchase price of approximately $3.4 million in cash, $0.7 million in notes,
plus additional payments over the next five years based on acquisition earnout
agreements. These payments will supplement the purchase price and be recorded
as additional goodwill when paid, as applicable. The most significant
acquisition in 2000 was the purchase of Boston Mortgage Capital Corporation
(Boston Mortgage) by L.J. Melody for approximately $2.1 million, plus
supplemental payments based on an acquisition earnout agreement. Boston
Mortgage
D-18
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
provides further mortgage banking penetration into the northeastern part of the
US. It services approximately $1.8 billion in loans covering roughly 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.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (dollars in thousands):
DECEMBER 31
----------------------------
2002 2001
------------ -------------
Leasehold improvements ............................ $ 20,000 $ 19,710
Furniture and equipment ........................... 116,268 126,864
Equipment under capital leases .................... 13,925 27,541
--------- ----------
150,193 174,115
Accumulated depreciation and amortization ......... (83,559) (105,664)
--------- ----------
Property and equipment, net ...................... $ 66,634 $ 68,451
========= ==========
Depreciation expense was $20.8 million for the twelve months ended
December 31, 2002, $9.1 million for the period from February 20, 2001
(inception) through December 31, 2001, $12.6 million for the period from
January 1, 2001 through July 20, 2001 and $19.2 million for the twelve months
ended December 31, 2000.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 replaces APB
Opinion No. 16, "Business Combinations," and requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001. It also provides guidance on purchase accounting related to the
recognition of intangible assets. Under SFAS No. 142, goodwill and other
intangible assets deemed to have indefinite useful lives are no longer
amortized but are subject to impairment tests, on an annual basis, at a
minimum, or whenever events or circumstances occur indicating goodwill might be
impaired. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values and be reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company adopted SFAS No. 141 for all business combinations completed
after June 30, 2001 and fully adopted SFAS No. 142 effective January 1, 2002.
The Company identified its reporting units and determined the carrying value of
each reporting unit by assigning assets and liabilities, including existing
goodwill and intangible assets, to those units for purposes of performing the
required transitional goodwill impairment assessment.
In June 2002, the Company completed the first step of the transitional
goodwill impairment test, which entailed comparing the fair value of each
reporting unit to its carrying value. The Company determined that no impairment
existed at the effective date of the implementation of the new standard. The
Company also completed its required annual goodwill impairment test as of
October 1, 2002 and determined that no impairment existed as of that date.
Had the Company accounted for goodwill consistent with the provisions of
SFAS No. 142 in prior periods, the Company's net income (loss) would have been
affected as follows (dollars in thousands, except share data):
D-19
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMPANY COMPANY PREDECESSOR PREDECESSOR
-------------- -------------- ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
-------------- -------------- ----------------- ----------------
FEBRUARY 20,
TWELVE 2001 TWELVE
MONTHS (INCEPTION) PERIOD FROM MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
-------------- -------------- ----------------- ----------------
Reported net income (loss) .............................. $ 18,727 $ 17,426 $ (34,020) $ 33,388
Add back amortization of goodwill, net of taxes ......... -- -- 7,701 14,054
-------- -------- --------- --------
Adjusted net income (loss) .............................. $ 18,727 $ 17,426 $ (26,319) $ 47,442
======== ======== ========= ========
BASIC EARNINGS (LOSS) PER SHARE:
Reported earnings (loss) per share ...................... $ 1.25 $ 2.22 $ (1.60) $ 1.60
Add back goodwill amortization per share ................ -- -- 0.36 0.67
-------- -------- --------- --------
Adjusted basic earnings (loss) per share ................ $ 1.25 $ 2.22 $ (1.24) $ 2.27
======== ======== ========= ========
DILUTED EARNINGS (LOSS) PER SHARE:
Reported earnings (loss) per share ...................... $ 1.23 $ 2.20 $ (1.60) $ 1.58
Add back goodwill amortization per share ................ -- -- 0.36 0.67
-------- -------- --------- --------
Adjusted diluted earnings (loss) per share .............. $ 1.23 $ 2.20 $ (1.24) $ 2.25
======== ======== ========= ========
The Company has finalized the fair value of all assets and liabilities as
of the 2001 Merger date. The resulting changes in the carrying amount of
goodwill for the twelve months ended December 31, 2002, are as follows (dollars
in thousands):
AMERICAS EMEA ASIA PACIFIC TOTAL
------------ ---------- -------------- -----------
Balance at January 1, 2002 ...................... $ 510,188 $ 96,637 $2,718 $ 609,543
Reclassed (to) from intangible assets .......... (57,841) 3,617 -- (54,224)
Purchase accounting adjustments related to prior
acquisitions ................................. 15,321 5,809 688 21,818
--------- -------- ------ ---------
Balance at December 31, 2002 .................... $ 467,668 $106,063 $3,406 $ 577,137
========= ======== ====== =========
Intangible assets totaled $91.1 million, net of accumulated amortization
of $7.7 million, as of December 31, 2002 and are comprised of the following
(dollars in thousands):
AS OF DECEMBER 31, 2002
------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
---------------- -------------
Amortizable intangible assets
Management contracts .......... $18,887 $5,605
Loan servicing rights ......... 16,234 2,134
------- ------
Total ......................... $35,121 $7,739
======= ======
Unamortizable intangible assets
Trademark ...................... $63,700
=======
In accordance with SFAS No. 141, the trademark was separately identified
as a result of the 2001 Merger and has an indefinite life. The management
contracts are being amortized over their weighted average useful lives of
approximately 8.6 years and the loan servicing rights are being amortized over
their weighted average useful lives of approximately 10.0 years. Amortization
expense related to these
D-20
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
intangible assets was $3.8 million for the year ended December 31, 2002. The
estimated amortization expense for the five years ending December 31, 2007
approximates $3.8 million, $3.7 million, $3.7 million, $3.4 million and $3.4
million, respectively.
9. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Investments in and advances to unconsolidated subsidiaries as of December
31, 2002 and 2001 are as follows (dollars in thousands):
DECEMBER 31
----------------------
INTEREST 2002 2001
---------- ---------- ---------
CB Richard Ellis Strategic Partners, LP .......... 2.9% $10,690 $ 8,490
CB Commercial/Whittier Partners, LP .............. 50.0% 8,816 10,159
Global Innovation Partners, LLC .................. 4.9% 6,228 1,468
Strategic Partners II, LP. ....................... 3.4% 5,965 --
Ikoma CB Richard Ellis KK ........................ 20.0% 4,782 4,132
KB Opportunity Investors ......................... 45.0% 1,857 4,499
CB Richard Ellis/Pittsburgh, LP .................. 50.0% 1,461 1,108
CB Richard Ellis Corporate Partners, LLC ......... 9.1% -- 3,855
Other ............................................ * 10,409 8,824
------- -------
Total ............................................ $50,208 $42,535
======= =======
----------
* Various interests with varying ownership rates.
Combined condensed financial information for the entities accounted for
using the equity method is as follows (dollars in thousands):
Condensed Balance Sheets Information:
DECEMBER 31
-------------------------
2002 2001
------------ ----------
Current assets ................. $ 127,635 $ 92,427
Noncurrent assets .............. 1,552,546 866,224
Current liabilities ............ 108,463 51,064
Noncurrent liabilities ......... 664,241 392,357
Minority interest .............. 3,938 265
Condensed Statements of Operations Information:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
------------------- ------------------- ------------------
Net revenue .................... $349,121 $286,138 $241,902
Income from operations ......... 78,171 60,259 59,936
Net income ..................... 81,498 30,098 50,183
Included in other current assets in the accompanying consolidated balance
sheets is a note receivable from the Company's equity investment in Investor
1031, LLC in the amount of $1.2 million as of December 31, 2002. This note was
issued on June 20, 2002, bears interest at 20.0% per annum and is due for
repayment on July 15, 2003.
The Company's investment management business involves investing the
Company's own capital in certain real estate investments with clients,
including its equity investments in CB Richard Ellis Strategic
D-21
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Partners, LP, Global Innovation Partners, LLC and other co-investments included
in the table above. The Company has provided investment management, property
management, brokerage, appraisal and other professional services to these
equity investees and earned revenues from these co-investments of $22.4
million, $15.4 million and $7.3 million during the years ended December 31,
2002, 2001 and 2000, respectively.
10. OTHER ASSETS
The following table summarizes the items included in other assets (dollars
in thousands):
DECEMBER 31
-----------------------
2002 2001
---------- ----------
Property held for sale ................ $45,883 $ 42,456
Deferred financing costs, net ......... 20,467 23,346
Deposits .............................. 8,714 6,505
Cost investments ...................... 6,524 5,768
Notes receivable ...................... 4,943 4,895
Employee loans (1) .................... 4,089 --
Deferred compensation assets .......... 1,440 3,520
Prepaid pension costs ................. -- 13,588
Miscellaneous ......................... 1,797 2,754
------- --------
Total ................................. $93,857 $102,832
======= ========
----------
(1) See Note 22 for additional information.
11. EMPLOYEE BENEFIT PLANS
CBRE HOLDING, INC., THE COMPANY
Option Plans and Warrants. As part of the 2001 Merger, the Company issued
255,477 warrants to purchase shares of Class B common stock with an exercise
price of $30.00 per share. These warrants do not vest until August 26, 2007 and
expire on August 27, 2007. The Company also issued 1,520,207 options to acquire
Class A common stock at an exercise price of $16.00 per share. These options
vest and are exercisable in 20% increments over a five-year period ending on
July 20, 2006. All options and warrants will become fully vested and
exercisable upon change in control of the Company.
CB RICHARD ELLIS SERVICES, INC., THE PREDECESSOR
Option Plans and Warrants. At the effective time of the 2001 Merger, each
holder of an option to acquire CBRE's common stock, whether or not vested, had
the right to receive, in consideration for the cancellation of his or her
options, an amount per share of common stock equal to the greater of (i) the
amount by which $16.00 exceeded the exercise price of the option, if any, or
(ii) $1.00, reduced in each case by applicable withholding taxes. Employees
holding warrants to acquire shares of CBRE received $1.00 per share of common
stock underlying the warrant. Warrants held by non-employees, other than FS
Equity Partners III, L.P. and FS Equity Partners International, L.P. who
received warrants to acquire shares of the Company's Class B common stock, were
cancelled and no payments were made to such shareholders. As of December 31,
2001, there were no options or warrants outstanding to acquire CBRE's stock.
The options and warrants outstanding prior to the 2001 Merger were issued
in connection with various acquisitions and employee stock-based compensation
plans, had exercise prices that ranged from $10.00 to $36.75, with vesting
periods that ranged up to 5 years and expired at various dates through August
2010.
D-22
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's and the Predecessor's option
plans and warrants is presented in the tables below:
COMPANY
--------------------------------------------------------
CBRE HOLDING, INC.
--------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISABLE EXERCISE
SHARES PRICE SHARES PRICE
------------- ---------- ------------- -----------
Outstanding at February 20, 2001 ......... -- $ -- -- $ --
Granted .................................. 1,775,684 18.01
Forfeited ................................ (17,186) 16.00
--------- ------ ------- -------
Outstanding at December 31, 2001 ......... 1,758,498 18.03 -- --
Granted .................................. 123,873 16.00
Forfeited ................................ (175,295) 16.00
--------- ------ ------- -------
Outstanding at December 31, 2002 ......... 1,707,076 $ 18.10 277,575 $ 16.00
========= ======= ======= =======
PREDESSOR
--------------------------------------------------------------------
CB RICHARD ELLIS SERVICES, INC.
--------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISABLE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ---------------- ------------- ---------------
Outstanding at December 31, 1999 .................... 3,075,356 $ 20.71 770,756 $ 21.86
Granted ............................................. 487,710 24.81
Forfeited/Expired ................................... (223,056) 19.84
--------- -------- ------- --------
Outstanding at December 31, 2000 .................... 3,340,010 21.25 1,824,665 23.90
Exercised ........................................... (86,521) 12.89
Forfeited/Expired ................................... (93,370) 20.27
Paid and/or cancelled as a result of the merger ..... (3,160,119) 21.50
---------- -------- --------- --------
Outstanding at July 20, 2001 ........................ -- $ -- -- $ --
========== ======== ========= ========
Option plans and warrants outstanding at December 31, 2002 and their
related weighted average price and life information is presented below:
EXERCISABLE OPTIONS
OUTSTANDING OPTIONS AND WARRANTS AND WARRANTS
------------------------------------------------ ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTURAL LIFE PRICE EXERCISABLE PRICE
----------------- ------------- ------------------- ---------- ------------- -----------
$16.00 .......... 1,451,599 8.59 $ 16.00 277,575 $ 16.00
$30.00 .......... 255,477 4.66 30.00 -- --
--------- -------- ------- -------
1,707,076 $ 18.10 277,575 $ 16.00
========= ======== ======= =======
Deferred Compensation Plan (the DCP). In 1994, CBRE implemented the 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 at some future date these deferred
amounts invested in interest bearing accounts, which are an unsecured liability
of the Company, in shares of common stock of the Company, where elections are
recorded to additional paid-in capital or in insurance
D-23
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
products which function like mutual funds. The Company has elected to fund a
portion of its obligation for deferrals in these insurance products, but is not
obligated to do so in the future.
As part of the 2001 Merger, the DCP was amended so that each stock fund
unit was converted to the right to receive one share of Class A common stock of
the Company. Each participant in the DCP who was a US employee or an
independent contractor in specified states and had vested stock fund units
prior to the 2001 Merger was permitted to make one of the following elections:
(i) convert the value of his or her vested stock fund units, based upon the
value of $16.00 per stock unit, into any of the insurance mutual fund
alternatives or the Interest Index Fund II provided under the DCP, (ii)
continue to hold the vested stock fund units in his or her account under the
DCP or (iii) transfer amounts invested in insurance mutual fund alternatives
into DCP stock fund units. In accordance with a change in control provision
included in the terms of the DCP, stock fund units associated with the 1999
Company matching contribution, which were unvested prior to the 2001 Merger,
became vested upon completion of the 2001 Merger, but remained as stock fund
units.
Each stock fund unit that was unvested prior to the 2001 Merger remained
in participants' accounts, but after the 2001 Merger was converted to the right
to receive one share of Class A common stock of the Company. These unvested
stock fund units have been accounted for as a deferred compensation asset. The
deferred compensation asset will be amortized as compensation expense over the
remaining vesting period for such stock fund units in accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," with $1.8 million charged to compensation expense for the twelve
months ended December 31, 2002 and $0.9 million charged to compensation expense
for the period from February 20, 2001 (inception) through December 31, 2001.
The accompanying consolidated balance sheets include the unamortized balances
totaling $1.9 million and $1.4 million in other current assets and other
assets, respectively, as of December 31, 2002. Subsequent to the 2001 Merger,
no new deferrals are allowed in stock fund units.
In 2001, the Company announced a match for the Plan Year 2000, effective
July 2001, in the amount of $8.0 million to be invested in an interest bearing
account on behalf of participants. The 2000 Company Match vests at 20% per
year, and will be fully vested by December 2005. The related compensation
expense will be amortized over the vesting period. The amounts charged to
expense for the 2000 Company match were $1.7 million for the twelve months
ended December 31, 2002, $0.7 million for the period from February 20, 2001
(inception) through December 31, 2001 and $0.2 million for the period from
January 1, 2001 through July 20, 2001.
Included in the Company's accompanying consolidated balance sheets is the
accumulated non-stock liability of $106.3 million and $105.1 million at
December 31, 2002 and 2001, respectively, and the assets (in the form of
insurance) set aside to cover the liability of $63.6 million and $69.4 million
as of December 31, 2002 and 2001, respectively. In addition, the Company's
deferred stock liability, included in additional paid-in capital, totaled $18.2
million and $18.8 million at December 31, 2002 and 2001, respectively.
Stock Purchase Plans. Prior to the 2001 Merger, CBRE had restricted stock
purchase plans covering select key executives including senior management. A
total of 500,000 and 550,000 shares of common stock were reserved for issuance
under CBRE's 1999 and 1996 Equity Incentive Plans, respectively. The shares
were issued to senior executives for a purchase price equal to the greater of
$18.00 and $10.00 per share or fair market value, respectively. The purchase
price for these shares was paid either in cash or by delivery of a full
recourse promissory note. All promissory notes related to the 1999 Equity
Incentive Plan were repaid as part of the 2001 Merger. The majority of the
notes related to the 1996 Equity Incentive Plan were also repaid, with the
remaining unpaid outstanding balances of $0.6 million and $1.0 million as of
December 31, 2002 and 2001, respectively, included in notes receivable from
sale of stock in the accompanying consolidated statements of stockholders'
equity. As part of the 2001 Merger, the CBRE shares related to these
outstanding promissory notes were exchanged for shares of Class B common stock
of the Company.
D-24
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bonuses. The Company has bonus programs covering select key employees,
including senior management. Awards are based on the position and performance
of the employee and the achievement of pre-established financial, operating and
strategic objectives. The amounts charged to expense for bonuses were $40.2
million for the twelve months ended December 31, 2002, $18.0 million for the
period from February 20, 2001 (inception) through December 31, 2001, $16.5
million for the period from January 1, 2001 through July 20, 2001 and $49.8
million for the twelve months ended December 31, 2000.
Capital Accumulation Plan (the Cap Plan). The Cap Plan is a defined
contribution profit sharing plan under Section 401(k) of the Internal Revenue
Code and is the Company's only such plan. Generally, a US employee of the
Company is eligible to participate in the plan if the employee is at least 21
years old. The Cap Plan provides for participant contributions as well as
discretionary employer contributions. A participant is allowed to contribute to
the Cap Plan from 1% to 15%, in whole percentages of his or her compensation,
subject to limits imposed by the U.S. Internal Revenue Code. Each year, the
Company determines the amount of employer contributions, if any, it will
contribute to the Cap Plan based on the performance and profitability of the
Company's consolidated U.S. operations. The Company's contributions for the
year are allocated to participants who are actively employed on the last day of
the plan year in proportion to each participant's pre-tax contributions for
that year, up to 5% of the participant's compensation. In connection with the
Cap Plan, the Company incurred no expense for the twelve months ended December
31, 2002, $0.8 million for the period from February 20, 2001 (inception)
through December 31, 2001, no expense for the period from January 1, 2001
through July 20, 2001 and $2.2 million for the twelve months ended December 31,
2000.
In connection with the 2001 Merger, each share of common stock of CBRE
formerly held by the Cap Plan and credited to participant accounts was
exchanged for $16.00 in cash. In addition, the Cap Plan was amended to
eliminate the common stock of CBRE as an investment option within the Cap Plan
after July 20, 2001. The cash received for the shares of CBRE common stock was
available for reinvestment in one or more of the investment alternatives
available within the Cap Plan in accordance with the terms of the plan,
including a new company stock fund in which employees could invest on a
one-time basis in Class A shares of common stock of the Company. Subsequent to
the 2001 Merger, participants are no longer entitled to purchase additional
shares of CBRE Holding Class A or Class B common stock for allocation to their
account balance.
Pension Plan. The Company, through the acquisition of Hillier Parker in
the UK, maintains a contributory defined benefit pension plan to provide
retirement benefits to existing and former Hillier Parker employees
participating in the plan. It is the Company's policy to fund the minimum
annual contributions required by applicable regulations. Pension expense
totaled $3.6 million for the twelve months ended December 31, 2002, $1.4
million for the period February 20, 2001 (inception) through December 31, 2001,
$0.9 million for the period from January 1, 2001 through July 20, 2001 and $0.9
million for the twelve months ended December 31, 2000.
As a result of the plan's under-funded status in 2002, the Company
recorded a charge to accumulated other comprehensive loss, net of the related
deferred tax impact, appropriately eliminating the prepaid pension asset and
establishing a minimum liability for under-funding. This non-cash charge had no
impact on net income or cash flow. The following sets forth a reconciliation of
the benefit obligation, plan assets, plan's funded status and amounts
recognized in the accompanying consolidated balance sheets (dollars in
thousands):
D-25
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMPANY COMPANY PREDECESSOR
------------------- ---------------------- ----------------
CBRE CBRE CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES,
INC. INC. INC.
------------------- ---------------------- ----------------
FEBRUARY 20, 2001 PERIOD FROM
TWELVE MONTHS (INCEPTION) JANUARY 1, 2001
ENDED THROUGH DECEMBER 31, THROUGH
DECEMBER 31, 2002 2001 JULY 20, 2001
------------------- ---------------------- ----------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period ................ $ 74,418 $ 75,453 $ 71,076
Service cost ............................................. 5,578 2,325 2,875
Interest cost ............................................ 4,764 2,059 2,316
Plan participant contributions ........................... 1,226 234 641
Actuarial loss (gain) .................................... 3,997 (6,558) 2,990
Benefits paid ............................................ (1,939) (408) (1,109)
Foreign currency translation ............................. 8,690 1,313 (3,336)
--------- -------- ---------
Benefit obligation at end of period ...................... $ 96,734 $ 74,418 $ 75,453
========= ======== =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period ......... $ 80,950 $ 87,603 $ 103,688
Actual return on plan assets ............................. (13,777) (8,430) (12,675)
Company contributions .................................... 2,299 438 1,740
Plan participant contributions ........................... 1,226 234 641
Benefits paid ............................................ (1,939) (408) (1,109)
Foreign currency translation ............................. 7,671 1,513 (4,682)
--------- -------- ---------
Fair value of plan assets at end of period ............... $ 76,430 $ 80,950 $ 87,603
========= ======== =========
Funded status ............................................ $ (20,304) $ 6,533 $ 12,150
Unrecognized net actuarial loss .......................... 33,350 6,566 12,106
Company contributions in the post-measurement
period .................................................. 530 489 --
--------- -------- ---------
Net amount recognized .................................... $ 13,576 $ 13,588 $ 24,256
========= ======== =========
NET AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Accrued benefit liability ................................ $ (10,766) $ -- $ --
Prepaid benefit cost ..................................... -- 13,588 24,256
Accumulated other comprehensive loss ..................... 24,342 -- --
--------- -------- ---------
$ 13,576 $ 13,588 $ 24,256
========= ======== =========
D-26
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Weighted average assumptions used in developing the projected benefit
obligation were as follows:
COMPANY COMPANY PREDECESSOR
------------------- ---------------------- ------------------
CBRE CBRE CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES,
INC. INC. INC.
------------------- ---------------------- ------------------
FEBRUARY 20, 2001
TWELVE MONTHS (INCEPTION) TWELVE MONTHS
ENDED THROUGH DECEMBER 31, ENDED
DECEMBER 31, 2002 2001 DECEMBER 31, 2000
------------------- ---------------------- ------------------
Discount rate .......................... 5.60% 6.00% 6.00%
Expected return on plan assets ......... 8.20% 8.00% 7.75%
Rate of compensation increase .......... 4.30% 4.50% 5.00%
Net periodic pension cost consisted of the following (dollars in
thousands):
COMPANY COMPANY PREDECESSOR PREDECESSOR
------------------- ---------------------- ----------------- ------------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES
INC. INC. INC. INC.
------------------- ---------------------- ----------------- ------------------
FEBRUARY 20, 2001 PERIOD FROM
TWELVE MONTHS (INCEPTION) JANUARY 1, 2001 TWELVE MONTHS
ENDED THROUGH DECEMBER 31, THROUGH ENDED
DECEMBER 31, 2002 2001 JULY 20, 2001 DECEMBER 31, 2000
------------------- ---------------------- ----------------- ------------------
Employer service cost .................. $ 5,578 $ 2,325 $ 2,875 $ 5,728
Interest cost on projected benefit
obligation ............................ 4,764 2,059 2,316 4,026
Expected return on plan assets ......... (6,767) (2,945) (4,257) (8,395)
Unrecognized net gain .................. -- -- -- (425)
-------- -------- -------- --------
Net periodic pension cost .............. $ 3,575 $ 1,439 $ 934 $ 934
======== ======== ======== ========
D-27
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. DEBT
Total debt consists of the following (dollars in thousands):
DECEMBER 31
-------------------------
2002 2001
----------- -----------
LONG-TERM DEBT:
11 1/4% Senior Subordinated Notes, net of unamortized discount of $3.1
million and $3.3 million at December 31, 2002 and 2001, respectively, due
in 2011 ..................................................................... $225,943 $225,737
Senior secured term loans, with interest ranging from 5.07% to 7.50%, due
from 2002 through 2008 ...................................................... 220,975 230,325
16% Senior Notes, net of unamortized discount of $5.1 million and $5.3
million at December 31, 2002 and 2001, respectively, due in 2011 ............ 61,863 59,656
Westmark Senior Notes, with interest at 9.0% through December 31, 2004
and at variable rates depending on the Company's credit facility rate
thereafter, due from 2008 through 2010 ...................................... 12,129 14,863
Capital lease obligations, mainly for automobiles and telephone equipment,
with interest ranging from 6.50% to 9.74%, due through 2007 ................. 763 1,438
Other ........................................................................ 171 267
-------- --------
Sub-total ................................................................... 521,844 532,286
Less current maturities of long-term debt ................................... 10,711 10,223
-------- --------
TOTAL LONG-TERM DEBT ........................................................ 511,133 522,063
SHORT-TERM BORROWINGS:
Warehouse Line of Credit, with interest at 1.0% over the Residential
Funding Corporation base rate with a maturity date of August 31, 2003 ....... 63,140 106,790
Non-recourse secured debt related to property held for sale with interest at
one-month Yen LIBOR plus 4.95% and a maturity date of June 18, 2003 ......... 40,005 37,179
Euro cash pool loan, with interest ranging from 4.37% to 6.60% and no
stated maturity date ........................................................ 7,904 11,162
Other ........................................................................ 16 487
-------- --------
TOTAL SHORT-TERM BORROWINGS ................................................. 111,065 155,618
Add current maturities of long-term debt .................................... 10,711 10,223
-------- --------
Total current debt .......................................................... 121,776 165,841
-------- --------
TOTAL DEBT .................................................................. $632,909 $687,904
======== ========
Future annual aggregate maturities of total consolidated debt at December
31, 2002 are as follows (dollars in thousands): 2003--$121,776; 2004--$10,640;
2005--$10,623; 2006--$10,619; 2007--$6,244; and $473,007 thereafter.
The Company issued $229.0 million in aggregate principal amount of 11 1/4%
Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and
sold by Blum CB Corp. for approximately $225.6 million, net of discount, on
June 7, 2001 and assumed by CBRE in connection with the 2001 Merger. The Notes
are jointly and severally guaranteed on a senior subordinated basis by the
Company and its domestic subsidiaries. The Notes require semi-annual payments
of interest in arrears on June 15 and December 15, having commenced on December
15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at
105.625% of par on that date and at declining prices thereafter. In addition,
before June 15, 2004, the Company may redeem up to 35.0% of the originally
issued amount of the Notes at 111 1/4% of par, plus accrued and unpaid interest,
solely with the net cash proceeds from public equity
D-28
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
offerings. In the event of a change of control, the Company is obligated to
make an offer to purchase the Notes at a redemption price of 101.0% of the
principal amount, plus accrued and unpaid interest.
The Company also entered into a $325.0 million Senior Credit Facility (the
Credit Facility) with CSFB and other lenders. The Credit Facility is jointly
and severally guaranteed by the Company and its domestic subsidiaries and is
secured by substantially all of their assets. The Credit Facility includes the
Tranche A term facility of $50.0 million, maturing on July 20, 2007; the
Tranche B term facility of $185.0 million, maturing on July 18, 2008; and the
revolving line of credit of $90.0 million, including revolving credit loans,
letters of credit and a swingline loan facility, maturing on July 20, 2007.
Borrowings under the Tranche A and revolving facility bear interest at varying
rates based on the Company's option at either three-month LIBOR plus 2.50% to
3.25% or the alternate base rate plus 1.50% to 2.25% as determined by reference
to the Company's ratio of total debt less available cash to EBITDA, which is
defined in the debt agreement. Borrowings under the Tranche B facility bear
interest at varying rates based on the Company's option at either three-month
LIBOR plus 3.75% or the alternate base rate plus 2.75%. The alternate base rate
is the higher of (1) CSFB's prime rate or (2) the Federal Funds Effective Rate
plus one-half of one percent.
The Tranche A facility will be repaid by July 20, 2007 through quarterly
principal payments over six years, which total $7.5 million each year through
June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The
Tranche B facility requires quarterly principal payments of approximately $0.5
million, with the remaining outstanding principal due on July 18, 2008. The
revolving line of credit requires the repayment of any outstanding balance for
a period of 45 consecutive days commencing on any day in the month of December
of each year as determined by the Company. The Company repaid its revolving
credit facility as of November 5, 2002 and December 1, 2001 and at December 31,
2002 and 2001, the Company had no revolving line of credit principal
outstanding.
The Company issued an aggregate principal amount of $65.0 million of 16.0%
Senior Notes due on July 20, 2011 (the Senior Notes). The Senior Notes are
unsecured obligations, senior to all current and future unsecured indebtedness,
but subordinated to all current and future secured indebtedness of the Company.
Interest accrues at a rate of 16.0% per year and is payable quarterly in cash
in arrears. Interest may be paid in kind to the extent CBRE's ability to pay
cash dividends is restricted by the terms of the Credit Facility. Additionally,
interest in excess of 12.0% may, at the Company's option, be paid in kind
through July 2006. The Company elected to pay in kind interest in excess of
12.0%, or 4.0%, that was payable on April 20, 2002, July 20, 2002 and October
20, 2002. The Senior Notes are redeemable at the Company's option, in whole or
in part, at 116.0% of par commencing on July 20, 2001 and at declining prices
thereafter. As of December 31, 2002, the redemption price was 112.8% of par. In
the event of a change in control, the Company is obligated to make an offer to
purchase all of the outstanding Senior Notes at 101.0% of par.
The Senior Notes are solely the Company's obligation to repay. CBRE has
neither guaranteed nor pledged any of its assets as collateral for the Senior
Notes and is not obligated to provide cashflow to the Company for repayment of
these Senior Notes. However, the Company has no substantive assets or
operations other than its investment in CBRE to meet any required principal and
interest payments on the Senior Notes. The Company will depend on CBRE's cash
flows to fund principal and interest payments as they come due.
The Notes, the Credit Facility and the Senior Notes all contain numerous
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, pay dividends or distributions to stockholders,
repurchase capital stock or debt, make investments, sell assets or subsidiary
stock, engage in transactions with affiliates, issue subsidiary equity and
enter into consolidations or mergers. The Credit Facility requires the Company
to maintain a minimum coverage ratio of interest and certain fixed charges and
a maximum leverage and senior leverage ratio of earnings before interest,
taxes, depreciation and amortization to funded debt. The Credit Facility
requires the Company to pay a facility fee based on the total amount of the
unused commitment.
D-29
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has short-term borrowings of $111.1 million and $155.6 million
with related weighted average interest rates of 3.9% and 4.5% as of December
31, 2002 and 2001, respectively.
A subsidiary of the Company has a credit agreement with Residential
Funding Corporation (RFC) for the purpose of funding mortgage loans that will
be resold. The credit agreement in 2001 initially provided for a revolving line
of credit of $150.0 million, bore interest at the greater of one-month LIBOR or
3.0% (RFC Base Rate), plus 1.0%, and expired on August 31, 2001. Through
various executed amendments and extension letters in 2001, the revolving line
of credit was increased to $350.0 million and the maturity date was extended to
January 22, 2002.
Effective January 23, 2002, the Company entered into a Second Amended and
Restated Warehousing Credit and Security Agreement. This agreement provided for
a revolving line of credit in the amount of $350.0 million until February 28,
2002 and $150.0 million for the period from March 1, 2002 through August 31,
2002. Additionally, on February 1, 2002, the Company executed a Letter
Agreement with RFC that redefined the RFC Base Rate to the greater of one-month
LIBOR or 2.25% per annum. On April 20, 2002, the Company obtained a temporary
revolving line of credit increase of $210.0 million that resulted in a total
line of credit equaling $360.0 million, which expired on July 31, 2002. Upon
expiration of the temporary increase and through various executed amendments
and extension letter agreements, the Company established a revolving line of
credit of $200.0 million, redefined the RFC Base Rate to the greater of
one-month LIBOR or 2.0% and extended the maturity date of the agreement to
December 20, 2002. On December 16, 2002, the Company entered into the Third
Amended and Restated Warehousing Credit and Security Agreement effective
December 20, 2002. The agreement provides for a revolving line of credit of
$200.0 million, bears interest at the RFC Base Rate plus 1.0% and expires on
August 31, 2003.
During the years ended December 31, 2002 and 2001, respectively, the
Company had a maximum of $309.0 million and $164.0 million revolving line of
credit principal outstanding with RFC. At December 31, 2002 and 2001,
respectively, the Company had a $63.1 million and a $106.8 million warehouse
line of credit outstanding, which are included in short-term borrowings in the
accompanying consolidated balance sheets. Additionally, the Company had a $63.1
million and a $106.8 million warehouse receivable, which are also included in
the accompanying consolidated balance sheets as of December 31, 2002 and 2001,
respectively.
A subsidiary of the Company has a credit agreement with JP Morgan Chase.
The credit agreement provides for a non-recourse revolving line of credit of up
to $20.0 million, bears interest at 1.0% of the bank's cost of funds and
expires on May 28, 2003. At December 31, 2002 and 2001, the Company had no
revolving line of credit principal outstanding.
During 2001, the Company incurred $37.2 million of non-recourse debt
through a joint venture. In September 2002, the maturity date on this
non-recourse debt was extended to June 18, 2003.
13. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. Management
believes that any liability that may result from disposition of these lawsuits
will not have a material effect on the Company's consolidated financial
position or results of operations.
The following is a schedule by year of future minimum lease payments for
noncancelable leases as of December 31, 2002 (dollars in thousands):
D-30
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CAPITAL OPERATING
LEASES LEASES
--------- ----------
2003 .................................... $731 $ 66,632
2004 .................................... 29 58,320
2005 .................................... 9 50,966
2006 .................................... 4 42,924
2007 .................................... 3 35,090
Thereafter .............................. -- 233,379
---- --------
Total minimum payments required ......... $776 $487,311
==== ========
The interest portion of capital lease payments represents the amount
necessary to reduce net minimum lease payments to present value calculated at
the Company's incremental borrowing rate at the inception of the leases. This
totaled approximately $.01 million at December 31, 2002, resulting in a present
value of net minimum lease payments of $.76 million. At December 31, 2002, $.72
million and $.04 million were included in current maturities of long-term debt
and long-term debt, respectively. In addition, the total minimum payments for
noncancelable operating leases were not reduced by the minimum sublease rental
income of $4.3 million due in the future under noncancelable subleases.
Substantially all leases require the Company to pay maintenance costs,
insurance and property taxes, and generally may be renewed for five-year
periods. The composition of total rental expense under noncancelable operating
leases consisted of the following (dollars in thousands):
COMPANY COMPANY PREDECESSOR PREDECESSOR
--------------- ------------------ ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
--------------- ------------------ ----------------- ----------------
FEBRUARY 20,
TWELVE MONTHS 2001 (INCEPTION) PERIOD FROM TWELVE MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
--------------- ------------------ ----------------- ----------------
Minimum rentals ............... $ 68,711 $27,203 $32,831 $ 56,243
Less sublease rentals ......... (1,157) (500) (551) (1,387)
-------- ------- ------- --------
$ 67,554 $26,703 $32,280 $ 54,856
======== ======= ======= ========
A subsidiary of the Company has an agreement with Fannie Mae to fund the
purchase of a $104.6 million loan portfolio using proceeds from its RFC line of
credit. A 100% participation in the loan portfolio was sold to Fannie Mae with
the Company retaining the credit risk on the first 2% of losses incurred on the
underlying portfolio of commercial mortgage loans. The Company has
collateralized a portion of its obligation to cover the first 1% of losses
through a letter of credit in favor of Fannie Mae for a total of approximately
$1.0 million.
At December 31, 2002, the Company had outstanding letters of credit
totaling $7.8 million, including the Fannie Mae letter of credit discussed in
the preceding paragraph. The letters of credit expire at varying dates through
December 2004.
An important part of the strategy for the Company's investment management
business involves investing the Company's own capital in certain real estate
investments with its clients. These co-investments typically range from 2% to
5% of the equity in a particular fund. As of December 31, 2002, the Company had
committed an additional $22.6 million to fund future co-investments.
D-31
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. INCOME TAXES
The Company's tax provision (benefit) consisted of the following (dollars
in thousands):
COMPANY COMPANY PREDECESSOR PREDECESSOR
--------------- ------------------ ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
--------------- ------------------ ----------------- ----------------
FEBRUARY 20,
TWELVE MONTHS 2001 (INCEPTION) PERIOD FROM TWELVE MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
--------------- ------------------ ----------------- ----------------
Federal:
Current ....................... $ 10,204 $ 11,747 $ -- $ 24,924
Deferred tax .................. 6,232 (3,252) (911) 921
Change in valuation allowances -- 796 -- (3,000)
-------- -------- ------ --------
16,436 9,291 (911) 22,845
State:
Current ....................... 1,824 3,173 1,600 6,895
Deferred tax .................. 378 (494) (658) (1,243)
-------- -------- ------ --------
2,202 2,679 942 5,652
Foreign:
Current ....................... 12,920 10,137 1,079 7,015
Deferred tax .................. (1,452) (4,091) -- (761)
-------- -------- ------ --------
11,468 6,046 1,079 6,254
-------- -------- ------ --------
$ 30,106 $ 18,016 $1,110 $ 34,751
======== ======== ====== ========
The following is a reconciliation, stated as a percentage of pre-tax
income, of the US statutory federal income tax rate to the Company's effective
tax rate on income from operations:
COMPANY COMPANY PREDECESSOR PREDECESSOR
--------------- ------------------ ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
--------------- ------------------ ----------------- ----------------
FEBRUARY 20,
TWELVE MONTHS 2001 (INCEPTION) PERIOD FROM TWELVE MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
--------------- ------------------ ----------------- ----------------
Federal statutory tax rate ........................ 35% 35% (35)% 35%
Permanent differences ............................. 15 5 25 11
State taxes, net of federal benefit ............... 3 5 2 6
Foreign income taxes in excess of US rate ......... 9 4 11 4
Change in valuation allowances .................... -- 2 -- (5)
-- -- --- -----
Effective tax rate ................................ 62% 51% 3% 51%
== == === ====
The domestic component of income (loss) before provision for income taxes
included in the accompanying consolidated statements of operations was $31.0
million for the twelve months ended December 31, 2002, $22.5 million for the
period from February 20, 2001 (inception) through December 31, 2001, $(23.0)
million for the period January 1, 2001 to July 20, 2001 and $63.2 million for
the twelve months ended December 31, 2000. The international component of
income (loss) before provision for income taxes was $17.8 million for the
twelve months ended December 31, 2002, $12.9 million for the
D-32
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
period from February 20, 2001 (inception) through December 31, 2001, $(9.9)
million for the period from January 1, 2001 through July 20, 2001 and $4.9
million for the twelve months ended December 31, 2000.
Cumulative tax effects of temporary differences are shown below at
December 31, 2002 and 2001 (dollars in thousands):
DECEMBER 31
---------------------------
2002 2001
------------ ------------
ASSET (LIABILITY)
Property and equipment ..................................... $ 10,960 $ 16,665
Bad debts and other reserves ............................... 12,459 10,225
Intangible amortization .................................... (26,065) (2,311)
Bonus, unexercised restricted stock, deferred compensation . 57,780 53,418
Investment ................................................. 4,189 5,045
Net operating loss (NOL) and alternative minimum tax
credit carryforwards ..................................... 5 3,778
Unconsolidated affiliates .................................. 5,283 7,568
Pension obligation ......................................... 7,303 --
All other, net ............................................. (2,923) 3,312
--------- ---------
Net deferred tax asset before valuation allowances ......... 68,991 97,700
Valuation allowances ....................................... (13,892) (11,543)
--------- ---------
Net deferred tax asset ................................... $ 55,099 $ 86,157
========= =========
The Company had no federal income tax NOLs at December 31, 2002.
Management has determined that as of December 31, 2002, $13.9 million of
deferred tax assets do not satisfy the recognition criteria set forth in SFAS
No. 109. Accordingly, a valuation allowance has been recorded for this amount.
Approximately $13.1 million of this valuation allowance relates to deferred tax
assets acquired in the 2001 Merger. Accordingly, goodwill will be reduced at
such time as these deferred tax assets are realized.
A deferred US tax liability has not been provided on the unremitted
earnings of foreign subsidiaries because it is the intent of the Company to
permanently reinvest these earnings. Undistributed earnings of foreign
subsidiaries, which have been, or are intended to be, permanently invested in
accordance with APB No. 23, "Accounting for Income Taxes--Special Areas,"
aggregated $52.0 million at December 31, 2002. The determination of the tax
liability upon repatriation is not practicable.
15. STOCKHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 shares of common stock,
including 75,000,000 shares of Class A common stock and 25,000,000 shares of
Class B common stock, both with $0.01 par value per share. The holders of Class
A common stock are entitled to one vote for each share. Holders of Class B
common stock are entitled to ten votes for each share. There are no differences
between the two classes of common stock other than number of votes. The holders
of Class A and Class B common stock shall share equally on a per-share basis
all dividends and other cash, stock or property distributions.
Upon written request of any holder of Class B common stock, any shares
will be automatically converted on a share-for-share basis into the same number
of shares of Class A common stock. In addition, upon any transfer, sale or
other disposition of the Company, shares of Class B common stock shall be
converted into shares of Class A common stock on a share-for-share basis,
excluding the transfer to certain permitted Class B common stockholders. Also,
upon completion of an underwritten public
D-33
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
offering in which the Company becomes listed on a national securities exchange,
all outstanding shares of Class B common stock shall automatically be converted
into shares of Class A common stock on a share-for-share basis.
As long as Class B common stock is outstanding, if a holder of Class B
common stock purchases any shares of Class A common stock, the holder may
convert the Class A common shares on a share-for-share basis into the same
number of shares of Class B common stock.
16. EARNINGS (LOSS) PER SHARE INFORMATION
The following is a calculation of earnings (loss) per share (dollars in
thousands, except share data):
COMPANY COMPANY
---------------------------------- ---------------------------------
CBRE HOLDING, INC. CBRE HOLDING, INC.
---------------------------------- ---------------------------------
FEBRUARY 20, 2001 (INCEPTION)
TWELVE MONTHS ENDED THROUGH
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------------------- ---------------------------------
PER- PER-
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ------------ ---------- ---------- ----------- ----------
BASIC EARNINGS PER SHARE:
Net income applicable to common
stockholders ......................... $18,727 15,025,308 $ 1.25 $17,426 7,845,004 $ 2.22
======= ========== ====== ======= ========= ======
DILUTED EARNINGS PER SHARE:
Net income applicable to common
stockholders ......................... $18,727 15,025,308 $17,426 7,845,004
Dilutive effect of contingently issuable
shares ............................... 196,803 64,793
------- ---------- ------- ---------
Net income applicable to common
stockholders ........................... $18,727 15,222,111 $ 1.23 $17,426 7,909,797 $ 2.20
======= ========== ====== ======= ========= ======
PREDECESSOR PREDECESSOR
-------------------------------------- ----------------------------------
CB RICHARD ELLIS CB RICHARD ELLIS
SERVICES, INC. SERVICES, INC.
-------------------------------------- ----------------------------------
PERIOD FROM JANUARY 1, 2001 TWELVE MONTHS ENDED
THROUGH JULY 20, 2001 DECEMBER 31, 2000
-------------------------------------- ----------------------------------
PER- PER-
SHARE SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT
------------- ------------ ----------- ---------- ------------ ----------
BASIC (LOSS) EARNINGS PER SHARE:
Net (loss) income applicable to
common stockholders ................... $ (34,020) 21,306,584 $ (1.60) $33,388 20,931,111 $ 1.60
========= ========== ======= ======= ========== ======
DILUTED (LOSS) EARNINGS PER SHARE:
Net (loss) income applicable to
common stockholders ................... $ (34,020) 21,306,584 $33,388 20,931,111
Dilutive effect of exercise of options
outstanding ........................... -- 35,594
Dilutive effect of stock-based
compensation programs ................. -- 130,535
----------- ---------- -------- ----------
Net (loss) income applicable to
common stockholders ................... $ (34,020) 21,306,584 $ (1.60) $33,388 21,097,240 $ 1.58
=========== ========== ======= ======== ========== ======
D-34
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following items were not included in the computation of diluted
earnings (loss) per share because their effect, in aggregate, was
anti-dilutive:
COMPANY COMPANY PREDECESSOR PREDECESSOR
------------------- ------------------- ------------------ ------------------
CBRE CBRE
HOLDING, HOLDING, CB RICHARD ELLIS CB RICHARD ELLIS
INC. INC. SERVICES, INC. SERVICES, INC.
------------------- ------------------- ------------------ ------------------
FEBRUARY 20, 2001 PERIOD FROM
TWELVE MONTHS (INCEPTION) JANUARY 1, 2001 TWELVE MONTHS
ENDED THROUGH THROUGH ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 JULY 20, 2001 DECEMBER 31, 2000
------------------- ------------------- ------------------ ------------------
Stock options
Outstanding ............... 1,451,599 1,503,021 2,562,150 2,574,029
Price ranges .............. $16.00 $16.00 $0.38-$36.75 $11.81-$36.75
Expiration ranges ......... 7/20/11-7/31/12 7/20/11 6/8/04-8/31/10 6/8/04-8/31/10
Stock warrants
Outstanding ............... 255,477 255,477 597,969 598,387
Price ..................... $30.00 $30.00 $30.00 $30.00
Expiration date ........... 8/27/07 8/27/07 8/28/04 8/28/04
All options and warrants for the period from January 1, 2001 to July 20,
2001 were anti-dilutive as the Company reported a net loss. Any assumed
exercise of options or warrants would have been anti-dilutive as they would
have resulted in a lower loss per share.
17. FIDUCIARY FUNDS
The accompanying consolidated balance sheets do not include the net assets
of escrow, agency and fiduciary funds, which amounted to $414.6 million and
$373.2 million at December 31, 2002 and 2001, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the accompanying consolidated balance sheets.
Value is defined as the amount at which an instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The fair value estimates of financial instruments are not
necessarily indicative of the amounts the Company might pay or receive in
actual market transactions. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash and Cash Equivalents: Includes cash and cash equivalents with
maturities of less than three months. The carrying amount approximates fair
value due to the short maturity of these instruments.
Short-Term Borrowings: The majority of this balance represents the
warehouse line of credit and non recourse debt related to a property held for
sale. Due to their short-term maturities and variable interest rates, fair
value approximates carrying value (See Note 12).
Senior Subordinated Notes: Based on dealers' quotes, the estimated fair
value of the Company's 11 1/4% Senior Subordinated Notes is $208.4 million and
$199.5 million at December 31, 2002 and 2001, respectively. Their actual
carrying value totaled $225.9 million and $225.7 million at December 31, 2002
and 2001, respectively (See Note 12).
16% Senior Notes: There was no trading activity for the 16% Senior Notes,
which are due in 2011. Their carrying value totaled $61.9 million and $59.7
million at December 31, 2002 and 2001, respectively (see Note 12).
D-35
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Secured Terms Loans & Other Long-Term Debt: Estimated fair values
approximate respective carrying values because the majority of these
instruments are based on variable interest rates (see Note 12).
19. NONRECURRING CHARGES
During the period from February 20, 2001 (inception) through December 31,
2001, the Company recorded nonrecurring pre-tax charges totaling $6.4 million
which mainly related to the write-off of e-business investments. During the
period from January 1, 2001 through July 20, 2001, CBRE recorded merger-related
and other nonrecurring charges of $22.1 million, which included merger-related
costs incurred of $16.4 million, severance costs incurred of $2.8 million
related to CBRE's cost reduction program implemented in May 2001, as well as
the write-off of an e-investment of $2.9 million.
20. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the 2001 Merger with Blum CB and as part of the
financing of the 2001 Merger, CBRE assumed an aggregate of $229.0 million in
Senior Subordinated Notes (the Notes) due June 15, 2011. These Notes are
unsecured and rank equally in right of payment with any of the Company's future
senior subordinated unsecured indebtedness. The Notes are effectively
subordinated to indebtedness and other liabilities of the Company's
subsidiaries that are not guarantors of the Notes. The Notes are guaranteed on
a full, unconditional, joint and several basis by the Company, CBRE and CBRE's
wholly owned domestic subsidiaries.
The following condensed consolidating financial information includes:
(1) Condensed consolidating balance sheets as of December 31, 2002 and
December 31, 2001; condensed consolidating statements of operations for the
twelve months ended December 31, 2002, the period from February 20, 2001
(inception) through December 31, 2001, the period from January 1, 2001
through July 20, 2001 and the twelve months ended December 31, 2000; and
condensed consolidating statements of cash flows for the twelve months
ended December 31, 2002, the period from February 20, 2001 (inception)
through December 31, 2001, the period from January 1, 2001 through July 20,
2001 and the twelve months ended December 31, 2000 of: (a) Holding, the
Parent, (b) CBRE, which is the subsidiary issuer, (c) the guarantor
subsidiaries, (d) the nonguarantor subsidiaries and (e) the Company on a
consolidated basis.
(2) Elimination entries necessary to consolidate CBRE Holding, Inc., the
Parent, with CBRE and its guarantor and nonguarantor subsidiaries.
Investments in consolidated subsidiaries are presented using the equity
method of accounting. The principal elimination entries eliminate investments
in consolidated subsidiaries and intercompany balances and transactions.
D-36
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
GUARANTOR
PARENT CBRE SUBSIDIARIES
---------- ----------- --------------
Current Assets:
Cash and cash equivalents ............................. $ 127 $ 54 $ 74,173
Receivables, less allowance for doubtful
accounts ............................................. -- 40 61,624
Warehouse receivable .................................. -- -- 63,140
Prepaid and other current assets ...................... 18,723 22,201 8,432
-------- -------- --------
Total current assets ................................. 18,850 22,295 207,369
Property and equipment, net ............................ -- -- 51,419
Goodwill ............................................... -- -- 442,965
Other intangible assets, net ........................... -- -- 89,075
Cash surrender value of insurance policies, deferred
compensation plan ..................................... -- 63,642 --
Investment in and advances to unconsolidated
subsidiaries .......................................... -- 4,782 39,205
Investment in consolidated subsidiaries ................ 302,593 322,794 66,162
Inter-company loan receivable .......................... -- 429,396 --
Deferred tax assets, net ............................... 36,376 -- --
Other assets ........................................... 4,896 17,464 20,453
-------- -------- --------
Total assets .......................................... $362,715 $860,373 $916,648
======== ======== ========
Current Liabilities:
Accounts payable and accrued expenses ................. $ 2,137 $ 4,610 $ 36,895
Inter-company payable ................................. 20,199 -- --
Compensation and employee benefits payable ............ -- -- 40,938
Accrued bonus and profit sharing ...................... -- -- 59,942
Income taxes payable .................................. 15,451 -- --
Short-term borrowings:
Warehouse line of credit ............................. -- -- 63,140
Other ................................................ -- -- 16
-------- -------- --------
Total short-term borrowings .......................... -- -- 63,156
Current maturities of long-term debt .................. -- 9,975 --
-------- -------- --------
Total current liabilities ............................ 37,787 14,585 200,931
Long-Term Debt:
11 1/4% senior subordinated notes, net of
unamortized discount ................................. -- 225,943 --
Senior secured term loans ............................. -- 211,000 --
16% senior notes, net of unamortized discount ......... 61,863 -- --
Other long-term debt .................................. -- -- 12,129
Inter-company loan payable ............................ -- -- 362,344
-------- -------- --------
Total long-term debt ................................. 61,863 436,943 374,473
Deferred compensation liability ........................ -- 106,252 --
Other liabilities ...................................... 11,724 -- 18,450
-------- -------- --------
Total liabilities ..................................... 111,374 557,780 593,854
Minority interest ...................................... -- -- --
Commitments and contingencies
Stockholders' equity ................................... 251,341 302,593 322,794
-------- -------- --------
Total liabilities and stockholders' equity ............ $362,715 $860,373 $916,648
======== ======== ========
NONGUARANTOR CONSOLIDATED
SUBSIDIARIES ELIMINATION TOTAL
-------------- ---------------- -------------
Current Assets:
Cash and cash equivalents ............................. $ 5,347 $ -- $ 79,701
Receivables, less allowance for doubtful
accounts ............................................. 104,549 -- 166,213
Warehouse receivable .................................. -- -- 63,140
Prepaid and other current assets ...................... 7,729 (20,199) 36,886
-------- ------------ ----------
Total current assets ................................. 117,625 (20,199) 345,940
Property and equipment, net ............................ 15,215 -- 66,634
Goodwill ............................................... 134,172 -- 577,137
Other intangible assets, net ........................... 2,007 -- 91,082
Cash surrender value of insurance policies, deferred
compensation plan ..................................... -- -- 63,642
Investment in and advances to unconsolidated
subsidiaries .......................................... 6,221 -- 50,208
Investment in consolidated subsidiaries ................ -- (691,549) --
Inter-company loan receivable .......................... -- (429,396) --
Deferred tax assets, net ............................... -- -- 36,376
Other assets ........................................... 51,044 -- 93,857
-------- ------------ ----------
Total assets .......................................... $326,284 $ (1,141,144) $1,324,876
======== ============ ==========
Current Liabilities:
Accounts payable and accrued expenses ................. $ 58,773 $ -- $ 102,415
Inter-company payable ................................. -- (20,199) --
Compensation and employee benefits payable ............ 22,796 -- 63,734
Accrued bonus and profit sharing ...................... 43,916 -- 103,858
Income taxes payable .................................. -- -- 15,451
Short-term borrowings:
Warehouse line of credit ............................. -- -- 63,140
Other ................................................ 47,909 -- 47,925
-------- ------------ ----------
Total short-term borrowings .......................... 47,909 -- 111,065
Current maturities of long-term debt .................. 736 -- 10,711
-------- ------------ ----------
Total current liabilities ............................ 174,130 (20,199) 407,234
Long-Term Debt:
11 1/4% senior subordinated notes, net of
unamortized discount ................................. -- -- 225,943
Senior secured term loans ............................. -- -- 211,000
16% senior notes, net of unamortized discount ......... -- -- 61,863
Other long-term debt .................................. 198 -- 12,327
Inter-company loan payable ............................ 67,052 (429,396) --
-------- ------------ ----------
Total long-term debt ................................. 67,250 (429,396) 511,133
Deferred compensation liability ........................ -- -- 106,252
Other liabilities ...................................... 13,127 -- 43,301
-------- ------------ ----------
Total liabilities ..................................... 254,507 (449,595) 1,067,920
Minority interest ...................................... 5,615 -- 5,615
Commitments and contingencies
Stockholders' equity ................................... 66,162 (691,549) 251,341
-------- ------------ ----------
Total liabilities and stockholders' equity ............ $326,284 $ (1,141,144) $1,324,876
======== ============ ==========
D-37
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
GUARANTOR
PARENT CBRE SUBSIDIARIES
---------- ----------- --------------
Current Assets:
Cash and cash equivalents ............................. $ 3 $ 931 $ 42,204
Receivables, less allowance for
doubtful accounts .................................... 47 71 70,343
Warehouse receivable .................................. -- -- 106,790
Prepaid and other current assets ...................... 32,155 12,465 6,321
Total current assets ................................. 32,205 13,467 225,658
-------- -------- --------
Property and equipment, net ............................ -- -- 51,314
Goodwill ............................................... -- 197,748 208,432
Other intangible assets, net ........................... -- -- 31,219
Cash surrender value of insurance policies, deferred
compensation plan ..................................... -- 69,385 --
Investment in and advances to unconsolidated
subsidiaries .......................................... -- 4,132 34,296
Investment in consolidated subsidiaries ................ 271,615 65,690 168,974
Inter-company loan receivable .......................... -- 465,173 --
Deferred tax assets, net ............................... 54,002 -- --
Prepaid pension costs .................................. -- -- --
Other assets ........................................... 5,266 21,600 14,739
-------- -------- --------
Total assets ......................................... $363,088 $837,195 $734,632
======== ======== ========
Current Liabilities:
Accounts payable and accrued expenses ................. $ 2,022 $ 4,236 $ 37,325
Inter-company payable ................................. 10,321 -- --
Compensation and employee benefits .................... -- -- 44,192
Accrued bonus and profit sharing ...................... -- -- 56,821
Income taxes payable .................................. 21,736 -- --
Short-term borrowings:
Warehouse line of credit ............................. -- -- 106,790
Other ................................................ -- 178 309
-------- -------- --------
Total short-term borrowings .......................... -- 178 107,099
Current maturities of long-term debt .................. -- 9,350 129
-------- -------- --------
Total current liabilities ............................ 34,079 13,764 245,566
Long-Term Debt:
11 1/4 % senior subordinated notes, net of
unamortized discount ................................. -- 225,737 --
Senior secured term loans ............................. -- 220,975 --
16% senior notes, net of unamortized discount ......... 59,656 -- --
Other long-term debt .................................. -- -- 14,974
Inter-company loan payable ............................ -- -- 393,827
-------- -------- --------
Total long-term debt ................................. 59,656 446,712 408,801
Deferred compensation liability ........................ -- 105,104 --
Other liabilities ...................................... 16,830 -- 14,575
-------- -------- --------
Total liabilities .................................... 110,565 565,580 668,942
Minority interest ...................................... -- -- --
Commitments and contingencies ..........................
Stockholders' equity ................................... 252,523 271,615 65,690
-------- -------- --------
Total liabilities and stockholders' equity . ......... $363,088 $837,195 $734,632
======== ======== ========
NONGUARANTOR CONSOLIDATED
SUBSIDIARIES ELIMINATION TOTAL
-------------- --------------- -------------
Current Assets:
Cash and cash equivalents ............................. $ 14,312 $ -- $ 57,450
Receivables, less allowance for
doubtful accounts .................................... 85,973 -- 156,434
Warehouse receivable .................................. -- -- 106,790
Prepaid and other current assets ...................... 8,353 (10,321) 48,973
Total current assets ................................. 108,638 (10,321) 369,647
-------- ----------- ----------
Property and equipment, net ............................ 17,137 -- 68,451
Goodwill ............................................... 203,363 -- 609,543
Other intangible assets, net ........................... 6,898 -- 38,117
Cash surrender value of insurance policies, deferred
compensation plan ..................................... -- -- 69,385
Investment in and advances to unconsolidated
subsidiaries .......................................... 4,107 -- 42,535
Investment in consolidated subsidiaries ................ -- (506,279) --
Inter-company loan receivable .......................... -- (465,173) --
Deferred tax assets, net ............................... -- -- 54,002
Prepaid pension costs .................................. 13,588 -- 13,588
Other assets ........................................... 47,639 -- 89,244
-------- ----------- ----------
Total assets ......................................... $401,370 $ (981,773) $1,354,512
======== =========== ==========
Current Liabilities:
Accounts payable and accrued expenses ................. $ 39,399 $ -- $ 82,982
Inter-company payable ................................. -- (10,321) --
Compensation and employee benefits .................... 23,926 -- 68,118
Accrued bonus and profit sharing ...................... 28,367 -- 85,188
Income taxes payable .................................. -- -- 21,736
Short-term borrowings:
Warehouse line of credit ............................. -- -- 106,790
Other ................................................ 48,341 -- 48,828
-------- ----------- ----------
Total short-term borrowings .......................... 48,341 -- 155,618
Current maturities of long-term debt .................. 744 -- 10,223
-------- ----------- ----------
Total current liabilities ............................ 140,777 (10,321) 423,865
Long-Term Debt:
11 1/4% senior subordinated notes, net of
unamortized discount ................................. -- -- 225,737
Senior secured term loans ............................. -- -- 220,975
16% senior notes, net of unamortized discount ......... -- -- 59,656
Other long-term debt .................................. 721 -- 15,695
Inter-company loan payable ............................ 71,346 (465,173) --
-------- ----------- ----------
Total long-term debt ................................. 72,067 (465,173) 522,063
Deferred compensation liability ........................ -- -- 105,104
Other liabilities ...................................... 15,256 -- 46,661
-------- ----------- ----------
Total liabilities .................................... 228,100 (475,494) 1,097,693
Minority interest ...................................... 4,296 -- 4,296
Commitments and contingencies ..........................
Stockholders' equity ................................... 168,974 (506,279) 252,523
-------- ----------- ----------
Total liabilities and stockholders' equity . ......... $401,370 $ (981,773) $1,354,512
======== =========== ==========
D-38
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(COMPANY)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT CBRE SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
---------- ---------- -------------- -------------- ------------- -------------
Revenue ...................................... $ -- $ -- $849,563 $320,714 $ -- $1,170,277
Costs and expenses:
Commissions, fees and other incentives ...... -- -- 413,830 141,112 -- 554,942
Operating, administrative and other ......... 415 1,186 345,231 147,117 -- 493,949
Depreciation and amortization ............... -- -- 15,833 8,781 -- 24,614
Equity income from unconsolidated
subsidiaries .............................. -- (662) (7,449) (1,215) -- (9,326)
Merger-related and other nonrecurring
charges ................................... -- 36 -- -- -- 36
-------- ------- -------- -------- --------- ----------
Operating (loss) income ...................... (415) (560) 82,118 24,919 -- 106,062
Interest income .............................. 158 42,845 2,079 916 (42,726) 3,272
Interest expense ............................. 11,344 42,731 39,742 9,410 (42,726) 60,501
Equity income from consolidated
subsidiaries ................................ 27,306 32,898 4,957 -- (65,161) --
-------- ------- -------- -------- --------- ----------
Income before (benefit) provision for
income taxes ................................ 15,705 32,452 49,412 16,425 (65,161) 48,833
(Benefit) provision for income taxes ......... (3,022) 5,146 16,514 11,468 -- 30,106
-------- ------- -------- -------- --------- ----------
Net income ................................... $ 18,727 $27,306 $ 32,898 $ 4,957 $ (65,161) $ 18,727
======== ======= ======== ======== ========= ==========
D-39
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 20, 2001 (INCEPTION)
THROUGH DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(COMPANY)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT CBRE SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
---------- ----------- -------------- -------------- ------------- -------------
Revenue ...................................... $ -- $ -- $416,446 $146,382 $ -- $562,828
Costs and expenses:
Commissions, fees and other incentives ...... -- -- 207,019 59,745 -- 266,764
Operating, administrative and other ......... 500 3,589 145,145 67,012 -- 216,246
Depreciation and amortization ............... -- -- 8,523 3,675 -- 12,198
Equity income from unconsolidated
subsidiaries .............................. -- (198) (1,290) (66) -- (1,554)
Merger-related and other nonrecurring
charges ................................... -- 2,144 3,530 768 -- 6,442
-------- -------- -------- -------- --------- --------
Operating (loss) income ...................... (500) (5,535) 53,519 15,248 -- 62,732
Interest income .............................. 1,135 19,270 370 561 (18,909) 2,427
Interest expense ............................. 8,199 20,353 17,091 2,983 (18,909) 29,717
Equity income from consolidated
subsidiaries ................................ 22,721 27,713 8,605 -- (59,039) --
-------- -------- -------- -------- --------- --------
Income before (benefit) provision for
income taxes ................................ 15,157 21,095 45,403 12,826 (59,039) 35,442
(Benefit) provision for income taxes ......... (2,269) (1,626) 17,690 4,221 -- 18,016
-------- -------- -------- -------- --------- --------
Net income ................................... $ 17,426 $ 22,721 $ 27,713 $ 8,605 $ (59,039) $ 17,426
======== ======== ======== ======== ========= ========
D-40
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH JULY 20, 2001
(DOLLARS IN THOUSANDS)
(PREDECESSOR)
GUARANTOR NONGUARANTOR CONSOLIDATED
CBRE SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
------------ -------------- -------------- ------------- -------------
Revenue .................................... $ -- $ 465,280 $ 142,654 $ -- $ 607,934
Costs and expenses:
Commissions, fees and other incentives .... -- 217,799 63,014 -- 280,813
Operating, administrative and other ....... 1,155 216,063 79,168 -- 296,386
Depreciation and amortization ............. -- 17,021 8,635 -- 25,656
Equity income from unconsolidated
subsidiaries . .......................... (492) (2,141) (241) -- (2,874)
Merger-related and other nonrecurring
charges ................................. 19,260 2,867 -- -- 22,127
--------- --------- ---------- --------- ----------
Operating (loss) income .................... (19,923) 13,671 (7,922) -- (14,174)
Interest income ............................ 16,757 952 615 (16,757) 1,567
Interest expense ........................... 18,014 14,952 4,094 (16,757) 20,303
Equity losses from consolidated
subsidiaries .............................. (14,587) (12,480) -- 27,067 --
--------- --------- ---------- --------- ----------
Loss before (benefit) provision for
income taxes .............................. (35,767) (12,809) (11,401) 27,067 (32,910)
(Benefit) provision for income taxes ....... (1,747) 1,778 1,079 -- 1,110
--------- --------- ---------- --------- ----------
Net loss ................................... $ (34,020) $ (14,587) $ (12,480) $ 27,067 $ (34,020)
========= ========= ========== ========= ==========
D-41
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
(PREDECESSOR)
GUARANTOR NONGUARANTOR CONSOLIDATED
CBRE SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
----------- -------------- -------------- ------------- -------------
Revenue ...................................... $ -- $1,027,35 $296,245 $ -- $1,323,604
Costs and expenses:
Commissions, fees and other incentives ...... -- 507,061 121,036 -- 628,097
Operating, administrative and other ......... 3,375 396,027 152,126 -- 551,528
Depreciation and amortization ............... -- 26,604 16,595 -- 43,199
Equity (income) losses from
unconsolidated subsidiaries ............... (995) (5,615) 105 -- (6,505)
-------- --------- -------- --------- ----------
Operating (loss) income ...................... (2,380) 103,282 6,383 -- 107,285
Interest income .............................. 32,969 1,389 876 (32,680) 2,554
Interest expense ............................. 37,980 29,151 7,249 (32,680) 41,700
Equity income (losses) from consolidated
subsidiaries ................................ 39,157 (5,300) -- (33,857) --
-------- --------- -------- --------- ----------
Income before (benefit) provision for
income taxes ................................ 31,766 70,220 10 (33,857) 68,139
(Benefit) provision for income taxes ......... (1,622) 31,063 5,310 -- 34,751
-------- --------- -------- --------- ----------
Net income (loss) ............................ $ 33,388 $ 39,157 $ (5,300) $ (33,857) $ 33,388
======== ========= ======== ========= ==========
D-42
CBRE HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(COMPANY)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT CBRE SUBSIDIARIES SUBSIDIARIES TOTAL
---------- ------------ -------------- -------------- -------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES: .......................... $ 509 $ (7,905) $ 42,090 $ 30,188 $ 64,882
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of concessions
received ....................................... -- -- (10,049) (4,217) (14,266)
Proceeds from sale of properties, businesses
and servicing rights ........................... -- -- 2,515 3,863 6,378
Acquisition of businesses including net assets
acquired, intangibles and goodwill ............. -- (11,588) (35) (3,188) (14,811)
Other investing activities, net ................. -- 44 196 (1,671) (1,431)
------- ---------- --------- --------- ----------
Net cash used in investing activities .......... -- (11,544) (7,373) (5,213) (24,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline
credit facility ................................ -- 238,000 -- -- 238,000
Repayment of revolver and swingline
credit facility ................................ -- (238,000) -- -- (238,000)
Repayment of senior notes and other
loans, net ..................................... -- (189) (3,116) (4,900) (8,205)
Repayment of senior secured term loans .......... -- (9,351) -- -- (9,351)
Decrease (increase) in intercompany
receivables, net ............................... -- 28,284 462 (28,746) --
Other financing activities, net ................. (385) (172) (94) 369 (282)
------- ---------- --------- --------- ----------
Net cash (used in) provided by financing
activities ................................... (385) 18,572 (2,748) (33,277) (17,838)
------- ---------- --------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................... 124 (877) 31,969 (8,302) 22,914
CASH AND CASH EQUIVALENTS, AT BEGINNING
OF PERIOD ...................................... 3 931 42,204 14,312 57,450
Effect of currency exchange rate changes on
cash ........................................... -- -- -- (663) (663)
------- ---------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, AT END
OF PERIOD ...................................... $ 127 $ 54 $ 74,173 $ 5,347 $ 79,701
======= ========== ========= ========= ==========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ......... $ 8,509 $ 38,751 $ 1,635 $ 3,752 $ 52,647
Income taxes, net of refunds ................. $19,142 $ -- $ -- $ -- $ 19,142
D-43
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 20, 2001 (INCEPTION)
THROUGH DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(COMPANY)
PARENT CBRE
------------- ---------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ...... $ 310 $ 5,947
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions
received ........................................ -- --
Proceeds from sale of properties, businesses
and servicing rights ............................ -- --
Purchase of investments .......................... -- --
Investment in property held for sale ............. -- --
Contribution to CBRE ............................. (154,881) --
Acquisition of businesses including net assets
acquired, intangibles and goodwill .............. -- (212,369)
Other investing activities, net .................. -- (1)
----------- -------------
Net cash used in investing activities ........... (154,881) (212,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit
facility ........................................ -- 113,750
Repayment of revolver and swingline credit
facility ........................................ -- (113,750)
Proceeds from senior secured term loans .......... -- 235,000
Repayment of senior secured term loans ........... -- (4,675)
Proceeds from non recourse debt related to
property held for sale .......................... -- --
Repayment of 8 7/8% senior subordinated
notes ........................................... -- (175,000)
Proceeds from 11 1/4% senior subordinated
notes ........................................... -- 225,629
Proceeds from 16% senior notes ................... 65,000 --
Repayment of revolving credit facility ........... -- (235,000)
Repayment of senior notes and other loans,
net ............................................. -- --
Payment of deferred financing fees ............... (2,582) (19,168)
Proceeds from issuance of stock .................. 92,156 154,881
Decrease (increase) in intercompany
receivables, net ................................ -- 30,263
Other financing activities, net .................. -- (5,535)
----------- ------------
Net cash provided by (used in) financing
activities ..................................... 154,574 206,395
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 3 (28)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF
PERIOD .......................................... -- 959
Effect of currency exchange rate changes on
cash ............................................ -- --
----------- ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
$ 3 $ 931
=========== ============
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ........... $ 2,600 $ 22,562
Income taxes, net of refunds ................... $ 5,061 $ --
GUARANTOR NONGUARANTOR CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
-------------- -------------- ------------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ...... $ 56,478 $ 28,599 $ -- $ 91,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions
received ........................................ (4,246) (2,255) -- (6,501)
Proceeds from sale of properties, businesses
and servicing rights ............................ 1,996 112 -- 2,108
Purchase of investments .......................... (250) (831) -- (1,081)
Investment in property held for sale ............. -- (40,174) -- (40,174)
Contribution to CBRE ............................. -- -- 154,881 --
Acquisition of businesses including net assets
acquired, intangibles and goodwill .............. (1,850) (483) -- (214,702)
Other investing activities, net .................. (1,700) 658 -- (1,043)
-------- --------- ----------- -----------
Net cash used in investing activities ........... (6,050) (42,973) 154,881 (261,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit
facility ........................................ -- -- -- 113,750
Repayment of revolver and swingline credit
facility ........................................ -- -- -- (113,750)
Proceeds from senior secured term loans .......... -- -- -- 235,000
Repayment of senior secured term loans ........... -- -- -- (4,675)
Proceeds from non recourse debt related to
property held for sale .......................... -- 37,179 -- 37,179
Repayment of 8 7/8% senior subordinated
notes ........................................... -- -- -- (175,000)
Proceeds from 11 1/4% senior subordinated
notes ........................................... -- -- -- 225,629
Proceeds from 16% senior notes ................... -- -- -- 65,000
Repayment of revolving credit facility ........... -- -- -- (235,000)
Repayment of senior notes and other loans,
net ............................................. (1,185) (3) -- (1,188)
Payment of deferred financing fees ............... -- -- -- (21,750)
Proceeds from issuance of stock .................. -- -- (154,881) 92,156
Decrease (increase) in intercompany
receivables, net ................................ (6,981) (23,282) -- --
Other financing activities, net .................. (103) 2,118 -- (3,520)
-------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities ..................................... (8,269) 16,012 (154,881) 213,831
-------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 42,159 1,638 -- 43,772
CASH AND CASH EQUIVALENTS, AT BEGINNING OF
PERIOD .......................................... 45 12,658 -- 13,662
Effect of currency exchange rate changes on
cash ............................................ -- 16 -- 16
-------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
$ 42,204 $ 14,312 $ -- $ 57,450
======== =========== =========== ===========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ........... $ 874 $ 90 $ -- $ 26,126
Income taxes, net of refunds ................... $ -- $ -- $ -- $ 5,061
D-44
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH JULY 20, 2001
(DOLLARS IN THOUSANDS)
(PREDECESSOR)
GUARANTOR NONGUARANTOR CONSOLIDATED
CBRE SUBSIDIARIES SUBSIDIARIES TOTAL
---------------- -------------- -------------- ----------------
CASH FLOWS USED IN OPERATING ACTIVITIES ......... $ (37,633) $ (53,363) $ (29,234) $(120,230)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions
received ....................................... -- (11,309) (3,505) (14,814)
Proceeds from sale of properties, businesses and
servicing rights ............................... -- 9,105 439 9,544
Purchases of investments ........................ -- (2,500) (702) (3,202)
Investment in property held for sale ............ -- -- (2,282) (2,282)
Acquisition of businesses including net assets
acquired, intangibles and goodwill ............. -- (31) (1,893) (1,924)
Other investing activities, net ................. 251 (524) 812 539
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................... 251 (5,259) (7,131) (12,139)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility ......... 195,000 -- -- 195,000
Repayment of revolving credit facility .......... (70,000) -- -- (70,000)
(Repayment of) proceeds from senior notes and
other loans, net ............................... (2,490) (1,656) 4,592 446
Payment of deferred financing fees .............. (8) -- -- (8)
(Increase) decrease in intercompany receivables,
net ............................................ (85,712) 52,846 32,866 --
Other financing activities, net ................. 1,489 (81) (616) 792
----------- --------- --------- -----------
Net cash provided by financing activities ...... 38,279 51,109 36,842 126,230
----------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................... 897 (7,513) 477 (6,139)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF
PERIOD ......................................... 62 7,558 13,234 20,854
Effect of currency exchange rate changes on
cash ........................................... -- -- (1,053) (1,053)
----------- --------- --------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ..... $ 959 $ 45 $ 12,658 $ 13,662
=========== ========= ========= ===========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ......... $ 17,194 $ 1,165 $ 98 $ 18,457
Income taxes, net of refunds ................. $ 19,083 $ -- $ -- $ 19,083
D-45
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
(PREDECESSOR)
GUARANTOR NONGUARANTOR CONSOLIDATED
CBRE SUBSIDIARIES SUBSIDIARIES TOTAL
-------------- -------------- -------------- -------------
CASH FLOWS (USED IN) PROVIDED BY OPERATING
ACTIVITIES ..................................... $ (30,270) $ 106,234 $ 4,895 $ 80,859
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions
received ....................................... -- (14,575) (9,093) (23,668)
Proceeds from sale of properties, businesses and
servicing rights ............................... -- 16,926 569 17,495
Purchases of investments ........................ -- (20,316) (3,097) (23,413)
Acquisition of businesses including net assets
acquired, intangibles and goodwill ............. -- (4,959) (1,602) (6,561)
Other investing activities, net ................. (177) 6,336 (2,481) 3,678
---------- --------- --------- ----------
Net cash used in investing activities .......... (177) (16,588) (15,704) (32,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility ......... 179,000 -- -- 179,000
Repayment of revolving credit facility .......... (229,000) -- -- (229,000)
Decrease (increase) in intercompany
receivables, net ............................... 81,779 (82,424) 645 --
Other financing activities, net ................. (2,134) (5,951) 4,562 (3,523)
---------- --------- --------- ----------
Net cash provided by (used in) financing
activities ................................... 29,645 (88,375) 5,207 (53,523)
---------- --------- --------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .................................... (802) 1,271 (5,602) (5,133)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF
PERIOD ......................................... 864 6,287 20,693 27,844
Effect of currency exchange rate changes on
cash ........................................... -- -- (1,857) (1,857)
---------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ..... $ 62 $ 7,558 $ 13,234 $ 20,854
========== ========= ========= ==========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ......... $ 35,464 $ 2,606 $ 282 $ 38,352
Income taxes, net of refunds ................. $ 27,607 $ -- $ -- $ 27,607
21. INDUSTRY SEGMENTS
In the third quarter of 2001, subsequent to the 2001 Merger transaction,
the Company reorganized its business segments as part of its efforts to reduce
costs and streamline its operations. The Company reports its operations through
three geographically organized segments: (1) Americas, (2) Europe, Middle East
and Africa (EMEA) and (3) Asia Pacific. The Americas consists of operations
located in the US, Canada, Mexico, Central and South America. EMEA mainly
consists of operations in Europe, while Asia Pacific includes operations in
Asia, Australia and New Zealand. The Americas results for the period from
February 20, 2001 (inception) through December 31, 2001 include merger-related
and other nonrecurring charges of $5.4 million. The Americas results for the
period from January 1, 2001 through July 20, 2001
D-46
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
include $21.5 million in merger-related and other nonrecurring charges as well
as a nonrecurring sale of mortgage fund contracts of $5.6 million. The Americas
2000 results include a nonrecurring sale of certain non-strategic assets of
$4.7 million. The following table summarizes the revenue and operating income
(loss) by operating segment (dollars in thousands):
COMPANY COMPANY PREDECESSOR PREDECESSOR
--------------- -------------- ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
--------------- -------------- ----------------- ----------------
FEBRUARY 20,
2001
TWELVE MONTHS (INCEPTION) PERIOD FROM TWELVE MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
--------------- -------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
REVENUE
Americas .............................. $ 896,064 $440,349 $ 488,450 $1,074,080
EMEA .................................. 182,222 83,012 78,294 164,539
Asia Pacific .......................... 91,991 39,467 41,190 84,985
---------- -------- --------- ----------
$1,170,277 $562,828 $ 607,934 $1,323,604
========== ======== ========= ==========
OPERATING INCOME (LOSS)
Americas .............................. $ 81,341 $ 49,110 $ (8,336) $ 98,051
EMEA .................................. 17,287 11,463 (2,169) 9,339
Asia Pacific .......................... 7,434 2,159 (3,669) (105)
---------- -------- --------- ----------
106,062 62,732 (14,174) 107,285
INTEREST INCOME ........................ 3,272 2,427 1,567 2,554
INTEREST EXPENSE ....................... 60,501 29,717 20,303 41,700
---------- -------- --------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES .......................... $ 48,833 $ 35,442 $ (32,910) $ 68,139
========== ======== ========= ==========
DEPRECIATION AND AMORTIZATION
Americas .............................. $ 16,958 $ 9,221 $ 18,231 $ 28,600
EMEA .................................. 4,579 1,763 4,729 9,837
Asia Pacific .......................... 3,077 1,214 2,696 4,762
---------- -------- --------- ----------
$ 24,614 $ 12,198 $ 25,656 $ 43,199
========== ======== ========= ==========
CAPITAL EXPENDITURES, NET OF CONCESSIONS
RECEIVED
Americas .............................. $ 10,999 $ 4,692 $ 12,237 $ 16,158
EMEA .................................. 2,018 694 1,557 3,829
Asia Pacific .......................... 1,249 1,115 1,020 3,681
---------- -------- --------- ----------
$ 14,266 $ 6,501 $ 14,814 $ 23,668
========== ======== ========= ==========
EQUITY (INCOME) LOSSES FROM
UNCONSOLIDATED SUBSIDIARIES
Americas .............................. $ (8,425) $ (1,343) $ (2,465) $ (5,553)
EMEA .................................. (82) (22) 20 (3)
Asia Pacific .......................... (819) (189) (429) (949)
---------- -------- --------- ----------
$ (9,326) $ (1,554) $ (2,874) $ (6,505)
========== ======== ========= ==========
D-47
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31
-----------------------------
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
IDENTIFIABLE ASSETS
Americas ............. $ 868,990 $ 941,732
EMEA ................. 198,027 171,621
Asia Pacific ......... 123,059 97,552
Corporate ............ 134,800 143,607
---------- ----------
$1,324,876 $1,354,512
========== ==========
Identifiable assets by industry segment are those assets used in the
Company's operations in each segment. Corporate identifiable assets are
primarily cash and cash equivalents and net deferred tax assets.
DECEMBER 31
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Americas ................................................ $44,294 $37,585
EMEA .................................................... 1,058 751
Asia Pacific ............................................ 4,856 4,199
------- -------
$50,208 $42,535
======= =======
GEOGRAPHIC INFORMATION:
COMPANY COMPANY PREDECESSOR PREDECESSOR
--------------- -------------- ----------------- ----------------
CBRE CBRE CB RICHARD CB RICHARD
HOLDING, HOLDING, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
--------------- -------------- ----------------- ----------------
FEBRUARY 20,
2001
TWELVE MONTHS (INCEPTION) PERIOD FROM TWELVE MONTHS
ENDED THROUGH JANUARY 1, 2001 ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2002 2001 JULY 20, 2001 2000
--------------- -------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
REVENUE
United States ............... $ 849,563 $416,445 $465,281 $1,027,359
All other countries ......... 320,714 146,383 142,653 296,245
---------- -------- -------- ----------
$1,170,277 $562,828 $607,934 $1,323,604
========== ======== ======== ==========
DECEMBER 31
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
LONG-LIVED ASSETS
United States ............... $51,419 $51,314
All other countries ......... 15,215 17,137
------- -------
$66,634 $68,451
======= =======
The long-lived assets shown in the table above include property and
equipment.
22. RELATED PARTY TRANSACTIONS
Included in other current and long-term assets in the accompanying
consolidated balance sheets are employee loans of $5.9 million and $1.6 million
as of December 31, 2002 and 2001, respectively. The
D-48
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
majority of these loans represent prepaid retention and recruitment awards
issued to employees at varying principal amounts, bear interest at rates up to
10.0% per annum and mature on various dates through 2007. These loans and
related interest are typically forgiven over time, assuming that the relevant
employee is still employed by, and is in good standing with, the Company. As of
December 31, 2002, the outstanding employee loan balances included a $0.3
million loan to Raymond Wirta, the Company's Chief Executive Officer, and a
$0.2 million loan to Brett White, the Company's President. These non-interest
bearing loans to Mr. Wirta and Mr. White were issued during 2002 and are due
and payable on December 31, 2003.
The accompanying consolidated balance sheets also include $4.8 million and
$5.9 million of notes receivable from sale of stock as of December 31, 2002 and
2001, respectively. These notes are primarily composed of full-recourse loans
to employees, officers and certain shareholders of the Company, which are
secured by the Company's common stock that is owned by the borrowers. These
full-recourse loans are at varying principal amounts, require quarterly
interest payments, bear interest at rates up to 10.0% per annum and mature on
various dates through 2010.
Pursuant to the Company's 1996 Equity Incentive Plan (EIP), Mr. Wirta
purchased 30,000 shares of CBRE common stock in 2000 at a purchase price of
$12.875 per share that was paid for by delivery of a full recourse promissory
note bearing interest at 7.40%. As part of the 2001 Merger, the 30,000 shares
of
CBRE common stock were exchanged for 30,000 shares of Class B common stock
of the Company. These shares of Class B common stock were substituted for the
CBRE shares as security for the promissory note. All interest charged on the
outstanding promissory note balance for any year is forgiven if Mr. Wirta's
performance produces a high enough level of bonus (approximately $7,500 of
interest is forgiven for each $10,000 of bonus). As a result of bonuses paid in
2001 and in 2002, all interest on Mr. Wirta's promissory note for 2000 and 2001
was forgiven. As of December 31, 2002 and 2001, Mr. Wirta had an outstanding
loan balance of $385,950, which is included in notes receivable from sale of
common stock in the accompanying consolidated balance sheets.
Pursuant to the Company's 1996 EIP, Mr. White purchased 25,000 shares of
CBRE common stock in 1998 at a purchase price of $38.50 per share and 20,000
shares of CBRE common stock in 2000 at a purchase price of $12.875 per share.
These purchases were paid for by delivery of full recourse promissory notes
bearing interest at 7.40%. As part of the 2001 Merger, Mr. White's shares of
CBRE common stock were exchanged for a like amount of shares of Class B common
stock of the Company. These shares of Class B common stock were substituted for
the CBRE shares as security for the notes. A First Amendment to Mr. White's
1998 promissory note provided that the portion of the then outstanding
principal in excess of the fair market value of the shares would be forgiven in
the event that Mr. White was an employee of the Company or its subsidiaries on
November 16, 2002 and the fair market value of a share of the Company's common
stock was less than $38.50 on November 16, 2002. Mr. White's 1998 promissory
note was subsequently amended, terminating the First Amendment and adjusting
the original 1998 Stock Purchase Agreement by reducing the purchase price from
$38.50 to $16.00. During 2002, the 25,000 shares held as security for the
Second Amended Promissory Note were tendered as full payment for the remaining
balance of $400,000 on the 1998 promissory note. All interest charged on the
outstanding promissory note balances for any year is forgiven if Mr. White's
performance produces a high enough level of bonus (approximately $7,500 of
interest is forgiven for each $10,000 of bonus). As a result of bonuses paid in
2001 and in 2002, all interest on Mr. White's promissory notes for 2000 and
2001 was forgiven. As of December 31, 2002 and 2001, respectively, Mr. White
had outstanding loan balances of $257,300 and $657,300, which are included in
notes receivable from sale of common stock in the accompanying consolidated
balance sheets.
As of December 31, 2002 and 2001, Mr. White had an outstanding loan of
$164,832, which is included in notes receivable from sale of common stock in
the accompanying consolidated balance sheets. This outstanding loan relates to
the acquisition of 12,500 shares of CBRE's common stock prior to the 2001
Merger. Subsequent to the 2001 Merger, these shares were converted into shares
of the Company's common stock and the related loan amount was carried forward.
This loan bears interest at 6.0% and is
D-49
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payable at the earlier of: (i) October 14, 2003, (ii) the date of the sale of
shares held by the Company pursuant to the related security agreement or (iii)
the date of the termination of Mr. White's employment.
At the time of the 2001 Merger, Mr. Wirta delivered to the Company an
$80,000 promissory note, which bore interest at 10% per year, as payment for
the purchase of 5,000 shares of the Company's Class B common stock. Mr. Wirta
repaid this promissory note in full in April of 2002. Additionally, Mr. Wirta
and Mr. White delivered full-recourse notes in the amounts of $512,504 and
$209,734, respectively, as payment for a portion of the shares purchased in
connection with the 2001 Merger. During 2002, Mr. Wirta paid down his loan
amount by $40,004 and Mr. White paid off his note in its entirety. As of
December 31, 2002, Mr. Wirta has an outstanding loan of $472,500, which is
included in notes receivable from sale of common stock in the accompanying
consolidated balance sheet.
In the event that the Company's common stock is not freely tradable on a
national securities exchange or an over-the-counter market by June 2004, the
Company has agreed to loan Mr. Wirta up to $3.0 million on a full-recourse
basis to enable him to exercise an existing option to acquire shares held by
The Koll Holding Company, if Mr. Wirta is employed by the Company at the time
of exercise, was terminated without cause or resigned for good reason. This
loan will become repayable upon the earliest to occur of: (1) 90 days following
termination of his employment, other than by the Company without cause or by
him for good reason, (2) seven months following the date the Company's common
stock becomes freely tradable as described above or (3) the receipt of proceeds
from the sale of the pledged shares. This loan will bear interest at the prime
rate in effect on the date of the loan, compounded annually, and will be
repayable to the extent of any net proceeds received by Mr. Wirta upon the sale
of any shares of the Company's common stock. Mr. Wirta will pledge the shares
received upon exercise of the option as security for the loan.
23. SUBSEQUENT EVENT
On February 17, 2003, the Company, CBRE, Apple Acquisition Corp. (the
Merger Sub) and Insignia Financial Group, Inc. (Insignia) entered into an
Agreement and Plan of Merger (the Insignia Acquisition Agreement). Pursuant to
the terms and subject to the conditions of the Insignia Acquisition Agreement,
the Merger Sub will merge with and into Insignia, the separate existence of the
Merger Sub will cease and Insignia will continue its existence as a wholly
owned subsidiary of CBRE (the Insignia Acquisition).
When the Insignia Acquisition becomes effective, each outstanding share of
common stock of Insignia (other than the cancelled shares, dissenting shares
and shares held by wholly owned subsidiaries of Insignia) will be converted
into the right to receive $11.00 in cash, without interest, from the Merger
Sub, subject to adjustments as provided in the Insignia Acquisition Agreement.
At the same time, each outstanding share of common stock of the Merger Sub will
be converted into one share of common stock of the surviving entity in the
Insignia Acquisition.
As of February 17, 2003, the transaction was valued at approximately
$415.0 million, including the repayment of net debt and the redemption of
preferred stock. In addition to Insignia shareholder approval, the transaction,
which is expected to close in June 2003, is subject to the receipt of financing
and regulatory approvals. The sale by Insignia on March 14, 2003 of its
residential real estate services subsidiaries, Insignia Douglas Elliman LLC and
Insignia Residential Group, Inc., to Montauk Battery Realty, LLC and Insignia's
receipt of the cash proceeds from such sale will not affect the consideration
to be paid in the Insignia Acquisition.
D-50
CBRE HOLDING INC.
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following table sets forth the Company's unaudited quarterly results
of operations. The unaudited quarterly information should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto. The operating results for any quarter are not
necessarily indicative of the results for any future period.
COMPANY COMPANY COMPANY COMPANY
-------------- --------------- -------------- -------------
CBRE CBRE CBRE CBRE
HOLDING, HOLDING, HOLDING, HOLDING,
INC. INC. INC. INC.
-------------- --------------- -------------- -------------
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
-------------- --------------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Revenue ............................ $ 376,466 $ 284,928 $ 284,893 $ 223,990
Operating income ................... $ 52,168 $ 21,162 $ 29,263 $ 3,469
Net income (loss) .................. $ 15,097 $ 1,881 $ 7,289 $ (5,540)
Basic EPS (1) ...................... $ 1.01 $ 0.13 $ 0.48 $ (0.37)
Weighted average shares
outstanding for basic EPS (1) ..... 15,000,576 15,016,044 15,034,616 15,050,633
Diluted EPS (1) .................... $ 0.99 $ 0.12 $ 0.48 $ (0.37)
Weighted average shares
outstanding for
diluted EPS (1) ................... 15,238,038 15,225,788 15,217,186 15,050,633
----------
(1) EPS is defined as earnings (loss) per share
COMPANY COMPANY COMPANY
-------------- --------------- --------------
CBRE CBRE CBRE
HOLDING, HOLDING, HOLDING,
INC. INC. INC.
-------------- --------------- --------------
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30,
2001 2001 2001
-------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Revenue .............. $ 337,262 $ 225,566 --
Merger-related and
other non re-
curring charges ..... $ 3,166 $ 3,276 --
Operating income
(loss) .............. $ 46,949 $ 15,783 --
Net income (loss) .... $ 16,178 $ 1,978 $ (730)
Basic EPS(1) ......... $ 1.09 $ 0.17 $ (11.45)
Weighted average
shares
outstanding for
basic EPS(1) ........ 14,781,088 11,865,459 63,801
Diluted EPS(1) ....... $ 1.09 $ 0.17 $ (11.45)
Weighted average
shares
outstanding for
diluted EPS(1) ...... 14,905,538 11,865,459 63,801
COMPANY PREDECESSOR PREDECESSOR PREDECESSOR
------------- ----------------- ----------------- ----------------
CBRE CB RICHARD CB RICHARD CB RICHARD
HOLDING, ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
------------- ----------------- ----------------- ----------------
FEBRUARY 20,
2001 PERIOD FROM
(INCEPTION) JULY 1, 2001 THREE MONTHS THREE MONTHS
THROUGH THROUGH ENDED ENDED
MARCH 31, JULY 20, JUNE 30, MARCH 31,
2001 2001 2001 2001
------------- ----------------- ----------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Revenue .............. $-- $ 50,587 $ 284,849 $ 272,498
Merger-related and
other non re-
curring charges ..... $-- $ 16,519 $ 5,608 $ --
Operating income
(loss) .............. $-- $ (19,954) $ 3,455 $ 2,325
Net income (loss) .... $-- $ (29,653) $ (1,521) $ (2,846)
Basic EPS(1) ......... $-- $ (1.40) $ (0.07) $ (0.13)
Weighted average
shares
outstanding for
basic EPS(1) ........ 10 21,194,674 21,328,247 21,309,550
Diluted EPS(1) ....... $-- $ (1.40) $ (0.07) $ (0.13)
Weighted average
shares
outstanding for
diluted EPS(1) ...... 10 21,194,674 21,328,247 21,309,550
----------
(1) EPS is defined as earnings (loss) per share
D-51
CBRE HOLDING INC.
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
COMPANY
-------------------------------------------------
CBRE HOLDING, INC.,
-------------------------------------------------
ALLOWANCE
FOR BAD LEGAL LEASE OTHER
DEBTS RESERVE RESERVES RESERVES
---------- ----------- ---------- ---------
Balance, February 20, 2001 .............. $ -- $ -- $ -- $ --
Acquired due to the 2001 Merger with
CB Richard Ellis Services, Inc ......... 12,074 2,943 11,111 894
Purchase accounting adjustments ......... -- 2,000 8,823 --
Charges to expense ...................... 1,317 1,086 -- 311
Write-offs, payments and other .......... (1,643) (506) (178) (201)
-------- -------- ------- ------
Balance, December 31, 2001 .............. 11,748 5,523 19,756 1,004
Purchase accounting adjustments ......... -- (1,093) 5,014 --
Charges to expense ...................... 3,415 1,236 -- 2,998
Write-offs, payments and other .......... (4,271) (2,100) 406 (782)
-------- -------- ------- ------
Balance, December 31, 2002 .............. $ 10,892 $ 3,566 $25,176 $3,220
======== ======== ======= ======
PREDECESSOR
-------------------------------------------------
CB RICHARD ELLIS SERVICES, INC.
-------------------------------------------------
ALLOWANCE
FOR BAD LEGAL LEASE OTHER
DEBTS RESERVE RESERVES RESERVES
---------- ----------- ---------- ---------
Balance, December 31, 1999 .............. $ 15,560 $ 8,263 $ 13,994 $ 573
Charges to expense ..................... 3,061 2,015 24 25
Write-offs, payments and other ......... (5,990) (5,139) (1,988) 129
-------- -------- -------- ------
Balance, December 31, 2000 .............. 12,631 5,139 12,030 727
Charges to expense ..................... 3,387 69 -- 416
Write-offs, payments and other ......... (3,944) (2,265) (919) (249)
-------- -------- -------- ------
Balance, July 20, 2001 .................. $ 12,074 $ 2,943 $ 11,111 $ 894
======== ======== ======== ======
D-52
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
INSIGNIA FINANCIAL GROUP, INC.
The undersigned hereby appoints , and , or any
of them, proxies (each with full power of substitution) to vote, as indicated
below and in their discretion upon such other matters, not known or determined
as of the date of the proxy statement, as to which stockholders may be entitled
to vote at the special meeting of the stockholders of Insignia Financial Group,
Inc. to be held at on , 2003 at , local time, and at any
adjournment or postponement of the special meeting, as indicated on the reverse
side.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INSIGNIA
FINANCIAL GROUP, INC. This proxy, when properly executed, will be voted in a
manner directed herein by the undersigned stockholder. IF NO DIRECTION IS MADE,
THE PROXY WILL BE VOTED "FOR" THE PROPOSAL TO ADOPT THE AGREEMENT AND PLAN OF
MERGER AND APPROVE THE MERGER and by the persons named as proxies to vote in
accordance with their judgment with respect to matters which the Board of
Directors of Insignia did not know as of the date of the proxy statement would
be presented at the special meeting.
A proposal to adopt the Agreement and Plan of Merger, dated as of February
17, 2003, by and among Insignia Financial Group, Inc., CB Richard Ellis
Services, Inc., CBRE Holding, Inc. and Apple Acquisition Corp. and approve the
merger of Apple Acquisition Corp. with and into Insignia Financial Group, Inc.
as provided therein.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of the notice of the special
meeting and the proxy statement.
PLEASE SIGN AND DATE THIS PROXY BELOW.
Date: , 2003
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---------------------------------
Please sign exactly as your name
appears at left. When signing as
attorney, executor,
administrator, guardian or
corporate official, please give
full title.
INSIGNIA FINANCIAL GROUP, INC.
200 PARK AVENUE
NEW YORK, NEW YORK 10166
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2003
To the Stockholders of Insignia Financial Group, Inc.:
A special meeting of the stockholders of Insignia Financial Group, Inc.
will be held at on , 2003 at , local time, to consider
and vote upon the following matter:
o A proposal to adopt the Agreement and Plan of Merger, dated as of
February 17, 2003, by and among Insignia Financial Group, Inc., CBRE
Holding, Inc., CB Richard Ellis Services, Inc., a direct wholly owned
subsidiary of CBRE Holding, and Apple Acquisition Corp., a direct wholly
owned subsidiary of CB Richard Ellis Services, and approve the merger of
Apple Acquisition with and into Insignia Financial Group, with Insignia
Financial Group being the surviving corporation, in accordance with the
terms and subject to the conditions of the merger agreement. In the
merger:
o each outstanding share of our common stock will be converted into the
right to receive $11.00 in cash, subject to decrease if we pay a
dividend under specified circumstances prior to the time of the merger
and subject to increase of up to $1.00 per share if we sell certain
specified assets and receive net cash proceeds at or prior to the time
of the merger in excess of a specified amount (generally $45 million,
subject to increase);
o each outstanding share of our series A convertible preferred stock
will be converted into the right to receive $100.00 in cash, plus an
amount equal to any compound dividends accrued and unpaid on the
share; and
o each outstanding share of our series B convertible preferred stock
will be converted into the right to receive $100.00 in cash, plus an
amount equal to any compound dividends accrued and unpaid on the
share;
in each case, without interest and less any applicable withholding taxes
and other than shares held by us as treasury stock or owned by CBRE
Holding, CB Richard Ellis Services or Apple Acquisition or their
respective subsidiaries, or held by stockholders who perfect their
appraisal rights under Delaware law and do not effectively withdraw or
lose their appraisal rights.
o Such other business as may properly come before the special meeting or
any adjournment or postponement of the meeting.
The board of directors has specified , 2003, at the close of
business, as the record date for the purpose of determining the stockholders
who are entitled to receive notice of and to vote at the special meeting. A
list of the stockholders entitled to vote at the special meeting will be
available for examination by any stockholder at the special meeting. For 10
days prior to the special meeting, this stockholder list will also be available
for inspection by stockholders at our corporate offices at 200 Park Avenue, New
York, New York, during ordinary business hours.
Please read the proxy statement and other materials concerning Insignia
Financial Group, Inc. and the merger, which are mailed with this notice, for a
more complete statement regarding the proposals to be acted upon at the special
meeting. This notice also constitutes notice of appraisal rights under Delaware
law in connection with the merger, as described in the proxy statement and
Appendix C thereto.
BOTH OUR BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE OF OUR BOARD OF
DIRECTORS HAVE UNANIMOUSLY DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE
BEST INTERESTS OF OUR STOCKHOLDERS. Accordingly, our board of directors has
approved the merger agreement and the merger and our board of directors and the
special committee recommend that you vote "FOR" adoption of the merger
agreement and approval of the merger.
Your vote is important. Whether or not you plan to attend the special
meeting, please complete, sign and date the accompanying proxy card and return
it in the enclosed prepaid envelope. Failure to return a properly executed
proxy card or to vote at the special meeting will have the same effect as a
vote "AGAINST" the adoption of the merger agreement and the approval of the
merger. If you attend the special meeting, you may revoke your proxy and vote
in person if you wish, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
By Order of the Board of
Directors
/s/ Adam B. Gilbert
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Adam B. Gilbert
Secretary