CBRE

CBRE Holding, Inc. - Q1 2002 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2002. CBRE Holding, Inc. (the Company) operates as a global real estate services firm following its acquisition of CB Richard Ellis Services, Inc. in July 2001. The Company reports operations through three geographic segments: The Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific.

Auditor Status: The financial statements included in this filing are unreviewed. The Company was unable to obtain a review from its former auditor, Arthur Andersen LLP, and is actively seeking a new independent auditor. No auditor has opined that these statements present fairly the financial position of the Company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by $48.5 million (17.8%) year-over-year. This was primarily driven by a $30.7 million drop in lease revenue and a $12.8 million decline in sales revenue, largely attributed to the North American market.
• Expense Reductions: Commissions and fees decreased by $22.7 million (18.5%), and operating/administrative expenses fell by $22.9 million (16.9%) due to cost-cutting measures and organizational restructuring implemented post-merger.
• Increased Interest Expense: Interest expense rose significantly to $16.0 million (up $7.0 million or 76.9%) due to the debt incurred to finance the 2001 merger.
• Goodwill Accounting: Depreciation and amortization decreased by $4.1 million (35.1%) following the adoption of SFAS No. 142, which eliminated the amortization of goodwill.
• Cash Flow: Net cash used in operating activities improved (decreased) by $47.7 million compared to the prior year, primarily due to lower payments for 2001 bonuses and profit sharing.

Outlook, Risks, and Contingencies

• Liquidity: The Company believes existing sources of liquidity, including cash flow from operations and a $90 million revolving credit facility (with $37.5 million outstanding), are sufficient to meet requirements for the next 12 months.
• Debt Covenants: The Company is subject to restrictive covenants limiting additional indebtedness, dividends, and asset sales. It must maintain minimum net worth and coverage ratios.
• Credit Rating Downgrade: On March 12, 2002, Moody's downgraded the Company's senior secured term loans to B1 (from Ba3) and Senior Subordinated Notes to B3 (from B2). Standard & Poor's ratings remain BB- and B, respectively.
• Legal Proceedings: Class action lawsuits regarding the 2000 privatization transaction have been resolved. The Delaware appeal regarding attorney fees was dismissed in February 2002, and the California action was dismissed with prejudice.
• Forward-Looking Risks: Risks include commercial real estate vacancy levels, property values, rental rates, and general economic recessions.

Investor Verification Checklist

• Auditor Status: Verify the appointment of a new independent auditor and the subsequent review of these unaudited financial statements.
• Debt Compliance: Confirm the Company remains in compliance with debt covenants, particularly given the recent credit rating downgrades and high leverage.
• Revenue Trends: Monitor the continued decline in North American lease and sales revenue and the effectiveness of cost-cutting measures in maintaining operating margins.
• Interest Rate Exposure: Assess the impact of variable rate debt (LIBOR-based) on future interest expenses given the current rate environment.
• Goodwill Impairment: Watch for future disclosures regarding the annual impairment testing of goodwill ($611.3 million) under SFAS No. 142.