================================================================================
SECURITIES AND EXCHANGE COMMISSION
SCHEDULE 14A/A-2 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.
--------------------------------------------------------------------------------
(Name of registrant as specified in its charter)
--------------------------------------------------------------------------------
(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.
--------------------------------------------------------------------------
(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.
--------------------------------------------------------------------------
(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.
--------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction: $331,320,706
--------------------------------------------------------------------------
(5) Total fee paid: $26,803.85
--------------------------------------------------------------------------
[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:
--------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------
================================================================================
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 an amended and restated 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 (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) will be
converted into the right to receive $11.00 in cash, subject to increase to
$11.156 in cash per share if we complete the sale of our real estate investment
assets prior to the merger to Island Fund I LLC, which is affiliated with the
undersigned and other executive officers of Insignia. If the sale to Island
Fund is not completed prior to the merger, we may attempt to sell any of our
real estate investment assets to a different purchaser prior to or
simultaneously with the merger. If we receive net cash proceeds from such other
sale prior to or simultaneously with the merger in excess of a specified amount
(generally $45 million, subject to adjustment), the $11.00 per share merger
consideration may be increased by up to $1.00 per share. However, we believe
that a sale of our real estate investment assets to a party other than Island
Fund prior to or simultaneously with the merger and a resulting increase in the
merger consideration to a price higher than $11.156 are not likely to occur. In
addition, the completion of the sale of our real estate investment assets to
Island Fund and a corresponding increase in the merger consideration to
$11.156 are subject to conditions that are not expected to be fulfilled until
after the special meeting. As a result, at the time you vote on the merger you
will not know whether or not the merger consideration will be greater than
$11.00 per share and you should not assume or expect that the merger
consideration will 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 ....................................................................... 7
The Companies ......................................................................... 7
The Special Meeting ................................................................... 8
The Merger ............................................................................ 8
Recommendations of the Special Committee and our Board of Directors ................... 11
Opinion of Bear, Stearns & Co. Inc .................................................... 11
Interests of our Directors and Executive Officers in the Merger ....................... 11
Material U.S. Federal Income Tax Consequences ......................................... 13
The Merger Agreement .................................................................. 13
Appraisal Rights ...................................................................... 15
Regulatory Approvals .................................................................. 15
Financing of the Merger ............................................................... 16
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE .......................................... 17
INTRODUCTION ............................................................................. 19
Proposal to be Considered at the Special Meeting ...................................... 19
Record Date; Voting Rights; Vote Required for Approval ................................ 20
Voting and Revocation of Proxies ...................................................... 21
Solicitation of Proxies; Expenses of Solicitation ..................................... 21
Market Price Data ..................................................................... 22
Dividends ............................................................................. 22
Recent Developments ................................................................... 22
THE MERGER ............................................................................... 25
Background of the Merger .............................................................. 25
Recommendations of the Special Committee and Our Board of Directors ................... 34
Our Reasons for the Merger and the Recommendations of the Special Committee and Our
Board of Directors ................................................................... 34
Reasons of CBRE Holding for Engaging in the Merger .................................... 36
Opinion of Bear, Stearns & Co. Inc .................................................... 37
Other Related Agreements .............................................................. 43
Interests of Executive Officers and Directors in the Merger ........................... 44
Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders ....... 52
Effective Time of Merger .............................................................. 54
Payment of Merger Consideration and Surrender of Stock Certificates ................... 54
Financing of the Merger; Fees and Expenses of the Merger .............................. 55
Appraisal Rights ...................................................................... 58
Regulatory Approvals .................................................................. 60
THE MERGER AGREEMENT ..................................................................... 62
General ............................................................................... 62
Certificate of Incorporation; Bylaws; Directors and Officers of the Surviving
Corporation .......................................................................... 62
Consideration to be Received by Our Stockholders ...................................... 62
Potential Adjustments to the Common Stock Merger Consideration ........................ 62
Stock Options, Warrants, Restricted Stock Awards and Participation Interests .......... 65
Our Representations and Warranties .................................................... 65
Our Covenants ......................................................................... 66
i
Representations, Warranties and Covenants of CBRE Holding, CB Richard Ellis Services
and Apple Acquisition ................................................................ 68
Stockholder Meeting ................................................................... 70
No Solicitation ....................................................................... 70
Conditions to the Merger .............................................................. 71
Conditions to Payment of Increased Merger Considerations as a Result of a Sale of Real
Estate Investment Assets to Island Fund .............................................. 73
Termination of the Merger Agreement ................................................... 74
Termination Fee; Indemnification; Amendment of No Raid Agreement ...................... 75
Amendments to the Merger Agreement .................................................... 76
SALE OF OUR REAL ESTATE INVESTMENT ASSETS IN CONNECTION WITH THE
MERGER .................................................................................. 77
Adjustments to Cash Purchase Price .................................................... 77
Closing Conditions .................................................................... 77
Third Party Acquisition Proposals for the Real Estate Investment Assets ............... 77
Termination; Termination Fee and Reimbursement of Expenses ............................ 78
Exclusive Pre-Closing Remedy for Insignia and the CBRE Companies ...................... 78
Certain Other Provisions of the Purchase Agreement .................................... 79
Potential Increase in Common Stock Merger Consideration if Purchase Agreement Closes .. 79
CBRE HOLDING, INC. ....................................................................... 81
Overview .............................................................................. 81
History ............................................................................... 81
Business Segments ..................................................................... 81
Competitive Strengths ................................................................. 84
Risk Factors .......................................................................... 85
Employees ............................................................................. 91
Properties ............................................................................ 91
Legal Proceedings ..................................................................... 91
CBRE Holding's Selected Historical Financial Data ..................................... 92
Management's Discussion and Analysis of Financial Condition and Results of Operations . 94
Quantitative and Qualitative Disclosures about Market Risk ............................ 111
Change in Accountants ................................................................. 112
Financial Statements .................................................................. 112
OTHER MATTERS ............................................................................ 113
Security Ownership of Certain Beneficial Owners and Management ........................ 113
Legal Counsel ......................................................................... 115
Other Matters for Action at the Special Meeting ....................................... 115
Stockholder Proposals ................................................................. 115
Available Information ................................................................. 115
APPENDIX A AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER ...................................................................... A-1
APPENDIX B OPINION OF BEAR, STEARNS & CO. INC. ........................................... B-1
APPENDIX C PURCHASE AGREEMENT ............................................................ C-1
APPENDIX D SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW ............................................................. D-1
APPENDIX E CBRE HOLDING'S FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA .......................................................... E-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 if the sale of our real estate investment assets to Island Fund I LLC
is completed, as described below, common stockholders will receive an
additional $0.156 in cash per share;
o if the sale to Island Fund is not completed prior to the merger and we
sell our real estate investment assets to a different purchaser prior
to or simultaneously with the merger, common stockholders may receive,
instead of the additional $0.156 in cash per share described above, up
to $1.00 per share if we receive net cash proceeds from such other
transaction in excess of a specified amount (generally $45 million,
subject to adjustment) and do not retain any liabilities relating to
the sold assets. However, we believe that a sale of our real estate
investment assets to a party other than Island Fund prior to the
merger and a resulting increase in the merger consideration to a price
higher than $11.15 per share are not likely to occur;
o if the sale to Island Fund is not completed prior to or simultaneously
with the merger or we terminate the purchase agreement, in either case
because of specified circumstances, we and CBRE Holding are allowed to
withhold $5 million in liquidated damages from amounts otherwise
payable in connection with the merger to Andrew L. Farkas, our chief
executive officer and the controlling person of Island Fund. If Island
Fund and Mr. Farkas confirm in writing that the withholding has been
or may be properly made by us and CBRE Holding, approximately 10% of
the amount withheld will be paid to our stockholders and the merger
consideration will increase to $11.019 per share; and
o common stockholders who properly exercise their appraisal rights will
receive, instead of any of the amounts described above, 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 was the amount of merger consideration to be paid to holders of
Insignia common stock determined?
A: The merger consideration resulted from 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. CBRE
Holding has informed us that the material factors it considered in
negotiating the amount of the merger consideration were:
o CBRE Holding's view of the prospects for the combined CBRE/Insignia
business based on the results of CBRE Holding's due diligence review
and its knowledge of the real estate services business;
1
o CBRE Holding's belief that it could obtain estimated annual cost
savings of approximately $34 million from the elimination of
overlapping business resources and functions;
o CBRE Holding's belief at the time that the merger agreement was
executed that it may not be able to sell our real estate investment
assets for more than $45 million prior to the closing of the merger,
which was less than the estimated book value of such assets as of
December 31, 2002;
o the amount and terms of the debt financing commitment CBRE Holding
received and the equity financing commitments it received from
affiliates of Blum Capital Partners, L.P.;
o our historical financial results, our financial condition at the time
the merger agreement was entered into and CBRE Holding's view of our
prospects as a stand-alone company; and
o CBRE Holding's belief that our special committee and board of
directors would not agree to a lower purchase price.
The material factors that we considered in negotiating the amount of the
merger consideration were:
o the merger consideration of $10.15 per share initially offered by CBRE
Holding;
o the view of our special committee and board of directors that CBRE
Holding's first offer was not the highest price per share it would
pay;
o the range of low and high sale prices of $5.45 to $13.24 per share of
our common stock since January 1, 2001, as reported on the New York
Stock Exchange;
o the adverse trend in the commercial real estate services business in
the recent past;
o the expectation that a strategic buyer like CBRE Holding would put a
higher value on our business than a financial buyer;
o the view of our special committee and board of directors that CBRE
Holding's debt to equity ratio prior to the proposed merger would
limit its ability to borrow additional funds to finance the merger;
o our special committee's and board of director's view that we have
obtained the highest price per share that CBRE Holding is willing to
pay; and
o the presentations made by Bear Stearns to our special committee and
board of directors and Bear Stearns' 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.
Q: What is the purchase agreement with Island Fund I LLC regarding our real
estate investment assets?
A: Insignia, CBRE Holding and its direct and indirect subsidiaries, CB Richard
Ellis Services, Inc. and Apple Acquisition Corp., entered into a purchase
agreement with Island Fund that provides for the purchase by Island Fund of
our real estate investment assets immediately prior to the closing of the
merger. Island Fund is a newly-formed limited liability company that is
affiliated with each of 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. Mr. Farkas
also owns all of the equity interests of the managing member of Island
Fund, and Messrs. Farkas, Aston and Uretta and Jeffrey P. Cohen, executive
vice president of Insignia are officers of both Island Fund and its
managing member. The purchase agreement provides that the cash purchase
price for the real estate investment assets will be an aggregate of
approximately $44 million, subject to adjustment if, prior to the effective
time of the merger, we receive distributions from, or make capital
contributions to, these assets. In addition to the cash purchase price, the
purchase agreement provides that Island Fund will assume existing
employment-related contractual obligations of Insignia to Messrs. Farkas,
Aston and Uretta valued at approximately $7.8 million. If the transactions
contemplated by the purchase agreement closes prior to the closing of the
merger and certain conditions under the merger agreement are satisfied, our
common stockholders will receive $11.156 in cash per share in
2
connection with the merger. Under the merger agreement, the payment of this
increased merger consideration is conditioned upon the performance by us of
certain covenants and the accuracy of certain representations and
warranties in the merger agreement that are related to the purchase
agreement with Island Fund. In addition, under the Island Fund purchase
agreement the completion of the sale of our real estate investment assets
to Island Fund is conditioned on the receipt of certain third party
consents and certain other customary conditions precedent.
Q: Why will the merger consideration be increased by $0.156 if the sale to
Island Fund is completed prior to the closing of the merger?
A: The merger agreement provides that, if we sell any of our real estate
investment assets without retaining any liabilities relating to such 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. Under
these terms, our stockholders would not be entitled to any additional
merger consideration as a result of the proposed sale of the real estate
investment assets to Island Fund because, among other things, we would
retain $11.7 million in contingent liabilities related to the real estate
investment assets following the closing of the merger. However, we and the
other parties to the original merger agreement have entered into an amended
and restated merger agreement, which provides that our stockholders will
receive an additional $0.156 in cash per share under the circumstances
described in more detail in this proxy statement. See "Sale of Our Real
Estate Investment Assets In Connection With the Merger."
Q. Is the closing of the sale of our real estate investment assets to Island
Fund a condition to the closing of the merger?
A: No. However, if the conditions to the completion of the merger have been
satisfied or waived and the purchase of our real estate investment assets
by Island Fund has not closed, we will complete the merger and our
stockholders will not receive the additional merger consideration that
would be payable if we completed the sale to Island Fund. See, "The Merger
Agreement--Conditions to Payment of Increased Merger Consideration as a
Result of a Sale of Real Estate Investment Assets to Island Fund."
Q: Why does the merger agreement provide that potential increases in the
merger
consideration generally would be based on Insignia having received net cash
proceeds in excess of $45 million for the real estate investment 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 investment assets could be sold for their book value which at that
time was estimated by CBRE Holding to be approximately $67.2 million as of
December 31, 2002, in a transaction that would close on or prior to the
closing date of the merger. The only offer for the real estate investment
assets at that time was for $45 million from Andrew L. Farkas. This offer
was received prior to solicitation by us of any other offers. CBRE Holding
rejected this offer, indicating it was seeking a proposal with a higher
price and a greater degree of certainty of closing. 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 (subject to
adjustment), up to a maximum of $1.00 per share of our common stock.
Q: Why is any potential increase in the merger consideration under the merger
agreement 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 investment 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.
3
Q: When will I know if the merger consideration has been increased?
A: If the sale of the real estate investment assets to Island Fund is
completed prior to the closing of the merger or in the unlikely event that
we terminate our agreement with Island Fund and complete a sale of our real
estate investment assets to a different purchaser prior to or
simultaneously with the merger, we will promptly and publicly announce the
completion of that transaction and the amount by which the merger
consideration will be increased. However, the Island Fund transaction is
subject to conditions that will not be satisfied until after the special
meeting, or it may not be completed at all. As a result, at the time you
vote on the merger you will not know whether or not the merger
consideration will be greater than $11.00 per share and you should not
assume or expect that 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 owner 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 investment 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 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 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."
4
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 receiving at least $75
million under its amended and restated credit agreement, the satisfaction
of the conditions to the release from escrow of $200 million from the sale
of senior notes of CBRE Escrow, Inc., a wholly owned subsidiary of CB
Richard Ellis Services, or alternatively, obtaining at least $560 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."
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. You may also
vote by telephone by calling 1-866-580-7645 or through the Internet at
https://www.proxyvotenow.com/ifs. Failure to return your proxy, to vote by
telephone or through the Internet or to 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 or completed it by telephone or through the Internet?
5
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 or complete a new, later dated proxy by telephone or through the
Internet. 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
6
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
7
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 and the related transactions.
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 PP. )
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
Amended and Restated Agreement and Plan of Merger, dated as of May 28, 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 May
19, 2003 are entitled to notice of and to vote at the special meeting. On that
date, there were 1,416 holders of record of our common stock and 24,070,493
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 6.4% 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 the following, as applicable (in each case, subject
to decrease if we pay a dividend under specified circumstances prior
to the merger):
o $11.00 per share;
o an additional $0.156 per share, if the sale of our real estate
investment assets to Island Fund is completed prior to the merger
and the conditions provided in the merger agreement for the
payment of this increased merger consideration are satisfied; and
o if the sale to Island Fund is not completed prior to the merger
and we sell our real estate investment assets to a different
purchaser prior to or simultaneously with the merger, common
stockholders may receive, instead of the additional $0.156 in
cash per share
8
described above, up to $1.00 per share if we receive net cash
proceeds from such other transaction in excess of a specified
amount (generally $45 million, subject to adjustment) and do not
retain any liabilities relating to the sold assets. However, we
believe that a sale of our real estate investment assets to a
party other than Island Fund prior to the merger and a resulting
increase in the merger consideration to a price higher than
$11.156 per share are not likely to occur; and
o if the sale to Island Fund is not completed prior to the merger
or we terminate the purchase agreement, in either case because of
specified circumstances, we and CBRE Holding are allowed to
withhold $5 million in liquidated damages from amounts otherwise
payable in connection with the merger to Andrew L. Farkas, our
chief executive officer and the controlling person of Island
Fund. If Island Fund and Mr. Farkas confirm in writing that the
withholding has been or may be properly made by us and CBRE
Holding, approximately 10% of the amount withheld will be paid to
our stockholders and the merger consideration will increase to
$11.019 per share; and
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 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.
In addition, the completion of the sale of our real estate investment assets to
Island Fund and a corresponding increase in the merger consideration to $11.156
are subject to conditions that are not expected to be fulfilled until after the
special meeting. As a result, at the time you vote on the merger you will not
know whether or not the merger consideration will be greater than $11.00 per
share and you should not assume or expect that 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 warrants and
all outstanding options other than those described below, 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.
Outstanding options to purchase our common stock granted pursuant to our
1998 Stock Incentive Plan, whether vested or unvested, will be cancelled and
will represent the right to receive a cash payment, without interest, equal to
the excess, if any, of the higher of (a) the merger consideration, and (b) the
highest final sale price per share of our common stock as reported on the New
York Stock Exchange on any day during the 60-day period preceding the closing
of the merger, over the exercise price of the options, multiplied by the number
of shares of common stock subject to the options, less any applicable
withholding taxes. For example, the highest final sale price per share of our
common stock reported on the NYSE during the 60-day period preceding the date
of this proxy statement was $11.28 per share on May 9, 2003, which is higher
than the merger consideration.
9
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.
SALE OF OUR REAL ESTATE INVESTMENT ASSETS IN CONNECTION WITH THE MERGER (SEE
PP. )
Insignia, CBRE Holding, CB Richard Ellis Services, Apple Acquisition and
Island Fund I, LLC have entered into a purchase agreement providing for the
purchase by Island Fund of all of our real estate investment assets immediately
prior to the closing of the merger. Island Fund is a newly formed limited
liability company that is affiliated with each of 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. Mr. Farkas also owns all of the equity interests of the managing
member of Island Fund, and Messrs. Farkas, Aston and Uretta and Jeffrey P.
Cohen, executive vice president of Insignia, are officers of both Island Fund
and its managing member. The purchase agreement provides that the cash purchase
price for these assets will be an aggregate of approximately $44 million,
subject to adjustment if, prior to the effective time of the merger, we receive
distributions from, or make capital contributions to, these assets. In addition
to the cash purchase price, the purchase agreement provides that Island Fund
will assume existing employment-related contractual obligations of Insignia to
Messrs. Farkas, Aston and Uretta valued at approximately $7.8 million.
The merger agreement provides that if we are able to realize more than $45
million in net proceeds from the sale of our real estate investment assets, the
amount received over $45 million will be paid to our stockholders, up to an
additional $1.00 per share of our common stock. The merger agreement also
provides that liabilities related to the real estate assets to be sold that are
retained by us after the merger would reduce the amount of net proceeds from
the sale of the real estate investment assets. The purchase agreement with
Island Fund provides that we would remain liable for $11.7 million in contingent
liabilities related to the real estate investment assets, with the result that
the net proceeds would be less than $45 million and, our stockholders would not
receive any additional consideration under the merger agreement.
However, we and the CBRE Companies have amended the original merger
agreement to provide that if the sale to Island Fund is completed immediately
prior to the merger and the conditions under the merger agreement described
below are satisfied, the merger consideration will nonetheless increase from
$11.00 per share to $11.156 per share. There can be no assurance that the
transactions contemplated by the purchase agreement will be consummated prior to
the completion of the merger. The consummation of the transactions contemplated
by the purchase agreement with Island Fund and any payment of the increased
merger consideration are subject to conditions that are not expected to be
fulfilled until after the special meeting. As a result, at the time you vote on
the merger, you will not know whether or not the common stock merger
consideration will be greater than $11.00 per share and you should not assume or
expect that the merger consideration will be greater than $11.00 per share.
Under the merger agreement, the payment of any increased merger
consideration as a result of the sale of real estate investment assets to
Island Fund is conditioned upon the performance by us of certain covenants and
the accuracy of certain representations and warranties in the merger agreement
that are related to the purchase agreement with Island Fund. In addition, under
the Island Fund purchase agreement the completion of the sale of our real
estate investment assets to Island Fund is conditioned on the receipt of
certain third party consents and certain other customary conditions precedent.
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."
10
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 estimated
annual costs savings of approximately $34 million from the elimination of
overlapping business resources and functions after the merger.
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 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,
the date of the original merger agreement, and 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.
11
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, based upon the outstanding
shares of common stock, options, warrants and restricted stock awards as of the
record date and assuming that the merger were to occur on June 30, 2003:
AGGREGATE PAYMENTS
TO BE RECEIVED
AGGREGATE PAYMENTS ASSUMING AN
TO BE RECEIVED INCREASED MERGER
ASSUMING MERGER CONSIDERATION OF
NAME OF EXECUTIVE OFFICER OR CONSIDERATION OF APPROXIMATELY
DIRECTOR $11.00 PER SHAR $11.156 PER SHARE
---------------------------------------------------------- -------------------- -------------------
James A. Aston(1)(4) .................................... $ 3,099,997 $ 3,149,972
Jeffrey P. Cohen(1) ..................................... $ 1,724,710 $ 1,724,710
Robert J. Denison(2) .................................... $ 147,560 $ 152,084
Andrew L. Farkas(1)(2)(3) ............................... $15,380,244 $15,573,794
Robin L. Farkas(2) ...................................... $ 77,560 $ 82,084
Alan C. Froggatt(2)(5) .................................. $ 67,346 $ 69,186
Frank M. Garrison(1)(4) ................................. $ 3,779,827 $ 3,845,402
Adam B. Gilbert(1) ...................................... $ 2,125,146 $ 2,125,146
Robert G. Koen(2) ....................................... $ 77,560 $ 82,084
Stephen M. Ross(2) ...................................... $ 72,560 $ 72,872
Stephen B. Siegel(1)(2)(5) .............................. $ -- $ --
Ronald Uretta(1)(4) ..................................... $ 3,461,103 $ 3,511,078
H. Strauss Zelnick(2) ................................... $ 147,560 $ 152,084
All executive officers and directors as a group ......... $30,161,173 $30,540,496
----------
(1) Executive officer of Insignia.
(2) Director of Insignia.
(3) Includes a "material asset disposition" payment of $3,022,754 and a bonus
of $1,820,000. If the sale of our real estate investment assets to Island
Fund is completed as described below, the "material asset disposition"
payment will be increased to $3,060,304 as a result of the higher per
share merger consideration and the obligation to make the "material asset
disposition" and bonus payment will be assumed by Island Fund.
(4) Includes a "material asset disposition" payment of $1,511,377. If the
sale of our real estate investment assets to Island Fund is completed
prior to the merger, this payment will be increased to $1,530,152 as a
result of the higher per share merger consideration and the obligation to
make this payment to each of Messrs. Aston and Uretta will be assumed by
Island Fund.
(5) Stephen B. Siegel and Alan C. Froggatt will be employed by a subsidiary
of CB Richard Ellis Services, Inc. following the merger. The payments to
be received by them under their respective new employment agreements are
described below.
In addition to the payments summarized above, our executive officers and
directors will receive the following benefits in connection with the merger:
o Each of Messrs. Farkas, Garrison, Aston, Uretta, Gilbert and Cohen will
be entitled to receive the balances of their respective accounts under
our 401(k) restoration plan in accordance with the terms of such plan.
Based on the balances as of May 19, 2003, Mr. Farkas will be entitled to
receive $2,369,529, Mr. Garrison will be entitled to receive $1,028,064,
Mr. Aston will be entitled to receive $557,539, Mr. Uretta will be
entitled to receive $1,459,318, Mr. Gilbert will be entitled
12
to receive $182,795 and Mr. Cohen will be entitled to receive $270,297.
These payments represent amounts previously withheld from compensation due
to these individuals under the terms of their respective employment
agreements.
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. Under the
terms of his agreement Mr. Siegel will be entitled to (a) a cash signing
bonus of $1.6 million, (b) a cash retention bonus of $5.4 million, (c) an
annual forgivable draw of $2.5 million for a period of five years
following the closing of the merger, (d) a $200,000 annual bonus at the
end of each of the next five calendar years, (e) brokerage commission
equal to the highest percentage agreed 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 provided services
recognized by CB Richard Ellis, (f) forgiveness following the merger of a
$1.5 million loan granted to him by Insignia/ESG, Inc., including all
accrued and unpaid interest on this loan, and (g) reimbursement of certain
expenses and other perquisites and benefits as more fully described in
this proxy statement under the caption "--Stephen B. Siegel Employment
Agreement."
o Alan C. Froggatt, our director and officer, is expected to enter into an
amended employment agreement with Insignia Richard Ellis that will become
effective and supersede his existing employment agreement upon the
completion of the merger. Under the terms of his agreement Mr. Froggatt
is expected to be employed by Insignia Richard Ellis through at least
December 31, 2005 and will be entitled to (a) a fixed salary at the rate
of (pounds sterling)250,000 per year and the opportunity to earn an
annual target bonus of (pounds sterling)250,000 under the Executive
Bonus Plan of CB Richard Ellis, Inc., (b) an annual bonus under this
Executive Bonus Plan of no less than (pounds sterling)150,000 for
calendar year 2003, and (c) reimbursement of certain expenses, and (d)
other benefits and perquisites as more fully described in this proxy
statement under the caption "--Alan C. Froggatt Employment Agreement."
o The profit participation interests of the executive officers named above
in respect of our 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, which is affiliated with 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, has entered
into an agreement with us to purchase our real estate investment assets
in connection with the merger. In connection with the purchase agreement
with Island Fund, Island Fund has agreed to assume our contingent
obligations to make "material asset disposition" payments to Mr. Farkas
in the amount of approximately $3,060,304 and to each of Messrs. Aston
and Uretta in the amount of approximately $1,530,152, which would
otherwise have been payable to each of them under their respective
employment agreements in connection with the merger. Island Fund also has
agreed to assume our contingent obligation to pay Mr. Farkas a bonus of
$1,820,000 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
13
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."
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 a majority of the outstanding shares of our common stock;
o CBRE Holding or CB Richard Ellis Services must have received at least
$560 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.
The closing of the sale of our real estate investment assets under the
purchase agreement with Island Fund is not a condition to the consummation of
the merger. However, the payment of the $0.156 per share increased merger
consideration to holders of our common stock is conditioned upon the sale of
our real estate investment assets to Island Fund prior to the consummation of
the merger, as well as the performance by us of certain covenants and the
accuracy of certain representations and warranties in the merger agreement that
are related to the purchase 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:
14
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 31, 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;
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
15
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
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 options, warrants
and restricted stock awards as of the record date for the special meeting and
the outstanding indebtedness of us and CB Richard Ellis Services as of March
31, 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' fees and expenses in connection with the merger and related
financings is estimated to be approximately $432 million if the sale of our
real estate investment assets to Island Fund is not completed and the common
stock merger consideration equals $11.00 per share, and approximately $436
million if the sale to Island Fund is completed and the merger consideration is
increased to $11.156 per share and Island Fund assumes approximately $7.8
million of our contingent obligations to Messrs. Farkas, Aston and Uretta that
we would otherwise pay in connection with the merger. The CBRE Companies plan
to fund these amounts with the following sources of cash:
o $145 million if the sale to Island Fund is not completed, or at least
$101 million of equity financing if the sale to Island Fund is completed
(such equity financing will be provided 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 an estimated $40 million of cash proceeds from the sale of the real
estate investment assets to Island Fund, if completed;
o $200 million of gross proceeds from the sale and issuance of senior
notes by a wholly-owned subsidiary of CB Richard Ellis Services;
o up to $75 million of additional term loan borrowings under CBRE's
amended and restated senior secured credit agreement; and
o cash from 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."
16
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;
17
o the termination by any of our commercial real estate services brokers or
independent contractors as of February 7, 2003, the day we announced our
discussions regarding the merger, of their relationship with us and the
termination or substantial diminution by any of our clients as of that
date of their commercial real estate services with us, in each case
during the period from February 7, 2003, until the termination of the
merger agreement;
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.
18
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 Amended and Restated Agreement and Plan of Merger, dated as of May
28, 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 the following, as applicable (in each case, subject to
decrease if we pay a dividend under specified circumstances prior to the
merger):
o $11.00 in cash per share;
o an additional $0.156 in cash per share, if the sale of our real
estate investment assets to Island Fund is completed immediately prior
to the merger and the conditions provided in the merger agreement for
the payment of this increased merger consideration are satisfied;
o if the sale to Island Fund is not completed prior to the merger and we
sell our real estate investment assets to a different purchaser prior
to or simultaneously with the merger, common stockholders may receive,
instead of the additional $0.156 in cash per share described above, up
to $1.00 per share if we receive net cash proceeds from such other
transaction in excess of a specified amount (generally $45 million,
subject to adjustment) and do not retain any liabilities relating to
the sold assets. However, we believe that a sale of our real estate
investment assets to a party other than Island Fund prior to or
simultaneously with the merger and a resulting increase in the merger
consideration to a price higher than $11.156 per share are not likely
to occur; and
o if the sale to Island Fund is not completed prior to or simultaneously
with the merger or we terminate the purchase agreement, in either case
because of specified circumstances, we and CBRE Holding are allowed to
withhold $5 million in liquidated damages from amounts otherwise
payable in connection with the merger to Andrew L. Farkas, our chief
executive officer and the controlling person of Island Fund. If Island
Fund and Mr. Farkas confirm in writing that the withholding has been
or may be properly made by us and CBRE Holding, approximately 10% of
the amount withheld will be paid to our stockholders and the merger
consideration will increase to $11.019 per share;
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 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
19
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. In addition, although we have entered into an
agreement with Island Fund for the sale of our real estate investment assets
immediately prior to the closing of the merger, the completion of that sale and
a corresponding increase in the merger consideration to $11.156 per share are
subject to conditions that are not expected to be fulfilled until after the
special meeting. As a result, at the time you vote on the merger, you will not
know whether or not the merger consideration will be greater than $11.00 per
share and you should not assume or expect that the merger consideration will be
greater than $11.00 per share of common stock.
Also under the merger agreement:
o all outstanding warrants and all outstanding options other than those
described below, 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 outstanding options to purchase our common stock granted pursuant to our
1998 Stock Incentive Plan, whether vested or unvested, will be cancelled
and will represent the right to receive a cash payment, without interest,
equal to the excess, if any, of the higher of (a) the merger
consideration, and (b) the highest final sale price per share of our
common stock as reported on the New York Stock Exchange on any date
during the 60-day period preceding the closing of the merger, over the
exercise price of the options, multiplied by the number of shares of
common stock subject to the options, less any applicable withholding
taxes;
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.
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 May
19, 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 1,416 holders of
record of our common stock and 24,070,493 shares of our common stock
outstanding, of which 1,864,512 shares, or approximately 7.75% of our
outstanding common stock on that date, were held by our directors and executive
officers and their affiliates.
Any stockholder entitled to vote may vote either in person or by properly
executed proxy delivered by mail, telephone or the Internet. 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
20
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 6.4% 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. To vote by proxy, a
stockholder must fill out, sign and date the proxy card included with this proxy
statement and mail the signed proxy in the enclosed return envelope as soon as
possible. Alternatively, stockholders may deliver proxies by telephone at
1-866-580-7645 or through the Internet at http://www.proxyvotenow.com/ifs. 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 new, later dated proxy by telephone or through the Internet
until immediately prior to the special meeting;
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;
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.
21
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 daily closing 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 .................................. $ 10.99 $ 7.31
Second quarter (through May 27, 2003) .......... $ 11.28 $ 10.91
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 ................................. $ 10.95 $ 9.15
Third quarter .................................. $ 12.80 $ 9.50
Second quarter ................................. $ 12.82 $ 10.45
First quarter .................................. $ 13.24 $ 11.30
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.
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
SALE OF INSIGNIA RESIDENTIAL GROUP AND INSIGNIA DOUGLAS ELLIMAN
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 owner 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
22
o the assumption by the buyer of up to $4 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 investment 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 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 in connection with
a "material asset disposition," as defined in their respective employment
agreements, subject to the terms and conditions of these employment agreements.
"Material asset disposition" payments 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 have
agreed to waive their "material asset disposition" payments resulting from such
sale and 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."
AGREEMENT TO SELL REAL ESTATE INVESTMENT ASSETS
On May 28, 2003, we entered into a purchase agreement with the CBRE
Companies and Island Fund I LLC, pursuant to which agreement we agreed to sell
our real estate investment assets to Island Fund upon the terms and subject to
the conditions set forth in the purchase agreement. For additional information
regarding the sale of our real estate investment assets and the purchase
agreement, see "Sale of Our Real Estate Investment Assets in Connection with
the Merger." A copy of the purchase agreement with Island Fund is attached as
Appendix C to this proxy statement.
EFFECTS OF THE ANNOUNCEMENT OF THE MERGER ON OUR BUSINESS
Since the merger was announced on February 7, 2003, there have been
adverse consequence to our operations, including the resignation of
professionals and the termination of client relationships. The resignations and
terminations following the announcement of the merger have mainly been confined
to markets where there is a substantial overlap between CB Richard Ellis
Services' operations and our operations, and includes the termination of one of
our major property services relationships. Specific examples of the adverse
consequences include the following:
o the resignation of a substantial majority of the our personnel in
Phoenix, AZ;
o the de-stabilization of our operations in Asia;
o the loss of approximately 29.4 million square feet of property services
assignments, of which approximately 23.6 million square feet is
concentrated in one large portfolio.
23
o the loss of 120 employees, including 38 brokers in the U.S. (in markets
other than Phoenix); and
o the termination of our affiliation with a local services provider in
Indianapolis, IN. Other affiliates have also expressed their intention to
terminate their agreements prior to the closing of the merger.
We anticipated some level of employee and client attrition prior to the
merger's consummation, and the occurrence to date has been in line with our
expectations. There remains the possibility of further losses of affiliates,
employees, brokers, independent contractors and clients before the closing of
the merger.
STOCKHOLDER LITIGATION
On May 22, 2003, Sheldon Kurland filed a purported class action complaint
in the Court of Chancery of the State of Delaware, New Castle County, on behalf
of himself and all other stockholders of Insignia except those named as
defendants, against Andrew L. Farkas, Stephen B. Siegel, Alan C. Froggatt,
Robert G. Koen, Robin L. Farkas, Robert J. Denison, H. Strauss Zelnick and
Stephen M. Ross, who are all of our directors, and Insignia and CBRE Holding.
The complaint alleges, among other things, that: (1) Insignia's directors
violated their duty of loyalty to the public stockholders of Insignia by
renewing Mr. Andrew L. Farkas' employment agreement in December 2002, resulting
in the public shareholders effectively paying for the severance payments
payable to Mr. Andrew L. Farkas in connection with the closing of the merger;
(2) the merger vote is structured unfairly and violates the class's right to
vote for the merger without their votes unjustly enriching Mr. Andrew L.
Farkas; and (3) CBRE Holding has knowingly aided and abetted the breaches of
fiduciary duty committed by the director defendants.
The complaint seeks, among other things, to: (1) enjoin the defendants
from proceeding with, consummating and closing the proposed merger or,
alternatively to rescind the proposed merger in the event it has been
consummated and award rescissory damages to the class, and (2) to declare Mr.
Andrew L. Farkas' renewed employment agreement null and void and to distribute
to the class members their proportionate share of any severance benefits Mr.
Andrew L. Farkas would otherwise receive as a result of the merger.
We, our directors and CBRE Holding believe that this litigation is without
merit and intend to vigorously defend it.
24
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
25
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
26
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
27
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 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.
28
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 a potential future referral services arrangement between a
telecommunication services 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, a
senior managing director of Insignia Financial Services, Inc., 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
29
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
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 at that time CBRE Holding estimated had a net book value as of
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, in light of CBRE Holding's inability to enter into
an agreement providing for the unconditional sale of the real estate assets for
at least their net book value, which at that time was estimated by CBRE Holding
to be approximately $67.2 million as of December 31, 2002, 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 prior to or simultaneously
with 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,
30
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 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 before or simultaneously with 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
31
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 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 original 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 February, March, April and May 2003, Frank Garrison and Adam
Gilbert, as well as other employees and representatives of Insignia, held
discussions with representatives of a number of prospective purchasers of all
or portions of our real estate investment assets. Many of them entered into a
confidentiality and standstill agreement with us and, in some cases, conducted
a due diligence review of material in the data room regarding some or all of
the real estate investment assets and other information supplied to them.
During this period, two prospective purchasers (other than Island Fund) began
to negotiate draft agreements with us to acquire a portion of our real estate
investment assets.
On March 26, 2003, Island Fund submitted a proposal to us in the form of a
draft agreement to purchase all of the real estate investment assets, which
contemplated that CBRE Holding and CB Richard Ellis Services would also be
parties. The draft agreement provided for aggregate consideration of $50
million, including a cash purchase price of approximately $35.75 million and
the assumption by Island Fund of approximately $14.25 million of our
employment-related contractual obligations to Messrs. Farkas, Aston and Uretta
and certain of our other employees. The cash purchase price was subject to
adjustment if, prior to the merger, we received distributions from, or made
capital contributions to, the real estate investment assets and required us to
retain all contingent liabilities associated with outstanding letters of credit
and guarantees that we have provided for the benefit of these assets. Island
Fund would also assume certain ongoing payment obligations under the employment
agreements of Messrs. Farkas, Aston and Uretta and we would be required to
reimburse Island Fund for those payments as they were made.
On April 2, 2003, a meeting was held in New York City among Messrs.
Garrison and Gilbert, our outside legal counsel, legal counsel to the special
committee, legal counsel to Island Fund and Messrs. Farkas and Cohen (as
representatives of Island Fund) to discuss the Island Fund proposal. Mr. Farkas
indicated that he wanted the transaction to result in an additional $5 million
of merger consideration to our stockholders.
On April 3, 2003, the special committee met and received from its counsel
and Mr. Garrison an update on the status of our efforts to sell the real estate
investment assets prior to the closing of the merger, including the proposal we
received from Island Fund. After that meeting, the special committee requested
that Mr. Farkas submit a draft of the agreement to the CBRE Holding so that the
special committee could learn whether, in the view of the CBRE Holding, that
proposal would produce any incremental consideration for our stockholders under
the terms of the original merger agreement.
On April 14, 2003, the special committee met and again received from its
counsel and Mr. Garrison an update on the status of our efforts to sell the
real estate investment assets prior to the closing of the merger, including the
proposal we received from Island Fund. Among other things, at this meeting the
special committee advised its counsel to instruct Island Fund that the special
committee felt that Island Fund needed to increase the proposed purchase price
for the real estate investment assets.
On April 18, 2003, legal counsel to Island Fund distributed a further
revised draft of the agreement to all parties and counsel. Also on that day,
Messrs. Wirta and Farkas met in Mr. Farkas' office in New
32
York City to further discuss potential transaction structures, the status of
various real estate investment assets, and the Island Fund proposal. Commencing
April 21, 2003, legal counsel to Island Fund conducted due diligence in the
data room.
On April 22, 2003, legal counsel to CBRE Holding distributed a revised
draft of the Island Fund agreement that reflected their comments to the draft
distributed on April 18, 2003. On April 23, 2003, a telephone conference call
was held among our legal counsel, legal counsel to the special committee, legal
counsel to Island Fund and Mr. Cohen, to negotiate open issues in the draft
agreement.
On April 24, 2003, in a discussion between Mr. Farkas and the chairman of
the special committee, Island Fund increased the aggregate consideration under
its proposal to $50.6 million (including the assumption of employment-related
contractual obligations) subject to the adjustments described above, with the
provision that our stockholders receive $5 million of additional merger
consideration in connection with the sale. In a conversation with Mr. Farkas
later that day, Mr. Wirta indicated that such terms would be acceptable to CBRE
Holding as long as the other open issues relating to the proposed transaction
with Island Fund could be satisfactorily resolved, including the treatment of
our contingent liabilities relating to the real estate investment assets.
Between April 30 and May 2, 2003, Mr. Farkas and Mr. Wirta discussed the
terms of the draft agreement. As a result of those discussions, Mr. Farkas
agreed to increase the aggregate consideration to $52.8 million by increasing
the cash purchase price to approximately $40.8 million (subject to adjustment)
and reducing the amount of employment-related contractual obligations being
assumed to approximately $12 million, provided our stockholders would receive $5
million of additional merger consideration in connection with the sale. Under
Island Fund's revised proposal, we would remain liable for approximately $11.7
million of outstanding letters of credit and fixed dollar guarantees supporting
the repayment of certain debt of the real estate investment assets, but Island
Fund would reimburse CBRE Holding for 50% of any such amount paid and provide $3
million of collateral to support such reimbursement obligations. At the request
of CBRE Holding, the proposal also provided that if the parties were unable to
obtain the release of other outstanding guarantees relating to four other real
estate investment assets, the applicable real estate investment asset would not
be transferred to Island Fund and the cash purchase price would be reduced by an
agreed amount. No such reduction in the purchase price would affect the
additional merger consideration to be received by our stockholders in connection
with the sale.
CBRE Holding indicated that after evaluating the proposal it had concluded
that the net proceeds from the transaction (including assumed
employment-related contractual obligations) would be significantly less than
$49 million and CBRE Holding was not prepared to proceed unless the amount of
additional merger consideration payable as a result of the transaction was
reduced from $5 million to $4 million. Island Fund objected to the reduction
from $5 million to $4 million and indicated that it was not prepared to make a
proposal to the special committee that included a reduced payment for our
stockholders.
Due to CBRE Holding's continued insistence that it would not increase the
merger consideration by more than $4 million and Island Fund's inability to
negotiate CBRE Holding from its position, on or about May 5, 2003, Island Fund
indicated that it was prepared to continue discussions under the terms proposed
by CBRE Holding. On May 7 and May 8, 2003, meetings were held in New York City
among Messrs. Farkas and Cohen (as representatives of Island Fund), Messrs.
Garrison and Gilbert, our outside legal counsel, legal counsel to Island Fund
and, at the May 8, 2003 meeting, legal counsel to the special committee and
legal counsel to CBRE Holding (each of whom participated by telephone) to
negotiate open issues on the draft agreement.
On May 8, 2003, our board of directors, including the members of the
special committee, met with their respective advisors and received an update on
the status of the negotiations with potential purchasers (including Island
Fund), CBRE Holding's financing of the merger and the SEC review of our
preliminary proxy materials.
On May 11, 2003, legal counsel to Island Fund distributed a further
revised draft of the agreement to all parties and counsel providing for a
reduced aggregate consideration of $51.8 million as a result of negotiated
changes in the structure of the transaction, although these changes did not
result in a change
33
to the proposed $4 million increase to the merger consideration. Between May 11,
2003 and May 14, 2003, representatives of Island Fund and CBRE Holding continued
to negotiate the draft agreement and, late on the evening of May 14, 2003, they
reached an agreement in principle which also contemplated amendments to the
original merger agreement to, among other things, implement the agreement to
provide our stockholders, option holders and warrant holders with $4 million of
additional merger consideration in connection with the sale. The parties
continued to refine the draft agreement through the date it was executed.
On May 19, 2003, our board of directors and the special committee met with
their advisors to consider the Island Fund purchase agreement and the proposed
amended and restated merger agreement. Our outside legal counsel summarized the
terms of the Island Fund purchase agreement and the proposed amendments to the
original merger agreement. Mr. Garrison summarized the process in which we had
engaged to find potential purchasers for the real estate investment assets and
the status of the discussions with them. Representatives of Bear Stearns
indicated that while the aggregate consideration provided for in the Island
Fund agreement was near the low end of the range of values attributed to our
real estate investment assets in their analysis, the analysis assumed an
orderly liquidation of the assets and not a sale in the short period between
the signing and closing of the merger agreement. Our board of directors and the
special committee considered the additional due diligence that would be
required by another potential purchaser or purchasers in order to reach a
definitive agreement or agreements, the expected difficulty of obtaining
required consents in a transaction with another purchaser or purchasers and the
execution risk of an alternate transaction or transactions. After a discussion
(at which Mr. Farkas was not present) and an independent meeting of the special
committee, the special committee unanimously approved the Island Fund purchase
agreement and the amended and restated merger agreement and recommended that
our board of directors approve these transactions. Our board of directors (with
Mr. Farkas abstaining) has also unanimously approved the Island Fund purchase
agreement and the amended and restated merger agreement.
On the evening of May 28, 2003, the amended and restated merger agreement
and the Island Fund purchase agreement were executed, and before the open of
business on May 29, 2003, we and CBRE Holding issued a joint press release
announcing the agreements.
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 investment 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,
34
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.
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
additional merger consideration if we are able to sell certain of our
real estate investment assets under the conditions described in this
proxy statement.
o the obligation of CB Richard Ellis Services to seek alternative
financing under specified circumstances, and
35
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
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.
36
o The combined business will be able to provide a broader range of
services to its clients in regions around the world.
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 and CBRE
Holding incurred approximately $34 million of 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 annual costs after the merger 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
37
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.
Bear Stearns Opinion
In connection with rendering its opinion, Bear Stearns, among other
things:
o reviewed the original merger agreement dated as of February 17, 2003;
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.
38
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.
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 investment assets, which we expect to sell to Island Fund 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.
39
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 of approximately $266.4 million, and our total debt of
approximately $193.7 million, the liquidation value of our preferred stock of
$37.5 million and certain of our other liabilities of approximately $87 million
estimated to be outstanding as of December 31, 2002 and subtracting our cash of
approximately $141.5 million 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 for selected analysis by (1) subtracting the
proposed $73.5 million 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.
40
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.
41
Review of Insignia Real Estate
REVIEW OF INSIGNIA REAL ESTATE
ET BOOK VALUE
(IN MILLIONS)
---------------
@
12/31/02 LOW VALUATION HIGH VALUATION
(1)(2) 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.
(2) Excludes an investment in an unaffiliated real estate-related e-commerce
investment fund.
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.
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 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
42
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 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.
43
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, as amended on May 28,
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 6.4% 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 original
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, as
amended on May 28, 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 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 August 1,
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, in addition
to the matters discussed above under "Sale of Our Real Estate Investment Assets
in Connection with the Merger," some of our executive officers and the
44
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 warrants and all outstanding options other than those described in
clause (b) below, 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, (b) outstanding options to purchase our common stock granted
pursuant to our 1998 Stock Incentive Plan, whether vested or unvested, will be
cancelled and will represent the right to receive a cash payment, without
interest, equal to the excess, if any, of the higher of (x) the merger
consideration, and (y) the highest final sale price per share of our common
stock as reported on the New York Stock Exchange on any day during the 60-day
period preceding the closing of the merger, over the exercise price of the
options, multiplied by the number of shares of common stock subject to the
options, less any applicable withholding taxes, and (c) 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
with an exercise price lower than the merger consideration per share 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 and $11.156:
$11.00 PER SHARE $11.156 PER SHARE (1)
------------------------------------------ ----------------------------------------
SHARES OF COMMON SHARES OF COMMON
STOCK SUBJECT TO STOCK SUBJECT TO
"IN-THE-MONEY" "IN-THE-MONEY"
OPTIONS, WARRANTS AGGREGATE OPTIONS, WARRANTS AGGREGATE
NAME OF EXECUTIVE OFFICER AND RESTRICTED CONSIDERATION AND RESTRICTED CONSIDERATION
OR DIRECTOR STOCK AWARDS TO BE RECEIVED(2) STOCK AWARDS TO BE RECEIVED(2)
---------------------------- ------------------- -------------------- ------------------- ------------------
James A. Aston ............. 200,000 $ 600,000 200,000 $ 631,200
Jeffrey P. Cohen ........... -- -- -- --
Robert J. Denison .......... 27,000 $ 77,560 29,000 $ 82,084
Andrew L. Farkas ........... 1,000,000 $3,000,000 1,000,000 $3,156,000
Robin L. Farkas ............ 27,000 $ 77,560 29,000 $ 82,084
Alan C. Froggatt ........... 11,794(3) $ 67,346 11,794(3) $ 69,186
Frank M. Garrison .......... 300,000(4) $ 631,000 300,000(4) $ 677,800
Adam B. Gilbert ............ -- -- -- --
Robert G. Koen ............. 27,000 $ 77,560 29,000 $ 82,084
Stephen M. Ross ............ 2,000 $ 2,560 2,000 $ 2,872
Stephen B. Siegel .......... -- -- -- --
Ronald Uretta .............. 200,000 $ 600,000 200,000 $ 631,200
H. Strauss Zelnick ......... 27,000 $ 77,560 29,000 $ 82,084
------------
(1) The increased merger consideration of $11.156 per share will be paid if
the sale of our real estate investment assets to Island Fund is completed
prior to the merger.
(2) The merger agreement provides that outstanding options to purchase our
common stock granted pursuant to our 1998 Stock Incentive Plan will be
cancelled and will represent the right to receive a cash payment, without
interest, equal to the excess, if any, of the higher of (a) the merger
consideration, and (b) the highest final sale price per share of out
common stock as reported on the New York Stock Exchange during the 60 day
period preceding the closing of the merger, over the exercise of the
options, multiplied by the number of shares of common stock subject to
the options, less any applicable withholding taxes. We expect that this
formula will result in a price per share of common stock subject to such
options higher than either $11.00 or $11.156 per share. For example, the
highest final sale price per share of our common stock reported on the
NYSE during the 60-day period preceding the date of this proxy statement
was $11.28 per share on May 9, 2003. Accordingly, the amounts presented
in the table above may increase.
45
(3) Includes 2,000 unvested restricted stock awards.
(4) Includes 100,000 unvested options.
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
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, as amended May 28, 2003, with each of these
individuals that confirm the payments and other benefits due to each of
46
them under these employment agreements, as well as the benefits described below
in the section titled "Material Asset Disposition Payments" and 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, regardless of any
performance contingencies provided for in his current employment
arrangements;
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 $2,369,529 as of the record date; and
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
$1,511,377 (if the sale of our real estate investment assets to Island
Fund is completed prior to the merger, this payment will be increased to
$1,530,152 as a result of the higher per share merger consideration);
47
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 $1,028,064 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 $45,833 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 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 $557,539 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 $690 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 2002 bonus
compensation 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 $182,795 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 $1,082 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 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 $1,459,318 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.
48
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 2002 bonus
compensation 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 $270,297 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.
MATERIAL ASSET DISPOSITION PAYMENTS. The employment agreements of Messrs.
Farkas, Garrison, Aston and Uretta provide for us to pay 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. The contingent obligation to pay a "material
asset disposition" payment to Mr. Garrison in connection with the merger, as
indicated above, would be paid by CB Richard Ellis Services.
The purchase agreement with Island Fund provides that upon closing of that
agreement Island Fund will assume (a) the contingent obligation to pay Mr.
Farkas a "material asset disposition" payment of approximately $3,060,304 and a
bonus of $1,820,000 in connection with the merger, and (b) the contingent
obligation to pay Messrs. Aston and Uretta a "material asset disposition"
payment of approximately $1,530,152 each in connection with the merger.
If the sale of our real estate investment assets to Island Fund is not
completed, these contingent obligations will be paid by CB Richard Ellis
Services. In those circumstances, the amount of Mr. Farkas' bonus will remain
the same, but the "material asset disposition" payments of Messrs. Farkas, Aston
and Uretta will be approximately $3,022,754, $1,511,377 and $1,511,377,
respectively, as a result of the lower common stock merger consideration of
$11.00 per share.
The "material asset dispositon" payments due to Messrs. Farkas, Garrison,
Aston and Uretta 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.
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
49
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 C. 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. Insignia
Richard Ellis and Mr. Froggatt expect to enter into an amended and restated
executive service agreement, which will become effective upon the date of the
closing of the merger and will supersede Mr. Froggatt's existing employment
agreement with Insignia Richard Ellis. As a result of this agreement, following
the merger, Mr. Froggatt will remain as chief executive officer of the European
operations of CB Richard Ellis, Inc. and its affiliates. Mr. Froggatt's
employment may be terminated by Insignia Richard Ellis at any time under the
agreement.
This agreement provides that upon the closing date of the merger, Insignia
Richard Ellis will forgive Mr. Froggatt's existing obligation to repay Insignia
Richard Ellis approximately (pounds sterling)15,781. The agreement further
provides Mr. Froggatt with a fixed salary at the rate of (pounds
sterling)250,000 per year and the opportunity to earn an annual target bonus of
(pounds sterling)250,000 under the Executive Bonus Plan of CB Richard Ellis,
Inc. For calendar year 2003, CB Richard Ellis, Inc. has agreed that Mr.
Froggatt's annual bonus under this Executive Bonus Plan will be no less than
(pounds sterling)150,000. Also under the agreement, Mr. Froggatt will be
entitled to reimbursement of certain expenses and to certain benefits and
perquisites, including health insurance and life assurance benefits maintained
by Insignia Richard Ellis from time to time.
The agreement provides that if Mr. Froggatt's employment is terminated by
Insignia Richard Ellis prior to December 31, 2004, he will be entitled to
continue to receive his fixed salary, bonus and contractual benefits through
December 31, 2005. If Mr. Froggatt's employment is terminated by Insignia
50
Richard Ellis on or subsequent to December 31, 2004, he will be entitled to
continue to receive his fixed salary, bonus and contractual benefits for (a) 12
months following the date of termination of employment if Insignia Richard Ellis
previously has not provided Mr. Froggatt with a 12 month notice of its intention
to terminate the employment agreement, or (b) if Insignia Richard Ellis has
provided Mr. Froggatt with a 12 month notice of its intention to terminate the
employment agreement, for the remaining term of the 12 month notice period.
Mr. Froggatt's agreement generally provides that (a) he will not engage,
assist or be interested in any undertaking which provides services similar to
those provided by CB Richard Ellis or its affiliates in the United Kingdom for
a period of one year following his termination of employment, (b) he will not
employ, solicit or engage any person who was a senior executive or consultant
of CB Richard Ellis or its affiliates for a period of one year following his
termination of employment, and (c) he will not solicit or interfere with or
endeavor to entice away from CB Richard Ellis or its affiliates any person,
firm, company or entity in the United Kingdom who was a client of CB Richard
Ellis or its affiliates for a period of one year following his termination of
employment.
POST-CLOSING RESTRICTIONS. In connection with the signing of the original
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. In connection with the
signing of the purchase agreement with Island Fund, we agreed to amend these
letters to permit the completion of the transactions contemplated by the
purchase agreement. 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 investment
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
investment assets that he holds as of the closing of the merger;
o entering into any other agreement with us to acquire any of the real
estate investment 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 other transaction regarding the real estate investment
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 other agreement with us
prior to the closing of the merger to acquire any of our real estate
investment assets, entering into any agreement relating to those assets
after he has acquired them.
INTERESTS IN ISLAND FUND AND THE REAL ESTATE INVESTMENT ASSETS. Island
Fund is a newly-formed limited liability company affiliated with Messrs.
Farkas, Aston, Uretta and Cohen. Each of these individuals is an officer of
both Island Fund and its managing member. Mr. Farkas also owns all of the
equity interests of the managing member of Island Fund. The purchase agreement
with Island Fund provides that, in addition to the cash purchase price of
approximately $44 million, Island Fund will assume our existing
employment-related contractual obligations to Messrs. Farkas, Aston and Uretta
valued at approximately $7.8 million, including, (a) our obligation to pay Mr.
Farkas a "material asset disposition" payment of approximately $3,060,304 and a
bonus of $1,820,000 in connection with the merger, and (b) our obligation to
pay a "material asset disposition" payment of approximately $1,530,152 in
connection with the merger to each of Messrs. Aston and Uretta. Messrs. Farkas,
Aston, Uretta and Cohen will continue to have economic interests in our real
estate investment assets if the merger and the transactions contemplated by the
purchase agreement with Island Fund are both consummated. In addition, pursuant
to the Island Fund purchase agreement, we, and after the closing of the merger,
CBRE Holding, generally have agreed to indemnify Island Fund and its affiliates
for any claims arising out of, caused by or resulting
51
from the fact that affiliates of Island Fund are or were directors, officers and
employees of us and that we entered into the purchase agreement with Island Fund
and/or consummated the transactions contemplated by the purchase agreement.
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 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 certain 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, temporary
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;
52
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.
If a partnership holds our common stock, the tax treatment of a partner of
the partnership 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. An individual shareholder's
long-term capital gain generally is subject to U.S. federal income tax at a
maximum rate of 15%. 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, 28% 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
53
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, federal, 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 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.
54
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, options, warrants
and restricted stock awards as of the record date for the special meeting and
the outstanding indebtedness of us and CB Richard Ellis Services as of March
31, 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' fees and expenses in connection with the merger and related
financings is estimated to be approximately $432 million if the sale of our
real estate investment assets to Island Fund is not completed and the common
stock merger consideration equals $11.00 per share, and approximately $436
million if the sale to Island Fund is completed and the common stock merger
consideration is increased to $11.156 per share and Island Fund assumes
approximately $7.8 million of our employment-related contractual obligations
that we would otherwise pay in connection with the merger. The CBRE Companies
plan to fund the purchase price with the following sources of cash:
o $145 million, if the sale to Island Fund is not completed, or at least
$101 million of equity financing if the sale to Island Fund is completed
(such equity financing will be provided 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 an estimated $40 million of cash proceeds from the sale of the real
estate investment assets to Island Fund, if completed;
o $200 million of gross proceeds from the sale and issuance of senior
notes by CB Richard Ellis Services' wholly-owned subsidiary, CBRE Escrow,
Inc.;
o up to $75 million of additional term loan borrowings under CBRE's
amended and restated senior secured credit agreement; and
o cash from the general working capital of CB Richard Ellis Services and
Insignia.
The CBRE Companies currently anticipate using approximately $56 million of
cash on hand from the working capital of CB Richard Ellis Services and Insignia
in connection with the funding of the merger and the related transactions. As
of March 31, 2003, CBRE Holding had approximately $19.4 million of cash and
cash equivalents and Insignia had approximately $71.7 million of cash and cash
equivalents.
CBRE AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT
On May 22, 2003, CBRE Holding and CB Richard Ellis Services entered into
an amendment agreement with the lenders under its existing senior secured
credit agreement and Credit Suisse First Boston, which serves as the
administrative and collateral agent. Pursuant to this amendment agreement,
CBRE's lenders agreed to waive compliance by CBRE Holding and CB Richard Ellis
Services of certain provisions of the existing credit agreement in order to
permit the issuance by CBRE Escrow, Inc., a wholly owned subsidiary of CB
Richard Ellis Services, of senior unsecured notes, as described below under the
heading "9 3/4% Senior Notes due May 15, 2010 of CBRE Escrow," and the escrow
of the proceeds from this issuance as further described below.
55
If the merger is consummated on or prior to July 31, 2003 and the
conditions described below have been satisfied, the existing credit agreement
will be amended and restated as of the date on which the merger is consummated.
These amendments, among other things, will permit CB Richard Ellis Services
to borrow an additional $75 million under one of the two term loan facilities
under the amended and restated credit agreement for the purpose of funding a
portion of the merger and the related transactions. If the merger is not
consummated on or prior to July 31, 2003, the amended and restated credit
agreement will be of no force or effect and the exiting credit agreement will
continue to govern the senior secured credit facilities.
The effectiveness of the amended and restated credit agreement is
contingent upon the satisfaction of the following conditions:
o the simultaneous completion of the merger between us and Apple
Acquisition Corp.,
o the release from the escrow account of the net proceeds of the senior
unsecured notes described below and the merger of CBRE Escrow with and
into CB Richard Ellis Services,
o the completion of the funding described below under the caption
"Equity Financing,"
o the repayment of Insignia's senior credit agreement and senior
unsecured credit agreement and the release of all guarantees and
security that supports these agreements,
o no more than $10 million of borrowings being outstanding under the
revolving credit facility of the amended and restated credit agreement
after giving effect to the completion of the transactions described
above, and
o the delivery of ancillary agreements, financial information, other
documents and legal opinions, and the completion of security filings
and other actions, that are customary for the closing of senior secured
bank loans.
Assuming the merger is consummated and all conditions to the effectiveness
of the amended and restated credit agreement have been satisfied, the senior
secured credit facilities will consist of two term loan facilities and a
revolving line of credit which will include revolving credit loans, letters of
credit and a swingline loan subfacility. CBRE Holding and certain of its
subsidiaries, including Insignia and certain of its subsidiaries, will jointly
and severally guarantee these facilities. In addition, these facilities will be
secured by a pledge of all the equity interests of CBRE Holding and its
significant domestic subsidiaries, including CB Richard Ellis Services, CBRE
Investors, L.L.C., Insignia and L.J. Melody & Company. The lenders will also
generally have a lien on substantially all of CB Richard Ellis Services' and
its guarantor subsidiaries' accounts receivable, cash, general intangibles,
investment property and future acquired property.
9 3/4% SENIOR NOTES DUE MAY 15, 2010 OF CBRE ESCROW
On May 8, 2003, CBRE Holding, CBRE Escrow, Inc., CB Richard Ellis Services
and certain subsidiaries of CB Richard Ellis Services entered into a purchase
agreement with a group of initial purchasers. Pursuant to the terms and subject
to the conditions contained in the purchase agreement, CBRE Escrow agreed to
sell $200 million aggregate principal amount of its 9 3/4% senior notes due May
15, 2010 to the initial purchasers. The closing of this sale occurred on May
22, 2003, at which time the net proceeds from the sale of the senior notes were
deposited pursuant to an escrow agreement into an escrow account pending the
consummation of the merger and will be subject to special mandatory redemption
provisions if the merger is not consummated.
If the merger is consummated on or prior to July 31, 2003, CB Richard
Ellis Services generally will be entitled to instruct the escrow agent to
release the funds from the escrow account. Immediately prior to this release
from the escrow account, CBRE Escrow will merge with and into CB Richard Ellis
Services and CB Richard Ellis Services will use all or a portion of the funds
received from the escrow account for the purpose of funding a portion of the
merger and the related transactions. If the merger is not consummated on or
before July 31, 2003 or the merger agreement is earlier terminated, the notes
will be redeemed by CBRE Escrow at 100% of their accreted value at such date,
plus accrued and unpaid interest.
56
The notes, which will mature on May 15, 2010, will be senior unsecured
obligations of CB Richard Ellis Services after its merger with CBRE Escrow and
will bear interest at a rate of 9 3/4% per annum, payable on May 15 and
November 15 of each year. The indenture governing the notes will impose
affirmative and negative covenants on CB Richard Ellis Services, some of which
will also apply to CBRE Holding and certain of CB Richard Ellis Services'
subsidiaries after the merger.
EQUITY FINANCING
CBRE Holding has entered into a subscription agreement, as amended on May
28, 2003, pursuant to which some of its current stockholders agreed to make
equity contributions to CBRE Holding in the following amounts: Blum 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 has entered into a letter agreement, as amended
on May 28, 2003, with some of its current stockholders pursuant to which 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 (1) generally be increased by the
aggregate amount of merger consideration paid in excess of $11.00 per share and
(2) generally be decreased by the aggregate amount of net proceeds received by
us from the sale of real estate investment assets prior to the closing,
including the potential sale to Island Fund, and the amount of cash
distributions received by us from the real estate investment assets prior to
the closing, in each case subject to the release prior to the closing of any
letter of credit and guarantee support that we and certain of our subsidiaries
have provided to such asset being sold or making such distribution. However, in
no event will the aggregate amount of cash financing provided under this letter
agreement exceed $45 million or be less than $1 million in the aggregate. 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, which
may be called at the discretion of the general partners of these funds for
purposes of making the contemplated investments. The aggregate capital
commitments of the partners of Blum Strategic Partners, L.P., are approximately
$639 million of which approximately $61 million has not been called as of the
date of this proxy statement. The aggregate capital commitments of the partners
of Blum Strategic Partners II, L.P. are approximately $931 million, of which
approximately $553 million has not been called as of the date of this proxy
statement. The aggregate capital commitments of the partners of Blum Strategic
Partners II GmbH & Co. KG are approximately $19 million, of which approximately
$12 million has not been called as of the date of this proxy statement. The
general partners of each of these investment funds are affiliates of Blum
Capital Partners, L.P. and the limited partners of these investment funds
consist of large institutional investors, as well as a number of individuals
that have substantial wealth. 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.
57
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 D 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 D. You should review this discussion and Appendix D 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
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 D.
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
58
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 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
59
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.
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,
60
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.
61
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 outstanding share of our common stock will be converted into the
right to receive the following, as applicable (in each case, subject to
decrease if we pay a dividend under specified circumstances prior to the
merger):
o $11.00 per share;
o an additional $0.156 per share, if the sale of our real estate
investment assets to Island Fund is completed prior to the merger and
the conditions provided in the merger agreement for the payment of this
increased merger consideration are satisfied; and
o if the sale to Island Fund is not completed prior to the merger and
we sell our real estate investment assets to a different purchaser
prior to or simultaneously with the merger, common stockholders may
receive, instead of the additional $0.156 in cash per share
described above, up to $1.00 per share if we receive net cash
proceeds from such other transaction in excess of a specified amount
(generally $45 million, subject to adjustment) and do not retain any
liabilities relating to the sold assets. However, we believe that a
sale of our real estate investment assets to a party other than
Island Fund prior to the merger and a resulting increase in the
merger consideration to a price higher than $11.156 per share are not
likely to occur; and
o if the sale to Island Fund is not completed prior to the merger or we
terminate the purchase agreement, in either case because of specified
circumstances, we and CBRE Holding are allowed to withhold $5 million
in liquidated damages from amounts otherwise payable in connection
with the merger to Andrew L. Farkas, our chief executive officer and
the controlling person of Island Fund. If Island Fund and Mr. Farkas
confirm in writing that the withholding has been or may be properly
made by us and CBRE Holding, approximately 10% of the amount withheld
will be paid to our stockholders and the merger consideration will
increase to $11.019 per share; and
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;
62
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 and do not effectively
withdraw their right to appraisal. 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 investment assets which are specified in the
merger agreement. These real estate investment assets constitute substantially
all of the real estate assets owned in whole or in part by us. Our board of
directors has directed 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 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 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.
"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, (5) any cash
generated by any sale of real estate assets or related investments on or prior
to December 31, 2002, provided that this cash was in the possession of the
entity that controls the sold asset or investment, or would have been in its
possession but for an escrow, hold-back or similar arrangement, and (6) the
amount of any "termination fee," as defined in the asset purchase agreement
with Island Fund, paid to Island Fund under applicable provisions of that asset
purchase agreement, unless paid in connection with a termination of the asset
purchase agreement resulting solely from a breach of that agreement by CBRE
Holding, CB Richard Ellis Services or Apple Acquisition Corp. 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 are subject to the asset purchase agreement
with Island Fund and that we may continue to attempt to sell are generally
those that relate to our 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,
63
o our wholly owned or consolidated 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."
Insignia, CBRE Holding, CB Richard Ellis Services, Apple Acquisition and
Island Fund have entered into a purchase agreement providing for the purchase
by Island Fund of all of our real estate investment assets immediately prior to
the closing of the merger. Island Fund is a newly formed limited liability
company that is affiliated with 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. Mr. Farkas
also owns all the equity interests of the managing member of Island Fund, and
Messrs. Farkas, Aston and Uretta and Jeffrey P. Cohen, executive vice president
of Insignia, are officers of both Island Fund and its managing member. The
purchase agreement provides that the cash purchase price for these assets will
be an aggregate of approximately $44 million, subject to adjustment if, prior
to the effective time of the merger, we receive distributions from, or make
capital contributions to, these assets. In addition to the cash purchase price,
the purchase agreement provides that Island Fund will assume existing
employment-related contractual obligations of Insignia to Messrs. Farkas, Aston
and Uretta valued at approximately $7.8 million. See "Sale of Our Real Estate
Investment Assets in Connection with the Merger."
As described in greater detail above, the merger agreement generally
provides that if we are able to realize more than $45 million in net proceeds
from the sale of our real estate investment assets, the amount received over
$45 million will be paid to our stockholders, up to an additional $1.00 per
share of our common stock. The merger agreement also generally provides that
liabilities related to the real estate assets to be sold that are retained by
us after the merger would reduce the amount of net proceeds from the sale of
the real estate investment assets for purposes of the calculation of net
proceeds. The purchase agreement with Island Fund provides that we would remain
liable for $11.7 million in liabilities related to the real estate investment
assets, with the result that the net proceeds would be less than $45 million and
our stockholders would not receive any additional consideration under the merger
agreement.
However, we and the CBRE Companies amended the original merger agreement
to provide that if the sale to Island Fund is completed immediately prior to
the merger and the conditions under the merger agreement described below are
satisfied, the merger consideration will nonetheless increase from $11.00 to
$11.156 per share. There can be no assurance that the transactions contemplated
by the purchase agreement will be consummated prior to the completion of the
merger or that the other conditions to an increase in the merger consideration
will be satisfied. The consummation of the transactions contemplated by the
purchase agreement with Island Fund and any payment of the increased merger
consideration are subject to conditions that are not expected to be fulfilled
until after the special meeting. As a result, at the time you vote on the
merger, you will not know whether or not the common stock merger consideration
will be greater than $11.00 per share and you should not assume or expect that
the merger consideration will be greater than $11.00 per share.
Under the merger agreement, the payment of any increased merger
consideration as a result of the sale of real estate investment assets to
Island Fund is conditioned upon the performance by us of certain covenants and
the accuracy of certain representations and warranties that are contained in
the merger agreement and are related to the asset purchase agreement with
Island Fund. In addition, under the Island Fund purchase agreement the
completion of the sale of our real estate investment assets to Island Fund is
conditioned upon the receipt of certain third party consents and other
customary conditions precedent.
If the transaction with Island Fund does not close prior to the closing of
the merger or we terminate the agreement with Island Fund in either case because
of specified circumstances we and CBRE Holding are allowed to withhold $5
million in liquidated damages from amounts otherwise payable in connection with
the merger to Andrew L. Farkas, our chief executive officer and the controlling
person of Island
64
Fund. If Island Fund and Mr. Farkas confirm in writing prior to the closing of
the merger that the withholding has been or may be properly made by us and CBRE
Holding, approximately 10% of the amount withheld will be paid to our
shareholders and the merger consideration will increase to a maximum of $11.019
per share.
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 warrants and all outstanding options other
than as described below, 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, (b) outstanding options to purchase our common stock granted
pursuant to our 1998 Stock Incentive Plan, whether vested or unvested, will be
cancelled and will represent the right to receive a cash payment, without
interest, equal to the excess, if any, of the higher of (x) the merger
consideration, and (y) the highest final sale price per share of our common
stock as reported on the New York Stock Exchange at any time during the 60-day
period preceding the closing of the merger, over the exercise price of the
options, multiplied by the number of shares of common stock subject to the
options, less any applicable withholding taxes, and (c) 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
65
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 the real estate investment assets that are subject to the purchase
agreement with Island Fund;
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:
66
o conduct our business in all material respects in the ordinary course
consistent with past practice;
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;
67
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;
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;
o assume, guarantee or endorse any debt obligations of any other person or
entity, except obligations of our wholly-owned subsidiaries; or
o enter into any new recourse commitments with respect to the financing of
any real estate investment assets;
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;
68
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;
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 CBRE Holding and CB Richard Ellis Services have entered into an
amendment to their existing credit agreement that, upon the terms and
conditions described in the amendment, would permit CB Richard Ellis
Services to incur at least $75 million of additional borrowings, and CBRE
Holding, CB Richard Ellis Services and CBRE Escrow, Inc., a wholly-owned
subsidiary of CB Richard Ellis Services, have entered into a purchase
agreement regarding the sale of $200 million in aggregate principal
amount of senior notes of CBRE Escrow and the proceeds from this sale
have been placed in an escrow account pursuant to the terms of an escrow
agreement;
o CBRE Holding has entered into an amended 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 amendment to
the existing credit agreement, the senior notes purchase agreement, 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 obtain the
financing on the terms set forth in the amendment to the existing credit
agreement, the senior notes purchase agreement and the escrow agreement
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 debt 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 amendment to the existing credit agreement, the senior
notes purchase agreement and the escrow agreement, in the case of the
debt financing, and the subscription agreement and the letter agreement,
in the case of the other financing;
69
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;
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
70
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:
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:
71
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,
including any sale of our real estate investment assets, 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
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
72
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 either (a) must have received
the proceeds of the debt financing contemplated by the credit agreement
amendment and the conditions to the release of the senior notes proceeds
from the escrow account must have been satisfied or (b) must have
received an aggregate of at least $560 million of debt financing on terms
consistent with the covenant they provided in the merger agreement
regarding their obligation to obtain alternative financing.
The closing of the sale of our real estate investment assets under the
purchase agreement with Island Fund is not a condition to the consummation of
the merger. However, the payment of the $0.156 per share increased merger
consideration to holders of our common stock is conditioned upon the purchase
agreement being consummated at or prior to the consummation of the merger, as
well as the performance by us of certain covenants and the accuracy of certain
representations and warranties in the merger agreement that are related to the
purchase agreement. See "--Conditions to Payment of Increased Merger
Consideration as a Result of a Sale of Real Estate Investment Assets to Island
Fund."
"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) 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;
72
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.
CONDITIONS TO PAYMENT OF INCREASED MERGER CONSIDERATION AS A RESULT OF A SALE
OF REAL ESTATE INVESTMENT ASSETS TO ISLAND FUND
Under the merger agreement, the payment of any increased merger
consideration as a result of the sale of our real estate investment assets to
Island Fund is conditioned upon our performance of, or compliance with, the
following covenants contained in the merger agreement:
o subject to certain exceptions, we are restricted from entering into new
recourse commitments with respect to the financing of any real estate
investment assets;
o we must cause certain entities controlled by us to continue to pay us
fees payable under asset management, development, construction,
investment management, financial advisory, profit participation or
similar agreements or contracts we have with these entities until the
closing of the merger; and
o we must perform in all material respects our obligations under the
purchase agreement with Island Fund.
In addition, the payment of any increased merger consideration as a result
of the sale of our real estate investment assets to Island Fund is conditioned
upon the accuracy of our representations and warranties related to the real
estate investment assets at the time of the closing of the merger.
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 31, 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;
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;
74
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;
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 31, 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:
75
(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 31, 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 $560 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 resulting from the following:
o the termination, during the period from February 7, 2003 to the date of
termination of the merger agreement, which we refer to as the covered
period, 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 during the covered period 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 soliciting 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.
76
SALE OF OUR REAL ESTATE INVESTMENT ASSETS
IN CONNECTION WITH THE MERGER
Insignia, CBRE Holding, CB Richard Ellis Services, Apple Acquisition and
Island Fund have entered into a purchase agreement providing for the purchase
by Island Fund of all of our real estate investment assets. The purchase
agreement provides that the cash purchase price for the real estate investment
assets will be approximately $44 million, subject to adjustment as described in
the following paragraph. In addition to the cash purchase price, the purchase
agreement provides that Island Fund will assume existing employment-related
contractual obligations of Insignia to Messrs. Farkas, Aston and Uretta in
connection with the merger, which obligations are valued at approximately $7.8
million. See "The Merger--Interests of Executive Officers and Directors in the
Merger." The purchase agreement with Island Fund is attached as Appendix C to
this proxy statement and is incorporated into this section of the proxy
statement by reference. We encourage you to read the purchase agreement in its
entirety and the summary below is subject to the full text of the purchase
agreement.
ADJUSTMENT TO CASH PURCHASE PRICE
The cash purchase price of the real estate investment assets to be sold to
Island Fund will be adjusted as follows: (a) if and to the extent that we make
a net aggregate cash equity investment in respect of the real estate investment
assets between January 1, 2003 and the closing of the merger, the cash purchase
price will be increased by such amount; or (b) subject to certain exceptions,
if we receive net aggregate cash distributions in respect of the real estate
investment assets between January 1, 2003 and the closing of the merger, the
cash purchase price will be decreased (x) dollar-for-dollar for the first $1
million of such net distributions, (y) 50% for the next $3 million of such net
distributions and (z) dollar-for-dollar thereafter. For example, if the
decrease in the cash purchase price would otherwise be $4 million, the cash
purchase price will only be reduced by $2.5 million. As of the date of this
proxy statement these adjustments in the aggregate would result in the cash
purchase price under the purchase agreement being adjusted downward by $
million.
In addition, we or certain of our subsidiaries that would not be
transferred to Island Fund under the purchase agreement currently are parties
to guarantees of certain of the obligations of four of the real estate
investment assets that Island Fund may acquire under the purchase agreement. In
the event we are unable to obtain a release of the applicable guarantee with
respect to each of these four assets prior to the closing of the purchase
agreement, the applicable asset will not be purchased by Island Fund and the
cash purchase price will be reduced by a specified amount, which would be
approximately $5.2 million in the aggregate if all four assets were excluded).
None of the purchase price adjustments will affect the additional merger
consideration to be received by our stockholders if the sale to Island Fund is
completed.
CLOSING CONDITIONS
The obligation of the parties to close the transactions contemplated by
the purchase agreement is subject to the prior satisfaction or waiver of each
of the conditions under the merger agreement. In addition, the obligation of
Island Fund to close the transactions contemplated by the purchase agreement
also is subject to the parties obtaining the consent of specified third parties
to the purchase of the real estate investment assets by Island Fund and no
material adverse change in the financial condition or operations of the real
estate investment assets having occurred, subject to a number of exceptions. In
addition, both our obligation and Island Fund's obligation to close the
transactions contemplated by the purchase agreement are subject to a number of
other customary closing conditions, including the continued truth of the other
party's representations and warranties under the purchase agreement and the
other party's compliance with its covenants and obligations under the purchase
agreement. We are not permitted to waive any of the conditions to our
obligation to close the transactions contemplated by the purchase agreement
without the prior written consent of the CBRE Companies.
THIRD PARTY ACQUISITION PROPOSALS FOR THE REAL ESTATE INVESTMENT ASSETS
We may terminate the purchase agreement in order to accept a proposal from
a third party to acquire all or a portion of the real estate investment assets
if we satisfy certain requirements, including providing at least two business
days advance notice to Island Fund of our intention to terminate the purchase
77
agreement and paying Island Fund the $2,250,000 termination fee described
below. In the event we terminate the purchase agreement in order to enter into
an agreement with a third party regarding a sale of our real estate investment
assets, the amount of net proceeds from the other transaction that would
otherwise result in an increase in the common stock merger consideration will
be reduced by the amount of the termination fee that we are required to pay to
Island Fund. However, Island Fund has the right to submit a proposal that is
more favorable to our stockholders than the third party acquisition proposal,
after taking into account, and giving a dollar for dollar credit for, the
$2,250,000 termination fee, in which case we must enter into a definitive
agreement with Island Fund as proposed and abandon the third-party acquisition
proposal. See "Merger Agreement--Potential Adjustments in the Common Stock
Merger Consideration--Potential Increase in Common Stock Merger Consideration."
TERMINATION; TERMINATION FEE AND REIMBURSEMENT OF EXPENSES
The purchase agreement may be terminated by the following parties to the
purchase agreement under the following circumstances:
o the mutual agreement of Island Fund, the CBRE Companies and us;
o by Island Fund, if we transfer, or enter into a definitive agreement to
transfer, any of the real estate investment assets to a third party,
subject to certain exceptions;
o by us, in connection with a third party acquisition proposal, as
described above;
o by either us or Island Fund, if the other party breaches or fails to
perform in any material respect its representations, warranties,
covenants and agreements resulting in one of the terminating party's
conditions to closing being incapable of being satisfied;
o by Island Fund, if the the transactions contemplated by the purchase
agreement do not close by December 31, 2003, unless the failure to close
before such time was the result of a failure of Island Fund failing to
perform one of its obligations;
o by the CBRE Companies, if the merger is completed and the closing of the
the transactions contemplated by the purchase agreement has not occurred,
unless such failure to close was due to a breach by the CBRE Companies;
or
o automatically without any action by any party, if the merger agreement
is terminated.
If the purchase agreement is terminated under the circumstances described
in the second or third bullet points above or by Island Fund under the
circumstances described in the fourth bullet point due to a willful breach of
the purchase agreement by us, we must pay Island Fund a termination fee of
$2,250,000 on the next business day. If the purchase agreement is terminated
under the circumstances described in the fifth, sixth or seventh bullet points
above or by Island Fund under the circumstances described in the fourth bullet
point other than due to a willful breach by us, we must reimburse Island Fund
for up to $1,000,000 of its actual third party expenses incurred in connection
with negotiating and documenting the purchase agreement and performing its
obligations under the purchase agreement.
EXCLUSIVE PRE-CLOSING REMEDY FOR INSIGNIA AND THE CBRE COMPANIES
If the merger closes and
o the closing of the transactions contemplated by the purchase agreement
has not occurred and we or the CBRE Companies reasonably determine that
the failure to close solely was a result of a breach by Island Fund of
its obligation under the purchase agreement, or
o the purchase agreement is terminated by us due to Island Fund's breach
or failure to perform in any material respect its representations,
warranties, covenants and agreements resulting in one of our conditions
to closing being incapable of being satisfied,
then we and the CBRE Companies will be entitled to withhold $5,000,000 of the
amount that Andrew L. Farkas would otherwise be entitled to receive in
connection with the closing of the merger. See "--Interests of Executive
Officers and Directors in the Merger." In the event that Mr. Farkas agrees in
78
writing with the CBRE Companies that they are entitled to withhold the
$5,000,000 otherwise owed to him. A portion of this amount will be used by us
to increase the common stock merger consideration to $11.019 per share. See
"Merger Agreement--Potential Adjustments to the Common Stock Merger
Consideration."
CERTAIN OTHER PROVISIONS OF THE PURCHASE AGREEMENT
The purchase agreement also contains the following agreements and other
provisions:
o We, and after the closing of the merger, the CB Companies, generally
have agreed to indemnify Island Fund and its affiliates for any claims
arising out of, caused by or resulting from the fact that affiliates of
Island Fund are or were directors, officers and employees of us and that
we entered into the purchase agreement with Island Fund and/or
consummated transactions contemplated by the purchase agreement.
o We and, after the closing of the merger, the CBRE Companies, on the one
hand, and Island Fund, on the other hand, have agreed to indemnify the
other for breaches of representations, warranties and covenants under the
purchase agreement.
o We and, after the closing of the merger, the CBRE Companies generally
have agreed to indemnify Island Fund with respect to our ownership, use
or operation of the real estate investment assets, and any actions or
inactions by us when we were required to act, at or prior to the closing
of the transactions contemplated by the purchase agreement, subject to a
number of exceptions and limitations.
o Island Fund has agreed to indemnify us and the CBRE Companies with
respect to its ownership, use or operation of the real estate investment
assets, and any actions or inactions by it when it is required to act,
after the closing of the purchase agreement, subject to a number of
exceptions and limitations.
o The CBRE Companies have agreed to maintain for up to three years after
the closing approximately $10.4 million of letters of credit that we have
issued to support obligations of the real estate investment assets, and
Island Fund has agreed to reimburse the CBRE Companies for 50% of the
amounts that they may be required to fund under these letters of credit
or under an approximately $1.3 million repayment guarantee we have
provided with respect to a real estate investment asset. Island Fund will
secure its reimbursement obligations with an aggregate of approximately
$3 million of cash collateral and letters of credit, at Island's option.
Island Fund has agreed that it will not sell to a third party, or
facilitate the sale to a third party of, any of the real estate
investment assets that are supported by Insignia letters of credit or the
repayment guarantee unless the letter of credit and repayment guarantee
support are irrevocably and unconditionally terminated in connection with
the sale or are replaced by a third party.
o Island Fund will be permitted to offer employment to, and if the
purchase agreement is completed hire, certain of our current employees.
In connection with each of these employees that are hired by Island, we
have agreed to pay these individuals the severance amounts they would
have received under their employment agreements or our severance policy
as if these individuals had been terminated by us without cause in
connection with the closing of the merger.
POTENTIAL INCREASE IN COMMON STOCK MERGER CONSIDERATION IF PURCHASE AGREEMENT
CLOSES
If the sale to Island Fund is completed immediately prior to the merger
and certain conditions under the merger agreement have been satisfied, the
common stock merger consideration will be increased from $11.00 per share to
$11.156 per share. However, there can be no assurance that the transactions
contemplated by the purchase agreement will be consummated prior to the
completion of the merger or that the conditions to an increase in the merger
consideration will be satisfied. The consummation of the transactions
contemplated by the purchase agreement with Island Fund and any payment of the
increased merger consideration are subject to conditions that are not expected
to be fulfilled until after the special meeting. As a result, at the time you
vote on the merger you will not know whether or not the merger
79
consideration will be greater than $11.00 per share and you should not assume
or expect that the merger consideration will be greater than $11.00 per share.
Under the merger agreement, the payment of any increased merger
consideration as a result of the sale of real estate investment assets to
Island Fund is conditioned upon the performance by us of certain covenants and
the accuracy of certain representations and warranties that are contained in
the merger agreement and are related to the asset purchase agreement with
Island Fund. In addition, as described above, under the Island Fund purchase
agreement the completion of the sale of our real estate investment assets to
Island Fund is conditioned upon the receipt of certain third party consents and
other customary closing conditions. See "Merger Agreement--Conditions to
Payment of Increased Merger Consideration as a Result of a Sale of Real Estate
Investment Assets to Island Fund."
80
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. As
of December 31, 2002, CBRE Holding operated in 47 countries through various
subsidiaries and pursuant to cooperation agreements. As of March 31, 2003,
approximately 72% of CBRE Holding's revenue was generated from the United
States and 28% was 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:
81
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.
As of December 31, 2002, this line of business employed 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. As of
December 31, 2002, this line of business employed 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. As of December 31, 2002,
this business line employed 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. As of December 31,
2002, this business line employed 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. As of 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
82
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 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. As of December 31,
2002, CBRE Investors had 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. As of 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. As of December 31, 2002, Asset
Services employed 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. As of December 31, 2002, the Facilities
Management business line employed 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
As of December 31, 2002, CBRE Holding's EMEA division had 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 as of December 31, 2002. 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.
83
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 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
As of December 31, 2002, CBRE Holding's Asia Pacific division had 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 as of December 31, 2002. The CB Richard Ellis brand name is
recognized throughout this region as one of the leading worldwide commercial
real estate services firms. As of December 31, 2002, this division employed
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. As of
December 31, 2002, CBRE Holding operated 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.
84
Attractive Business Model. CBRE Holding's business model features a
diversified revenue base, a variable cost structure and low capital
requirements.
- 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. As of December 31, 2002, CBRE Holding's senior management team
beneficially owned 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
85
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 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
86
may be disruptive to business, as it requires coordination of geographically
diverse organizations and implementation of new accounting and information
technology systems.
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
87
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, 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
88
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.
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:
89
o the other participants may become bankrupt or have economic or other
business interests or goals that are inconsistent with CBRE Holding's;
and
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.
90
EMPLOYEES
At December 31, 2002, CBRE Holding had approximately 9,500 employees. CBRE
Holding believes that relations with its employees are good.
PROPERTIES
CBRE Holding leased the following offices as of December 31, 2002:
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.
91
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 three-months ended March 31, 2003
and 2002, 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 statement of operations data for the
three-month periods ended March 31, 2002 and 2003 and the balance sheet data as
of March 31, 2003 were derived from CBRE Holding's unaudited consolidated
financial statements included elsewhere 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 COMPANY COMPANY
-------------- -------------- -------------- --------------
CBRE CBRE CBRE CBRE
HOLDING, HOLDING, HOLDING, HOLDING,
INC. INC. INC. INC.
-------------- -------------- -------------- --------------
THREE THREE FEBRUARY 20,
MONTHS MONTHS TWELVE 2001
ENDED ENDED MONTHS (INCEPTION)
MARCH 31, MARCH 31, ENDED THROUGH
2003 2002 DECEMBER 31, DECEMBER 31,
(UNAUDITED) (UNAUDITED) 2002 2001(1)
-------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS
DATA(2):
Revenue ......................... $ 263,724 $ 223,990 $1,170,277 $ 562,828
Operating income (loss) ......... $ 10,842 $ 2,914 $ 106,062 $ 62,732
Interest expense, net ........... $ 13,249 $ 15,153 $ 57,229 $ 27,290
Net (loss) income ............... $ (1,347) $ (6,095) $ 18,727 $ 17,426
Basic EPS(3) .................... $ (0.09) $ (0.40) $ 1.25 $ 2.22
Weighted average shares
outstanding for basic
EPS(3)(4) ...................... 15,029,219 15,050,633 15,025,308 7,845,004
Diluted EPS(3) .................. $ (0.09) $ (0.40) $ 1.23 $ 2.20
Weighted average shares
outstanding for diluted
EPS(3)(4) ...................... 15,029,219 15,050,633 15,222,111 7,909,797
OTHER DATA:
EBITDA (5) ...................... $ 17,013 $ 10,506 $ 130,676 $ 74,930
Net cash (used in)
provided by operating
activities ..................... $ (70,761) $ (56,546) $ 64,882 $ 91,334
Net cash used in investing
activities ..................... $ (2,494) $ (11,330) $ (24,130) $(261,393)
Net cash provided by
(used in) financing
activities ..................... $ 11,756 $ 31,087 $ (17,838) $ 213,831
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
----------------- ----------------- ----------------- ----------------
CB RICHARD CB RICHARD CB RICHARD CB RICHARD
ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
----------------- ----------------- ----------------- ----------------
PERIOD
FROM TWELVE TWELVE TWELVE
JANUARY 1, MONTHS MONTHS MONTHS
2001 ENDED ENDED ENDED
THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31,
JULY 20, 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------
STATEMENT OF OPERATIONS
DATA(2):
Revenue ......................... $ 607,934 $1,323,604 $1,213,039 $1,034,503
Operating income (loss) ......... $ (14,174) $ 107,285 $ 76,899 $ 78,476
Interest expense, net ........... $ 18,736 $ 39,146 $ 37,438 $ 27,993
Net (loss) income ............... $ (34,020) $ 33,388 $ 23,282 $ 24,557
Basic EPS(3) .................... $ (1.60) $ 1.60 $ 1.11 $ (0.38)
Weighted average shares
outstanding for basic
EPS(3)(4) ...................... 21,306,584 20,931,111 20,998,097 20,136,117
Diluted EPS(3) .................. $ (1.60) $ 1.58 $ 1.10 $ (0.38)
Weighted average shares
outstanding for diluted
EPS(3)(4) ...................... 21,306,584 21,097,240 21,072,436 20,136,117
OTHER DATA:
EBITDA (5) ...................... $ 11,482 $ 150,484 $ 117,369 $ 110,661
Net cash (used in)
provided by operating
activities ..................... $ (120,230) $ 80,859 $ 70,340 $ 76,005
Net cash used in investing
activities ..................... $ (12,139) $ (32,469) $ (23,096) $ (222,911)
Net cash provided by
(used in) financing
activities ..................... $ 126,230 $ (53,523) $ (37,721) $ 119,438
92
COMPANY COMPANY COMPANY PREDECESSOR PREDECESSOR PREDECESSOR
------------- -------------- -------------- ----------------- ---------------- ---------------
CBRE CBRE CBRE CB RICHARD CB RICHARD CB RICHARD
HOLDINGS HOLDINGS HOLDINGS ELLIS SERVICES, ELLIS SERVICES ELLIS SERVICES
INC. INC. INC. INC. INC. INC.
------------- -------------- -------------- ----------------- ---------------- ---------------
MARCH 31,
2003 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2002 2001 2000 1999 1998
------------- -------------- -------------- ----------------- ---------------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents ... $ 19,370 $ 79,701 $ 57,450 $ 20,854 $ 27,844 $ 19,551
Total assets ................ $ 1,196,296 $ 1,324,876 $ 1,354,512 $ 963,105 $ 929,483 $ 856,892
Long-term debt .............. $ 509,266 $ 511,133 $ 522,063 $ 303,571 $ 357,872 $ 373,691
Total liabilities ........... $ 939,540 $ 1,067,920 $ 1,097,693 $ 724,018 $ 715,874 $ 660,175
Total stockholders' equity .. $ 251,029 $ 251,341 $ 252,523 $ 235,339 $ 209,737 $ 190,842
Number of shares
outstanding(4) ............. 14,349,762 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 (A)
operating income determined in accordance with accounting principles
generally accepted in the United States of America or (B) 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.
93
EBITDA is calculated as follows:
COMPANY COMPANY COMPANY COMPANY
----------- ----------- -------------- --------------
CBRE CBRE CBRE CBRE
HOLDING, HOLDING, HOLDING, HOLDING,
INC. INC. INC. INC.
----------- ----------- -------------- --------------
FEBRUARY 20,
THREE THREE TWELVE 2001
MONTHS MONTHS MONTHS (INCEPTION)
ENDED ENDED ENDED THROUGH
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2003 2002 2002 2002(1)
----------- ----------- -------------- --------------
(DOLLARS IN THOUSANDS)
Operating income (loss) ......... $10,842 $2,914 $106,062 $62,732
Add: Depreciation and
amortization .................. 6,171 7,592 24,614 12,198
------- ------ -------- -------
EBITDA .......................... 17,013 10,506 130,676 74,930
======= ====== ======== =======
PREDECESSOR PREDECESSOR PREDECESSOR PREDECESSOR
----------------- ----------------- ----------------- ----------------
CB RICHARD CB RICHARD CB RICHARD CB RICHARD
ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES, ELLIS SERVICES,
INC. INC. INC. INC.
----------------- ----------------- ----------------- ----------------
PERIOD
FROM
JANUARY 1, TWELVE TWELVE TWELVE
2001 MONTHS MONTHS MONTHS
THROUGH ENDED ENDED ENDED
JULY 20, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
Operating income (loss) ......... $ (14,174) $107,285 $ 76,899 $ 78,476
Add: Depreciation and
amortization .................. 25,656 43,199 40,470 32,185
--------- -------- -------- --------
EBITDA .......................... 11,482 150,484 117,369 110,661
========= ======== ======== ========
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. As of December
31, 2002, 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
94
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%
========= ===== ========== ===== ========= =====
95
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.
Three Months Ended March 31, 2003 Compared to the Three Months Ended March
31, 2002
CBRE Holding reported a consolidated net loss of $1.3 million for the
three months ended March 31, 2003 on revenue of $263.7 million as compared to a
consolidated net loss of $6.1 million on revenue of $224.0 million for the three
months ended March 31, 2002.
Revenue on a consolidated basis increased $39.7 million or 17.7% during
the three months ended March 31, 2003 as compared to the three months ended
March 31, 2002. The increase was driven by significantly higher worldwide sales
transaction revenue as well as slightly increased lease transaction revenue and
appraisal fees.
Cost of services on a consolidated basis totaled $123.6 million, an
increase of $24.5 million or 24.8% from the first quarter of 2002. Higher sales
transaction commissions in the United States (U.S.) commensurate with increased
sales transaction revenues and increased payroll related costs in the U.S. and
Europe primarily drove this increase. As a result of the latter, cost of
services as a percentage of revenue increased from 44.2% for the first quarter
of 2002 to 46.9% for the first quarter of the current year.
Operating, administrative and other expenses on a consolidated basis were
$126.2 million, an increase of $10.3 million or 8.9% for the three months ended
March 31, 2003 as compared to the first quarter of the prior year. The increase
was primarily driven by higher payroll related costs as well as increased
consulting fees and marketing expenses in the U.S. and Europe. These increases
were partially offset by foreign currency transaction gains resulting from the
weaker U.S. dollar.
Depreciation and amortization expense on a consolidated basis decreased by
$1.4 million or 18.7% mainly due to lower capital expenditures in the prior
year.
Equity income from unconsolidated subsidiaries increased $1.1 million or
52.8% for the three months ended March 31, 2003 as compared to the three months
ended March 31, 2002, primarily due to a gain on sale of owned units in an
investment fund.
Merger-related and other nonrecurring charges on a consolidated basis were
$0.6 million for the three months ended March 31, 2002 and primarily consisted
of costs for professional services related to the 2001 Merger.
Consolidated interest expense was $14.3 million for the three months ended
March 31, 2003 as compared to $16.0 million for the first quarter of the prior
year.
Income tax benefit on a consolidated basis was $1.1 million for the three
months ended March 31, 2003 as compared to $6.1 million for the three months
ended March 31, 2002. The effective tax rate
96
decreased from 50% for the first quarter of 2002 to 44% for the first quarter
of 2003. This decrease was primarily due to higher projected annual pre-tax
earnings for 2003 as compared to 2002 while certain expenses that are
non-deductible for tax purposes are expected to be consistent between years.
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.
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.
97
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.
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 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.
98
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 three-months ended March 31, 2003 and 2002 and the years ended December
31, 2002, 2001 and 2000:
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31
-------------------------------------------------- ------------------------
2003 2002 2002
----------------------- -------------------------- ------------------------
(DOLLARS IN THOUSANDS)
AMERICAS
Revenue ..................... $199,950 100.0% $178,613 100.0% $896,064 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 94,993 47.5 77,611 43.5 438,842 48.9
Operating,
administrative and
other ..................... 89,197 44.6 88,327 49.5 367,312 41.0
Depreciation and
amortization .............. 4,522 2.3 5,491 3.1 16,958 1.9
Equity income from
unconsolidated
subsidiaries .............. (3,226) (1.6) (1,530) (0.9) (8,425) (0.9)
Merger-related and
other nonrecurring
charges ................... -- -- 582 -- 36 --
-------- ----- -------- ----- -------- -----
Operating income ............ $ 14,464 7.2% $ 8,132 4.5% $ 81,341 9.1%
======== ===== ======== ===== ======== =====
EBITDA ...................... $ 18,986 9.5% $13,623 7.6% $ 98,299 11.0%
======== ===== ======== ===== ======== =====
EMEA
Revenue ..................... $ 45,478 100.0% $30,073 100.0% $182,222 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 19,563 43.0 13,760 45.8 75,475 41.4
Operating,
administrative and
other ..................... 25,660 56.2 18,212 60.6 84,963 46.6
Depreciation and
amortization .............. 913 2.0 1,113 3.7 4,579 2.5
Equity income from
unconsolidated
subsidiaries .............. 126 0.3 (9) -- (82) --
Merger-related and
other nonrecurring
charges ................... -- -- -- -- -- --
-------- ----- --------- ----- -------- -----
Operating (loss) income ..... $ (784) (1.7)% $(3,003) (10.0)% $ 17,287 9.5%
======== ===== ========= ===== ======== =====
EBITDA ...................... $ 129 0.3% $(1,890) (6.3)% $ 21,866 12.0%
======== ===== ========= ===== ======== =====
ASIA PACIFIC
Revenue ..................... $ 18,296 100.0% $15,304 100.0% $ 91,991 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 9,043 49.4 7,683 50.2 40,625 44.2
Operating,
administrative and
other ..................... 11,318 61.9 9,314 60.9 41,674 45.3
Depreciation and
amortization .............. 736 4.0 988 6.5 3,077 3.3
Equity income from
unconsolidated
subsidiaries .............. 37 0.2 (466) (3.0) (819) (0.9)
Merger-related and
other nonrecurring
charges ................... -- -- -- -- -- --
-------- ----- --------- ----- -------- -----
Operating (loss) income ..... $ (2,838) (15.5)% $(2,215) (14.5)% $ 7,434 8.1%
======== ===== ========= ===== ======== =====
EBITDA ...................... $ (2,102) (11.5)% $(1,227) (8.0)% $ 10,511 11.4%
======== ===== ========= ===== ======== =====
YEAR ENDED DECEMBER 31
-------------------------------------------------------
2001 2000
-------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
AMERICAS
Revenue ..................... $928,799 100.0% $1,074,080 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 448,813 48.4 530,284 49.3
Operating,
administrative and
other ..................... 388,645 41.8 422,698 39.4
Depreciation and
amortization .............. 27,452 3.0 28,600 2.7
Equity income from
unconsolidated
subsidiaries .............. (3,808) (0.4) (5,553) (0.5)
Merger-related and
other nonrecurring
charges ................... 26,923 2.8 -- --
-------- ----- ---------- -----
Operating income ............ $40,774 4.4% $ 98,051 9.1%
======== ===== ========== =====
EBITDA ...................... $68,226 10.2% $ 126,651 11.8%
======== ===== ========== =====
EMEA
Revenue ..................... $161,306 100.0% $ 164,539 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 63,343 39.3 61,194 37.1
Operating,
administrative and
other ..................... 81,728 50.6 84,172 51.2
Depreciation and
amortization .............. 6,492 4.0 9,837 6.0
Equity income from
unconsolidated
subsidiaries .............. (2) -- (3) --
Merger-related and
other nonrecurring
charges ................... 451 0.3 -- --
--------- ----- ----------- -----
Operating (loss) income ..... $ 9,294 5.8% $ 9,339 5.7%
========= ===== =========== =====
EBITDA ...................... $15,786 10.1% $ 19,176 11.7%
========= ===== =========== =====
ASIA PACIFIC
Revenue ..................... $80,657 100.0% $ 84,985 100.0%
Costs and expenses:
Commissions, fees and
other incentives .......... 35,421 43.9 36,619 43.1
Operating,
administrative and
other ..................... 42,259 52.4 44,658 52.5
Depreciation and
amortization .............. 3,910 4.9 4,762 5.6
Equity income from
unconsolidated
subsidiaries .............. (618) (0.8) (949) (1.1)
Merger-related and
other nonrecurring
charges ................... 1,195 1.5 -- --
--------- ----- ----------- -----
Operating (loss) income ..... $(1,510) (1.9)% $ (105) (0.1)%
========= ===== =========== =====
EBITDA ...................... $ 2,400 4.5% $ 4,657 5.5%
========= ===== =========== =====
99
EBITDA is calculated as follows:
THREE MONTHS ENDED MARCH
31 YEAR ENDED DECEMBER 31
------------------------- -----------------------------------
2003 2002 2002 2001 2000
------------ ------------ ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
AMERICAS
Operating income ........................... $ 14,464 $ 8,132 $81,341 $ 40,774 $ 98,051
Add: Depreciation and amortization ......... 4,522 5,491 16,958 27,452 28,600
-------- -------- ------- --------- --------
EBITDA ..................................... $ 18,986 $ 13,623 98,299 68,226 126,651
======== ======== ======= ========= ========
EMEA
Operating (loss) income .................... $ (784) $ (3,003) $17,287 $ 9,294 $ 9,339
Add: Depreciation and amortization ......... 913 1,113 4,579 6,492 9,837
-------- -------- ------- --------- --------
EBITDA ..................................... $ 129 $ (1,890) 21,866 15,786 19,176
======== ======== ======= ========= ========
ASIA PACIFIC
Operating (loss) income .................... $ (2,838) $ (2,215) $ 7,434 $ (1,510) $ (105)
Add: Depreciation and amortization ......... 736 988 3,077 3,910 4,762
-------- -------- ------- --------- --------
EBITDA ..................................... $ (2,102) $ (1,227) 10,511 2,400 4,657
======== ======== ======= ========= ========
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31,
2002
Americas
Revenue increased by $21.3 million or 11.9% for the three months ended
March 31, 2003 as compared to the three months ended March 31, 2002 primarily
driven by higher sales transaction revenue. Sales transaction revenue increased
due to an increased number of transactions and a higher average value per
transaction. Cost of services increased by $17.4 million or 22.4% for the three
months ended March 31, 2003 as compared to the three months ended March 31,
2002 consistent with the higher sales transaction revenue as well as increased
payroll related costs. Cost of services as a percentage of revenue increased
from 43.5% for the first quarter of the prior year to 47.5% for the first
quarter of the current year primarily due to the latter. Operating,
administrative and other expenses remained comparable to the first quarter of
the prior year as increased payroll related, marketing and consulting expense
was offset by foreign currency transaction gains resulting from the weakened
U.S. dollar. Equity income from unconsolidated subsidiaries increased $1.7
million or 110.8% due to a gain on sale of owned units in an investment fund.
Merger-related and other nonrecurring charges were $0.6 million for the three
months ended March 31, 2002 and primarily consisted of costs for professional
services related to the 2001 Merger.
EMEA
Revenue increased by $15.4 million or 51.2% for the three months ended
March 31, 2003 as compared to the three months ended March 31, 2002. This was
mainly driven by higher sales transaction revenue throughout Europe as well as
increased lease transaction revenue in Germany and France. Cost of services
increased $5.8 million or 42.2% due to higher compensation expense driven by
increased headcount and higher results as well as increased payroll related
expense. Operating, administrative and other expenses increased by $7.4 million
or 40.9% due to higher compensation, marketing and consulting expense.
Asia Pacific
Revenue increased by $3 million or 19.6% for the three months ended March
31, 2003 as compared to the three months ended March 31, 2002. The increase was
primarily driven by an overall increase in revenue in Australia, New Zealand
and China partially offset by lower investment management fees in Japan. Cost
of services increased by $1.4 million or 17.7% primarily from higher producer
compensation expense due to increased headcount in Australia and New Zealand.
Operating, administrative, and other expenses increased by $2 million or 21.5%
primarily due to an increased accrual for bonuses related to improved results
in Australia and New Zealand.
100
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 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 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
101
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 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
102
of $65 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 million in aggregate principal amount of
111/4% 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 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 87/8%
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 is currently pursuing efforts to obtain financing to
consummate the acquisition of Insignia. The terms and status of these efforts
are described in the section of this proxy statement titled "The
Merger--Financing of the Merger; Fees and Expenses of the Merger."
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 used in operating activities totaled $70.8 million for the three
months ended March 31, 2003, an increase of $14.2 million compared to the three
months ended March 31, 2002. This increase was primarily due to the timing of
payments to vendors partially offset by improved 2003 operating results. Net
cash provided by operating activities totaled $64.9 million for 2002, 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 $2.5 million in investing activities during the
three months ended March 31, 2003, a decrease of $8.8 million compared to the
prior year. This decrease was primarily due to payment of expenses related to
the 2001 Merger in the prior year quarter. CBRE Holding utilized $24.1 million
in investing activities during 2002, 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.
Net cash provided by financing activities totaled $11.8 million for the
three months ended March 31, 2003, compared to net cash provided by financing
activities of $31.1 million for the three months ended March 31, 2002. This
decrease was primarily attributable to a decline in the revolving credit
facility balance at March 31, 2003 as compared to the prior year. 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
103
$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 1111/4%
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 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
104
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 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 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 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. On April 3, 2003, Standard and Poor's Ratings Service downgraded CBRE
Holdings' senior secured term loans and Notes from BB- to B+ and B to B-,
respectively. 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. On March
28, 2003, the Company was notified that effective May 1, 2003, the RFC base rate
would be lowered to the greater of one-month LIBOR or 1.5%.
During the quarter ended March 31, 2003, CBRE Holding had a maximum of
$93.9 million revolving line of credit principal outstanding with RFC. 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 March 31, 2003, the Company had an $11.6 million
warehouse line of credit outstanding, which is included in short-term
borrowings in the accompanying consolidated balance sheets as of March 31,
2003. 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. As of March 31, 2003, the company had an $11.6 million warehouse
receivable, which is also included in the accompanying consolidated balance
105
sheets as of March 31, 2003. 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, 2002 and 2001,
respectively. The warehouse line of credit at March 31, 2003 will be repaid
with proceeds from the warehouse receivable and, 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. As of March 31, 2003 and 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) as of December 31, 2002:
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
106
from disposition of these lawsuits will not have a material effect on CBRE
Holding's consolidated financial position or results of operations.
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
107
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 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
108
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, 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
109
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 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
110
compensation. Finally, SFAS No. 148 amends Accounting Principles Board (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. 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.
As of March 31, 2003, approximately 28% of CBRE Holding's business was
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. 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):
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 111/4% Senior Subordinated Notes, the 16% Senior
Notes and the Tranche B term loans under the senior secured credit
facilities.
111
CBRE Holding utilizes sensitivity analyses to assess the potential effect
of its variable rate debt. If interest rates were to increase by 49 basis
points, approximately 10% of the weighted average variable rate at March 31,
2003, the net impact would be a decrease of $0.4 million on annual pre-tax
income and cash provided by operating activities for the three months ended
March 31, 2003.
Based on dealers' quotes, the estimated fair value of CBRE Holding's
$225.9 million 111/4% 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 E hereto for the consolidated financial statements and
supplementary data of CBRE Holding.
112
OTHER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 28, 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 May 28, 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) 9.7%
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) 1.2%
H. Strauss Zelnick ............................ 64,000(15) *
All directors and executive officers as a group
(13 individuals) ............................. 3,986,306(1)(6)-(16) 16.6%
----------
(*) Denotes less than 1%.
113
(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 May 28,
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 May 28, 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 May 28,
2003.
(8) Includes 53,000 shares subject to options and warrants that are or
will become exercisable within 60 days of May 28, 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 May 28, 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 May 28, 2003.
(11) Includes 53,000 shares subject to options and warrants that are or
will become exercisable within 60 days of May 28, 2003.
114
(12) Includes 12,000 shares subject to options and warrants that are or
will become exercisable within 60 days of May 28, 2003.
(13) Includes (a) 80,000 shares subject to options that are or will become
exercisable within 60 days of May 28, 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 May 28, 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 May 28, 2003.
(16) Includes 24,000 shares subject to options and warrants that are or
will become exercisable within 60 days of May 28, 2003.
LEGAL COUNSEL
Proskauer Rose LLP is outside counsel to Insignia. Proskauer Rose also has
represented, continues to represent and may in the future represent some or all
of Andrew L. Farkas, Frank M. Garrison, Ronald Uretta and other officers of
Insignia, Bear Stearns, CSFB, H. Strauss Zelnick, a director of Insignia and a
member of the special committee, and Related Companies, L.P., a real estate
firm, whose chairman, chief executive officer and managing general partner is
Stephen M. Ross, a director of Insignia and a member of the special committee,
on matters other than this transaction. A partner of Proskauer Rose is one of
the trustees of trusts established by Andrew L. Farkas.
Dechert LLP is counsel to the Special Committee. Dechert also has
represented, continues to represent and may in the future represent some or all
of affiliates of Bear Stearns, CSFB and Blum Capital Partners on matters other
than this transaction.
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
115
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 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
116
APPENDIX A
================================================================================
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INSIGNIA FINANCIAL GROUP, INC.,
CBRE HOLDING, INC.,
CB RICHARD ELLIS SERVICES, INC.
AND
APPLE ACQUISITION CORP.
MAY 28, 2003
================================================================================
A-1
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS ............................................................... A-5
1.1. Definitions ........................................................ A-5
ARTICLE 2 THE MERGER ................................................................ A-12
2.1. The Merger ......................................................... A-12
2.2. Organizational Documents ........................................... A-13
2.3. Directors and Officers ............................................. A-13
ARTICLE 3 CONVERSION OF SECURITIES AND RELATED MATTERS .............................. A-13
3.1. Capital Stock of Acquiror .......................................... A-13
3.2. Cancellation of Treasury Stock and Acquiror-Owned Shares ........... A-13
3.3. Conversion of Company Shares ....................................... A-13
3.4. Conversion of Company Series A Preferred Shares .................... A-14
3.5. Conversion of Company Series B Preferred Shares .................... A-14
3.6. Exchange of Certificates ........................................... A-14
3.7. Company Stock Options and Restricted Shares ........................ A-15
3.8. Warrants ........................................................... A-16
3.9. Supplemental Stock Purchase and Loan Plan .......................... A-16
3.10. Dissenting Shares .................................................. A-17
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY ............................. A-17
4.1. Corporate Existence and Power ...................................... A-17
4.2. Corporate Authorization ............................................ A-17
4.3. Governmental Authorization ......................................... A-17
4.4. Non-Contravention .................................................. A-18
4.5. Capitalization ..................................................... A-18
4.6. Subsidiaries ....................................................... A-19
4.7. Company SEC Documents; Financial Statements; Undisclosed
Liabilities ........................................................ A-20
4.8. Real Estate Investment Assets; Island Purchase ..................... A-21
4.9. Absence of Certain Changes ......................................... A-21
4.10. Litigation ......................................................... A-22
4.11. Taxes .............................................................. A-22
4.12. Employee Benefits .................................................. A-23
4.13. Compliance with Laws; Licenses, Permits and Registrations .......... A-25
4.14. Title to Assets .................................................... A-25
4.15. Intellectual Property .............................................. A-25
4.16. Transaction Fees; Opinions of Financial Advisor .................... A-26
4.17. Labor Matters ...................................................... A-26
4.18. Material Contracts ................................................. A-27
4.19. Real Estate ........................................................ A-28
4.20. Environmental ...................................................... A-29
4.21. Insurance .......................................................... A-29
4.22. Affiliate Transactions ............................................. A-29
4.23. Required Vote; Board Approval; State Takeover Statutes ............. A-30
4.24. Information to Be Supplied ......................................... A-30
4.25. No Knowledge of Breach ............................................. A-30
4.26. Disclaimer of Other Representations and Warranties ................. A-30
A-2
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF HOLDING, PARENT
AND ACQUIROR ............................................................... A-31
5.1. Corporate Existence and Power ....................................... A-31
5.2. Corporate Authorization ............................................. A-31
5.3. Governmental Authorization .......................................... A-31
5.4. Non-Contravention ................................................... A-31
5.5. Parent SEC Documents ................................................ A-31
5.6. [Reserved] .......................................................... A-32
5.7. Financing ........................................................... A-32
5.8. Information to Be Supplied .......................................... A-33
5.9. Disclaimer of Other Representations and Warranties .................. A-33
5.10. No Knowledge of Breach .............................................. A-33
ARTICLE 6 COVENANTS OF THE COMPANY ................................................... A-34
6.1. Company Interim Operations .......................................... A-34
6.2. Stockholder Meeting ................................................. A-37
6.3. Acquisition Proposals; Board Recommendation ......................... A-37
6.4. French Warrants ..................................................... A-39
6.5. Supplemental Company Disclosure Schedule ............................ A-39
6.6. Pre-Closing Terminations ............................................ A-40
ARTICLE 7 COVENANTS OF HOLDING, PARENT AND ACQUIROR .................................. A-40
7.1. Director and Officer Liability ...................................... A-40
7.2. Employee Benefits ................................................... A-42
7.3. Conduct of Holding, Parent and Acquiror ............................. A-42
7.4. Transfer Taxes and Other Tax Matters ................................ A-42
7.5. Financing Arrangements .............................................. A-43
7.6. Certain Existing Obligations ........................................ A-43
ARTICLE 8 COVENANTS OF HOLDING, PARENT, ACQUIROR AND THE
COMPANY .................................................................... A-44
8.1. Efforts and Assistance .............................................. A-44
8.2. Proxy Statement ..................................................... A-45
8.3. Public Announcements ................................................ A-46
8.4. Access to Information; Notification of Certain Matters .............. A-46
8.5. Further Assurances .................................................. A-46
8.6. Disposition of Litigation ........................................... A-47
8.7. Confidentiality and No-Raid Agreements .............................. A-47
8.8. Resignation of Directors ............................................ A-47
8.9. Sales of Real Estate Investment Assets .............................. A-47
8.10. Treatment of Net Proceeds; Increased Common Merger
Consideration ....................................................... A-48
8.11. 401(k) Restoration Plan ............................................. A-48
ARTICLE 9 CONDITIONS TO MERGER ....................................................... A-49
9.1. Conditions to the Obligations of Each Party ......................... A-49
9.2. Conditions to the Obligations of the Company ........................ A-49
9.3. Conditions to the Obligations of Holding, Parent and Acquiror ....... A-49
9.4. Island Purchase Not a Condition to Merger; Conditions to Increased
Common Merger Consideration as a Result of the Island Purchase ...... A-50
A-3
ARTICLE 10 TERMINATION .............................................................. A-50
10.1. Termination ....................................................... A-50
10.2. Effect of Termination ............................................. A-52
10.3. Fees and Expenses ................................................. A-53
10.4. Indemnification ................................................... A-53
ARTICLE 11 MISCELLANEOUS ............................................................ A-53
11.1. Notices ........................................................... A-53
11.2. Survival .......................................................... A-54
11.3. Amendment and Restatement; Effectiveness of Representations and
Warranties ........................................................ A-54
11.4. Amendments; No Waivers ............................................ A-55
11.5. Successors and Assigns ............................................ A-55
11.6. Counterparts; Effectiveness; Third Party Beneficiaries ............ A-55
11.7. Governing Law ..................................................... A-55
11.8. Jurisdiction ...................................................... A-55
11.9. Enforcement ....................................................... A-55
11.10. Entire Agreement .................................................. A-56
11.11. Authorship ........................................................ A-56
11.12. Severability ...................................................... A-56
11.13. Waiver of Jury Trial .............................................. A-56
11.14. Headings; Construction ............................................ A-56
A-4
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the "AGREEMENT")
is made and entered into as of this 28 day of May, 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, the parties hereto previously have entered into an Agreement and
Plan of Merger, dated as of February 17, 2003 (the "ORIGINAL AGREEMENT");
WHEREAS, pursuant to Section 8.9(a) of the Original Agreement, the Company
has 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 (as
defined herein);
WHEREAS, the Company and the other parties hereto have entered into a
Purchase Agreement, dated as of the date hereof (as it may be amended from time
to time, the "ISLAND PURCHASE AGREEMENT"), with Island Fund I LLC, a Delaware
limited liability company ("ISLAND"), pursuant to which, upon the terms and
subject to the conditions set forth therein, the Company agreed to sell,
assign, transfer and otherwise convey the Designated Interests (as defined in
the Island Purchase Agreement) to Island, and Island agreed to purchase and
acquire the Designated Interests from the Company immediately prior to the
Closing (as defined herein) (the "ISLAND PURCHASE");
WHEREAS, the parties hereto desire to amend and restate the Original
Agreement in order to address, among other things, certain matters related to,
or arising from, the transactions contemplated by the Island Purchase
Agreement;
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 the Original Agreement,
certain Company Stockholders entered into voting agreements with Parent, each
of which is in the form attached to the Original Agreement, as amended by
amendment agreements dated as of the date hereof (the "VOTING AGREEMENTS"),
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 (for purposes of
this Agreement, the phrase "transactions contemplated hereby" shall not include
the Island Purchase).
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.
A-5
"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.
"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 DISCLOSURE SCHEDULE" means, collectively, the Company Disclosure
Schedule attached to the Original Agreement (including, without limitation,
Sections 7.1(c) and 7.6 thereof deemed to be delivered as of the date of the
Original Agreement), the Supplemental Company Disclosure Schedule submitted
pursuant to Section 6.5 of the Original Agreement and the Company Disclosure
Schedule attached hereto.
"COMPANY JOINT VENTURE" means a Joint Venture of the Company or any of its
Subsidiaries.
A-6
"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;
(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.
A-7
"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).
"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.
"HOLDING, PARENT AND ACQUIROR DISCLOSURE SCHEDULE" means the Holding,
Parent and Acquiror Disclosure Schedule attached to the Original Agreement.
"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.
A-8
"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 the Original 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 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, (e) any cash generated by any sale of a Real
Estate Investment Asset on or prior to December 31, 2002 (provided that such
cash proceeds were in the possession at such time of the applicable Real Estate
Investment Entity that owns the Equity Interest in the asset in question, or
would have been in such entity's possession at such time but for an escrow,
hold-back or similar arrangement), and (f) the amount of any Termination Fee
(as defined in the Island Purchase Agreement) paid or payable by the Company
pursuant to Section 12.9(b) of the Island Purchase Agreement (unless paid or
payable in connection with a termination of the Island Purchase Agreement under
Section 12.4 thereof resulting solely from a CB Party's (as defined in the
Island Purchase Agreement) breach of or failure to perform in any material
respect any representation, warranty, covenant or agreement set forth therein).
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).
A-9
"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 Credit Suisse First
Boston.
"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.
"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
A-10
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.
"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.
A-11
"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 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 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
A-12
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.
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 the following (the "COMMON
MERGER CONSIDERATION"): (i) $11.00, subject to adjustment as contemplated by
Sections 7.4(c) and 8.10 hereof, if the Island Purchase is not consummated in
accordance with the terms and conditions of the Island Purchase Agreement or
the conditions set forth in Section 9.4(b) hereof have not been satisfied at or
prior to the Closing, or (ii) $11.156, subject to adjustment as contemplated by
Section 7.4(c) hereof, if the Island Purchase is consummated in accordance with
the terms and conditions of the Island Purchase Agreement and the conditions
set forth in Section 9.4(b) hereof have been satisfied at or prior to the
Closing.
A-13
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 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
A-14
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.
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,
A-15
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, 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. 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 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
A-16
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, 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.
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
A-17
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 May 16,
2003, (i) 25,573,093 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 paid and nonassessable and were
issued free of preemptive or similar rights, including 118,659 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) 80,528 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 3,692,074 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
A-18
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 May 16,
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, as amended, 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 any additional consideration
thereon, (ii) the consent, as amended, 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
A-19
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 the
Original 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.
(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).
A-20
(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. REAL ESTATE INVESTMENT ASSETS; ISLAND PURCHASE.
(a) Section 4.8(a) of the Company Disclosure Schedule contains a true
and complete list as of the date of this Agreement of all outstanding letters
of credit and Designated Real Estate Asset Guarantees (as such term is defined
in the letter agreement, dated as of May 8, 2003 (the "LETTER AGREEMENT"), by
and among the parties hereto), entered into by the Company and its Subsidiaries
with respect to Real Estate Investment Assets.
(b) Except as set forth in Section 4.8(b) of the Company Disclosure
Schedule, each Covered Interest (as defined in the Island Purchase Agreement)
is a Real Estate Investment Asset.
(c) Section 4.8(c) of the Company Disclosure Schedule sets forth, as to
each Real Estate Investment Entity that, as of March 31, 2003, had accrued and
unpaid fees payable to the Company pursuant to Real Estate Investment
Contracts, the name of such Real Estate Investment Entity and the amount of
such accrued and unpaid fees as of such date.
(d) Section 4.8(d) of the Company Disclosure Schedule lists each of the
Company Subsidiaries that (i) is a general partner of a Real Estate Investment
Entity that is a limited partnership, (ii) is a partner of a Real Estate
Investment Entity that is a general partnership or (iii) directly or indirectly
has similar liability as a holder of Equity Interests of any other Real Estate
Investment Entity (whether as managing member or otherwise) by virtue of
provisions providing for the same in the organizational documents of such Real
Estate Investment Entity or other written contract pursuant to which such
liability exists.
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 (i) in the ordinary course of business consistent with past
practices, (ii) pursuant to the Island Purchase Agreement, and/or (iii) the
sale of Insignia Residential Group, Inc., 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.
A-21
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
the Company Disclosure Schedule is a list of all Claims pending, or to the
Knowledge of the Company, threatened, as of the date of the Original Agreement,
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
A-22
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 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
A-23
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 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.
A-24
(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.
(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.
A-25
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, 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 February 17, 2003, 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
A-26
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 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 of the Original Agreement (true and complete copies (or written
summaries, if verbal) of which have been made available to Parent prior to such
date) (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
A-27
"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;
(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 the Original 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
A-28
Investment Entities) (the "OWNED REAL PROPERTY") as of the date of the Original
Agreement, 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 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 (vii) 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, (vii) for the Island Purchase Agreement and the transactions
contemplated thereby, or (viii) for any other
A-29
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 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.
A-30
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
HOLDING, PARENT AND ACQUIROR
Except as disclosed in the Holding, Parent and Acquiror Disclosure
Schedule, 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.
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.
A-31
(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 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) Holding and Parent have entered into an Amendment Agreement, dated
as of May 22, 2003 (the "CREDIT AGREEMENT AMENDMENT"), with respect to the
Parent Credit Agreement, pursuant to which, upon the terms and subject to the
conditions set forth therein, among other things, the Parent Credit Agreement
will be amended and restated (the "AMENDED AND RESTATED CREDIT AGREEMENT") and
Parent will be permitted to incur at least $75,000,000 of additional borrowings
under the Amended and Restated Credit Agreement (the "CREDIT AGREEMENT
FINANCING"). Holding, Parent and CBRE Escrow, Inc. ("ESCROW SUB") have entered
into a purchase agreement, dated as of May 8, 2003 (the "SENIOR NOTES PURCHASE
AGREEMENT") with a group of initial purchasers, pursuant to which Escrow Sub
issued and sold, and such initial purchasers purchased, $200,000,000 aggregate
principal amount of 9 3/4% Senior Notes due May 15, 2010 of Escrow Sub (the
"SENIOR NOTES"), subject to the terms and conditions set forth in the Senior
Notes Purchase Agreement (the "SENIOR NOTES FINANCING," and together with the
Credit Agreement Financing, the "FINANCING"). The proceeds of the sale have
been placed in escrow pursuant to the terms of an Escrow Agreement, dated as of
May 22, 2003 (the "ESCROW AGREEMENT"), among Escrow Sub, Parent and U.S. Bank
National Association, as escrow agent. A true and complete copy of each of the
Credit Agreement Amendment, the Senior Notes Purchase Agreement and the Escrow
Agreement has been previously provided to the Company. Holding, Parent and
Escrow Sub, as applicable, have fully paid any and all commitment fees or other
fees required by the Credit Agreement Amendment and the Senior Notes Purchase
Agreement to be paid as of the date hereof (and will duly pay any such fees
that become due after the date hereof). Each of the Credit Agreement Amendment,
the Purchase Agreement and the Escrow Agreement is valid and in full force and
effect, does not contain any material misrepresentation by Holding, Parent or
Escrow Sub, as applicable (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 Escrow Sub. 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 "ORIGINAL SUBSCRIPTION AGREEMENT") and an amendment to
the Original Subscription Agreement dated as of the date hereof (collectively
with the Original Subscription Agreement, the "AMENDED SUBSCRIPTION
A-32
AGREEMENT") and a commitment letter dated as of the date hereof (the "BLUM
STRATEGIC COMMITMENT LETTER"), which replaces a commitment letter previously
entered into by such parties as of February 17, 2003 (the "OLD BLUM STRATEGIC
COMMITMENT LETTER"), in each case 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 Amended Commitment
Letter titled "Acquisition" (collectively, the "ADDITIONAL FINANCING"). A true
and complete copy of each of the Amended Subscription Agreement and the Blum
Strategic Commitment Letter has been previously provided to the Company. Each
of the Amended 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 the Original Agreement, there were 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 the definition of "Consolidated EBITDA" in the
Amended and Restated Credit Agreement) 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 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.
A-33
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, as expressly contemplated by the Island Purchase Agreement
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 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
A-34
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, (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 (E) except as set forth in Section
6.1(f)(i)(E) of the Company Disclosure Schedule, enter into any new recourse
commitments with respect to the financing of any of the Real Estate Investment
Assets, 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 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
A-35
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);
(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
A-36
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 (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
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
A-37
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 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
A-38
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.
(g) For the avoidance of doubt, the Company's rights and obligations
under this Section 6.3 shall not be affected by the provisions of the Island
Purchase Agreement.
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 of the
Original Agreement 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 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)
A-39
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 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
A-40
(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 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.
A-41
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.
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.
A-42
(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. Holding and Parent each hereby agree to use
commercially reasonable efforts to obtain the Financing on the terms set forth
in the Credit Agreement Amendment, the Purchase Agreement and the Escrow
Agreement and the Additional Financing on the terms set forth in the Amended
Subscription Agreement and the Blum Strategic Commitment Letter. Holding and
Parent will keep the Company informed on a reasonably current basis in
reasonable detail on the status of their efforts to obtain the Financing and
the Additional Financing and shall not permit any amendment or modification
that is adverse to the Company to be made to, or any waiver that is adverse to
the Company of any provision or remedy under, the Credit Agreement Amendment,
the Purchase Agreement, the Escrow Agreement, the Amended Subscription
Agreement or the Blum Strategic Commitment Letter without the prior written
consent of the Company. The Company hereby consents to each of the following:
(i) the amendments to the Original Subscription Agreement reflected in the
Amended Subscription Agreement, as of the date hereof, (ii) the replacement of
the Old Blum Strategic Commitment Letter (which shall be null and void and of
no further force and effect) by the Blum Strategic Commitment Letter as of the
date hereof, (iii) the Escrow Agreement, and (iv) the Commitment Termination
Agreement, dated as of May 22, 2003, between Parent and Credit Suisse First
Boston, terminating the Commitment Letter, dated February 17, 2003, between
Credit Suisse First Boston, acting through its Cayman Island Branch, and
Parent. 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 Credit Agreement Amendment, the Purchase Agreement
and the Escrow Agreement or the Amended Subscription Agreement and Blum
Strategic Commitment Letter, as the case may be.
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 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 existed as of
A-43
the date of the Original 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) Notwithstanding the Island Purchase Agreement and 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.
(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
A-44
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 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
A-45
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. 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 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.
A-46
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) Notwithstanding the provisions of the Island Purchase Agreement,
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 8.9(a) are limited to requiring the
A-47
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 at or immediately prior to the Closing Date,
including such Real Estate Investment Assets that are subject to the Island
Purchase Agreement if the closing of the Island Purchase Agreement does not
occur immediately prior to the Merger or any such Real Estate Investment Assets
that are not acquired by Island pursuant to the terms of the Island Purchase
Agreement, shall 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) [Intentionally omitted].
(d) Each of the Company, Holding, Parent and Acquiror shall perform in
all material respects their respective obligations under the Island Purchase
Agreement, as contemplated therein.
(e) The Company shall cause the Real Estate Investment Entities (other
than those identified in Section 4.8(c) of the Company Disclosure Schedules) to
continue to pay through the Closing Date all fees payable under Real Estate
Investment Contracts in accordance with their terms as of the date hereof,
unless and to the extent that (i) the continuation of such payments reasonably
could be expected to cause damage to such Real Estate Investment Entity, or
(ii) the Company believes in good faith that discontinuation of such payments
is necessary to avoid or limit potential liability to any person who is a party
to a Company Joint Venture.
8.10. TREATMENT OF NET PROCEEDS; INCREASED COMMON MERGER CONSIDERATION.
(a) 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(c)(i) 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.
(b) If the Company, Holding, Parent and Acquiror are entitled to
withhold the Deposit (as defined under the Island Purchase Agreement) pursuant
to Section 13.14 of the Island Purchase Agreement and each of Island and Andrew
L. Farkas at or prior to the Closing have delivered a signed writing to Parent
(each of which writings shall be in form and substance satisfactory to Parent)
unconditionally and irrevocably confirming that the Deposit has been, or may
be, properly withheld by the Company and that the amount of severance and other
payments which the Company is obligated to pay Mr. Farkas will be permanently
reduced by the amount of the Deposit, the Common Merger Consideration shall be
increased to $11.019 per share, subject to adjustment as contemplated by
Section 7.4(c) hereof.
A-48
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 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. Except
as set forth in Section 9.4(a) below, 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
A-49
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) (A) Holding or Parent shall have received the proceeds of the
Credit Agreement Financing on the terms contemplated by the Credit Agreement
Amendment and the Amended and Restated Credit Agreement and (B) the conditions
to the release to Escrow Sub or Parent of the proceeds of the Senior Notes
Financing placed into escrow pursuant to the Escrow Agreement (as it may be
amended from time to time with the prior approval of the Company, which will
not be unreasonably withheld or delayed) shall have been satisfied or (ii)
Holding or Parent shall have received an aggregate of at least $560,000,000 of
debt financing on terms contemplated by the last sentence of Section 7.5
hereto.
9.4. ISLAND PURCHASE NOT A CONDITION TO MERGER; CONDITIONS TO INCREASED
COMMON MERGER CONSIDERATION AS A RESULT OF THE ISLAND PURCHASE.
(a) Notwithstanding anything herein to the contrary, (i) the
consummation of the Island Purchase, (ii) the performance by the Company of any
or all of its obligations contained in Sections 6.1(f)(i)(E), 8.9(d) and
8.9(e), or (iii) the accuracy of any or all of the Company's representations
and warranties contained in Section 4.8 hereto, are not, and shall not be,
conditions to the Closing of the Merger.
(b) The payment of Common Merger Consideration in the amount provided
for in Section 3.3(c)(ii) is subject to the satisfaction of the following
conditions:
(i) the Company shall have performed in all material respects all of
its obligations contained in Sections 6.1(f)(i)(E), 8.9(d) and 8.9(e)
required to be performed by it at or prior to the Effective Time;
(ii) all the representations and warranties of the Company contained
in Section 4.8 herein shall have been true and correct in all material
respects 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 in
all material respects as of such specified time); and
(iii) Acquiror shall have received at the Closing a certificate
signed by an executive officer of the Company (who is not currently, or
expected to become, an officer or employee of Island) to the foregoing
effect.
For the avoidance of doubt, if any of the foregoing conditions are not
satisfied, the Common Merger Consideration shall be the amount provided for in
Section 3.3(c)(i) hereof.
A-50
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 31, 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 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
A-51
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.
A-52
(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 Amended 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 Amended 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).
A-53
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. AMENDMENT AND RESTATEMENT; EFFECTIVENESS OF REPRESENTATIONS AND
WARRANTIES.
This Agreement amends certain provisions of the Original Agreement and
restates the terms of the Original Agreement in their entirety so as to reflect
and give effect to such amendments. All covenants,
A-54
agreements, terms and provisions of this Agreement (other than the amendments
to the Original Agreement effected by this Agreement) shall have effect from
the date of the Original Agreement. All of the amendments to the Original
Agreement effected by this Agreement shall have effect from the date hereof.
11.4. 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, 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.
11.5. 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.
11.6. 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.
11.7. 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.
11.8. 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
A-55
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.
11.9. 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.
11.10. 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 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.
11.11. 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.
11.12. 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.
11.13. 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.
11.14. 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.
* * *
A-56
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
---------------------------------
Name: Frank M. Garrison
Title: Office of the Chairman
CBRE HOLDING, INC.
By: /s/ Raymond E. Wirta
---------------------------------
Name: Raymond E. Wirta
Title: Chief Executive Officer
CB RICHARD ELLIS SERVICES, INC.
By: /s/ Raymond E. Wirta
---------------------------------
Name: Raymond E. Wirta
Title: Chief Executive Officer
APPLE ACQUISITION CORP.
By: /s/ Raymond E. Wirta
---------------------------------
Name: Raymond E. Wirta
Title: President
/s/ Robert J. Denison
---------------------------------
Robert J. Denison, Member of the Special Committee
on behalf of the Special Committee
A-57
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;
B-2
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
B-3
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
B-4
APPENDIX C
================================================================================
PURCHASE AGREEMENT
by and among
INSIGNIA FINANCIAL GROUP, INC.,
CBRE HOLDING, INC.,
CB RICHARD ELLIS SERVICES, INC.,
APPLE ACQUISITION CORP.
and
ISLAND FUND I LLC
Dated as of May 28, 2003
================================================================================
C-1
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1 SALE AND TRANSFER OF INTERESTS..................................2
1.1 Purchase of Designated Interests...................................2
1.2 Purchase Price.....................................................2
1.3 Closing Date.......................................................2
1.4 Excluded Liabilities...............................................2
1.5 Allocation of Purchase Price.......................................2
1.6 Purchase Price Adjustments.........................................3
1.7 Assumption of Liabilities..........................................6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER........................7
2.1 Corporate Existence and Power......................................7
2.2 Corporate Authorization............................................7
2.3 Non-Contravention..................................................7
2.4 Newco..............................................................8
2.5 Ownership of Newco.................................................8
2.6 No Liabilities.....................................................8
2.7 Governmental Authorization.........................................8
2.8 Merger Payment.....................................................9
2.9 Disclaimer of Other Representations and Warranties.................9
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BUYER........................11
3.1 Existence and Power...............................................11
3.2 Authorization.....................................................11
3.3 Non-Contravention.................................................11
3.4 Accredited Investor...............................................12
3.5 Governmental Authorization........................................12
3.6 No Knowledge of Seller Misrepresentation..........................12
3.7 No Knowledge of Pending Claims....................................12
3.8 Financing.........................................................12
3.9 No Encumbrances...................................................13
3.10 Control of Buyer..................................................13
3.11 Disclaimer of Other Representations and Warranties................13
C-2
ARTICLE 4 PRE-CLOSING COVENANTS..........................................13
4.1 The Designated Interests..........................................13
4.2 Conduct of Business Generally.....................................14
4.3 Absence of Material Changes.......................................14
4.4 Compliance with Laws..............................................15
4.5 Buyer Actions.....................................................15
4.6 Consents and Releases.............................................15
4.7 Restructuring of Covered Interests Prior to Closing...............16
4.8 Participation Interests...........................................16
4.9 Certain Employees.................................................16
4.10 Executive Management Employment Agreements........................18
4.11 Newco Foreign Qualification to Do Business........................18
4.12 Certain Entities..................................................18
4.13 Information Rights................................................18
4.14 Public Statements.................................................18
4.15 Voluntary Exercise of Certain Rights..............................18
4.16 No Amendments.....................................................19
4.17 No Loans..........................................................19
4.18 Assumption Agreement..............................................19
4.19 Distribution of Pre-2003 Cash.....................................19
4.20 General...........................................................19
ARTICLE 5 CONDITIONS TO OBLIGATIONS OF BUYER.............................19
5.1 Merger............................................................19
5.2 Continued Truth of Representations and Warranties; Compliance
with Covenants and Obligations....................................20
5.3 Corporate Proceedings.............................................20
5.4 No Injunction; Adverse Proceedings................................20
5.5 Required Consents.................................................20
5.6 No Material Adverse Change........................................20
5.7 Closing Deliveries................................................21
ARTICLE 6 CONDITIONS TO OBLIGATIONS OF SELLER............................22
6.1 Merger............................................................22
C-3
6.2 Continued Truth of Representations and Warranties; Compliance
with Covenants and Obligations....................................23
6.3 Corporate Proceedings.............................................23
6.4 No Injunction; Adverse Proceedings................................23
6.5 Nautica Consent and Release.......................................23
6.6 Releases..........................................................23
6.7 Closing Deliveries................................................23
ARTICLE 7 INDEMNIFICATION................................................24
7.1 Indemnification...................................................24
7.2 Survival of Representations and Warranties........................31
7.3 Indemnification as Sole Remedy....................................31
ARTICLE 8 THIRD PARTY OFFERS.............................................31
8.1 Third Party Acquisition Proposals.................................31
ARTICLE 9 POST-CLOSING AND CERTAIN OTHER AGREEMENTS......................32
9.1 Further Assurances................................................32
9.2 E-mail and Technical Support Services.............................33
9.3 Consents..........................................................33
9.4 Office Space......................................................35
9.5 Employee Interests................................................35
9.6 Property Management...............................................37
9.7 Letters of Credit.................................................37
9.8 Restricted Cash and Pre-2003 Cash.................................41
ARTICLE 10 TAX MATTERS....................................................42
10.1 Tax Periods Ending on or Before the Closing Date..................42
10.2 Buyer Returns Including Pre-Closing Periods.......................42
10.3 Cooperation on Tax Matters; Control of Proceedings................42
10.4 Certain Taxes.....................................................43
10.5 Certain Entities' Taxes...........................................44
ARTICLE 11 BROKERS........................................................44
11.1 For Buyer.........................................................44
11.2 For Seller........................................................44
11.3 For the CB Parties................................................44
C-4
ARTICLE 12 TERMINATION....................................................44
12.1 Termination by Agreement of the Parties...........................44
12.2 Termination by Buyer Under Certain Circumstances..................44
12.3 Termination by Seller Pursuant to Article 8.......................45
12.4 Termination by Reason of Breach of Other Party....................45
12.5 Termination by Reason of Passage of Time..........................45
12.6 Termination by Reason of Termination of Merger Agreement..........45
12.7 Termination by the CB Parties.....................................45
12.8 Manner of Exercise................................................45
12.9 Effects of Termination............................................46
12.10 Buyer Actions for Willful Breach, Fraud and Willful Misconduct....46
ARTICLE 13 MISCELLANEOUS..................................................47
13.1 Successors and Assigns............................................47
13.2 Entire Agreement; Amendments; Attachments.........................47
13.3 Expenses..........................................................47
13.4 Governing Law; Jurisdiction; Waiver of Jury Trial.................47
13.5 Waiver............................................................48
13.6 Section Headings..................................................48
13.7 Severability; "Blue Pencil" Provision.............................48
13.8 Counterparts......................................................48
13.9 No Third Party Beneficiaries......................................48
13.10 Notices...........................................................49
13.11 No Personal Liability.............................................50
13.12 Mutual Drafting...................................................50
13.13 Equitable Remedies................................................50
13.14 Exclusive Pre-Closing Remedy for Seller and CB Parties............51
13.15 Definitions.......................................................52
C-5
This PURCHASE AGREEMENT, dated as of May 28, 2003 (herein,
together with the Exhibits and Disclosure Schedules hereto, referred to as the
"AGREEMENT"), is made by and among Insignia Financial Group, Inc., a Delaware
corporation ("SELLER"), CBRE Holding, Inc., a Delaware corporation ("HOLDING"),
CB Richard Ellis Services, Inc., a Delaware corporation wholly-owned by Holding
("PARENT"), Apple Acquisition Corp., a Delaware corporation wholly-owned by
Parent ("ACQUIROR" and together with Holding and Parent, the "CB PARTIES"), and
Island Fund I LLC, a Delaware limited liability company ("BUYER"). Seller,
Holding, Parent, Acquiror and Buyer are each referred to in this Agreement as a
"PARTY" and together as the "PARTIES." Certain defined terms used herein are
defined separately in Section 13.15 below. To the extent the term "Seller" is
used herein and any act or obligation of Seller hereunder must actually, legally
or technically be effected or satisfied, as the case may be, by a Subsidiary of
Seller, then, in all such cases, Seller hereby agrees to cause any such
Subsidiary to effect such action or satisfy such obligation.
W I T N E S S E T H:
WHEREAS, Seller, Holding, Parent and Acquiror are parties to
an Amended and Restated Agreement and Plan of Merger of even date herewith (the
"MERGER AGREEMENT"), pursuant to which, among other things, Acquiror shall be
merged with and into Seller (the "MERGER") and, at the effective time of such
Merger, the corporate existence of Acquiror shall cease and Seller shall
continue in existence as the surviving corporation (the "SURVIVING
CORPORATION"); and
WHEREAS, Seller currently owns direct and indirect equity and
other economic interests in the real estate and real estate related investment
assets identified under the caption "Asset Name" on Schedule A of the Disclosure
Schedules (collectively, the "ASSETS"); and
WHEREAS, Buyer desires to acquire from Seller certain of the
direct and indirect equity and other economic interests of Seller in or relating
to the Assets identified under the caption "Covered Interests" on Schedule A of
the Disclosure Schedules (collectively, the "COVERED INTERESTS"), which purchase
and sale shall be consummated immediately prior to the closing of the Merger;
and
WHEREAS, prior to the closing of the transactions contemplated
hereby, Seller and its Subsidiaries shall transfer, assign or otherwise convey
to a newly-formed Delaware limited liability company ("NEWCO") substantially all
of the Covered Interests, as reasonably directed by Buyer pursuant to Section
4.1 below, and immediately prior to the closing of the transactions contemplated
hereby, Seller and its Subsidiaries will own 100% of the issued and outstanding
membership interests (the "NEWCO INTERESTS") of Newco; and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to
purchase from Seller, pursuant to this Agreement, the Newco Interests and such
of the Covered
C-6
Interests not contributed to Newco prior to the closing hereunder as Buyer shall
have designated in writing pursuant to Section 4.1 below (collectively, the
"DESIGNATED INTERESTS"); and
WHEREAS, the CB Parties desire to enter into this Agreement
and further desire that Seller and Buyer enter into this Agreement and that the
Parties consummate the transaction contemplated hereby.
NOW, THEREFORE, in reliance upon these premises, the
representations and warranties made herein and in consideration of the mutual
promises and agreements herein contained, the Parties agree as follows:
ARTICLE 1
SALE AND TRANSFER OF INTERESTS
1.1 Purchase of Designated Interests. Subject to the terms and conditions
of this Agreement, and except as otherwise provided in Sections 9.3 and 1.6(f)
hereof, at the Closing (as defined in Section 1.3 below), Seller and its
Subsidiaries will sell, assign, transfer and otherwise convey to Buyer the
Designated Interests, free and clear of all Encumbrances, and Buyer will
purchase the Designated Interests from Seller and its Subsidiaries (it being
understood and agreed that such purchase and sale shall be deemed not to have
occurred if the Merger is not consummated immediately thereafter).
1.2 Purchase Price. The aggregate purchase price (the "PURCHASE PRICE")
payable by Buyer to Seller in consideration of the sale and purchase of the
Designated Interests hereunder shall be $43,939,980 (as adjusted by Sections 1.6
and 1.7) in cash, which shall be paid by Buyer by wire transfer of immediately
available funds to an account of Seller designated in writing by Seller.
1.3 Closing Date. The closing of the transactions contemplated by this
Agreement (the "CLOSING") will take place on the date that is the closing date
and effective date of the Merger (the "CLOSING DATE"). The Closing shall take
place at the location of the closing of the Merger, or at such other place as
may be mutually agreed upon in writing by Buyer and Holding.
1.4 Excluded Liabilities. Except as expressly provided in this Agreement,
including, without limitation, Section 1.2 and the post-Closing indemnification
provisions of Article 7, Seller acknowledges and agrees with Buyer that it shall
ensure that neither Seller nor any of Seller's Subsidiaries shall convey to
Newco, or cause or permit Newco to incur, assume or otherwise become liable for,
in each case, prior to the Closing, any liabilities whatsoever (whether known or
unknown and whether absolute, accrued, contingent or otherwise), except as
expressly provided in this Agreement.
1.5 Allocation of Purchase Price. Seller and Buyer agree to allocate the
Purchase Price (and all other capitalizable costs) among the Designated
Interests for all
C-7
purposes in accordance with the allocation schedule to be agreed upon by each of
Holding, Seller and Buyer and to be set forth in a writing signed by the Parties
at least five (5) days before the Closing Date. Unless otherwise required by
applicable law, none of the Surviving Corporation, Buyer or the CB Parties shall
take, nor shall they permit any of their respective controlled Affiliates to
take, any position for purposes of any Tax with respect to the allocation of the
Purchase Price which is inconsistent with such allocation. The Surviving
Corporation and Buyer shall complete, execute and file a Form 8594 in a manner
consistent with this Section 1.5. Nothing in this Section 1.5 shall affect any
other term or condition of this Agreement or relieve any Party from any of its
obligations hereunder, including, but not limited to, its obligations in respect
of the Closing (it being understood that the agreement of Holding, Seller and
Buyer to an allocation schedule pursuant to this Section 1.5 shall not be a
condition precedent to the Closing).
1.6 Purchase Price Adjustments.
(a) The Purchase Price shall be decreased, on a dollar for dollar
basis (but without duplication), to the extent that Seller is deemed to have
received any Cash Distribution on or after January 1, 2003 through and including
the Closing Date in respect of or as a result of (i) the operations of any Asset
or (ii) any refinancing or sale or other disposition of any Asset (including,
without limitation, but without duplication, any and all Cash Distributions
deemed received by Seller from Insignia Opportunity Trust, Insignia Opportunity
Partners, Insignia Opportunity Directives, LLC, Insignia Opportunity Partners
II, L.P. and Insignia Opportunity Directives II, LLC); provided, however, that
the deemed receipt by Seller of any Restricted Cash distributed on or after
January 1, 2003 through and including the Closing Date shall not result in any
adjustment to the Purchase Price pursuant to this Section 1.6(a), and the
Parties acknowledge and agree that Seller shall be entitled to retain such
Restricted Cash for its own account. For purposes of this Section 1.6(a), Seller
shall be deemed to have received a Cash Distribution only to the extent that,
prior to the Closing, the amount thereof has actually been distributed to Seller
or a wholly-owned Subsidiary of Seller (other than a Transferred Entity) and all
indebtedness of all Subsidiaries in the chain of ownership at or above the level
at which the sale or other disposition of an Asset occurred has been repaid in
full (other than indebtedness under the Senior Credit Agreement and the Senior
Subordinated Credit Agreement), net of all incentive, profit sharing, promote,
participation or similar payments that are actually paid or required to be paid
to current or former employees or consultants of Seller or any Subsidiary of
Seller. Notwithstanding the foregoing, if the net adjustments pursuant to this
Section 1.6(a) would otherwise result in a decrease of the Purchase Price in
excess of $1,000,000, then such actual amount of the decrease to the Purchase
Price pursuant to this Section 1.6(a) shall be reduced by the lesser of (x) 50%
of such excess amount or (y) $1,500,000. For example, (i) if the net adjustments
pursuant to this Section 1.6(a) resulted in a decrease of the Purchase Price in
the amount of $2,000,000, then the actual amount of the decrease to the Purchase
Price pursuant to this Section 1.6(a) would be $1,500,000 and (ii) if the net
C-8
adjustments pursuant to this Section 1.6(a) resulted in a decrease of the
Purchase Price in the amount of $5,000,000, then the actual amount of the
decrease to the Purchase Price pursuant to this Section 1.6(a) would be
$3,500,000.
(b) The Purchase Price shall be increased, on a dollar for dollar
basis (but without duplication), to the extent Seller is deemed to have made an
additional cash equity investment permitted hereunder in respect of any Asset
(without duplication) on or after January 1, 2003 through and including the
Closing Date. For purposes of this Section 1.6(b), Seller shall be deemed to
have made an additional cash equity investment in respect of an Asset only to
the extent that Seller or a wholly-owned Subsidiary of Seller (other than a
Transferred Entity) has made an equity contribution of cash to a Transferred
Entity.
(c) In the event that Seller or any Subsidiary of Seller is required
to make an election (a "REQUIRED ELECTION") pursuant to an Existing Transfer
Obligation as to whether to (i) purchase an Equity Interest in an Entity that
directly or indirectly owns an Asset (a "SUBJECT INTEREST") or (ii) sell a
Covered Interest, then Seller shall give Buyer prompt written notice of such
requirement, the relevant facts and circumstances relating to the Required
Election (including, but not limited to, the requisite time period within which
Seller or the applicable Subsidiary of Seller must notify the applicable third
party of its election, and the specified purchase price) and, as reasonably
requested by Buyer, such other facts and circumstances related to the Required
Election. In addition, the following shall apply to any Required Election:
(i) If, in Seller's, the CB Parties' and Buyer's reasonable
judgment, the date by which Seller or any Subsidiary of Seller must notify any
third party of its determination with respect to a Required Election (the
"DETERMINATION DATE") is to occur following the Closing Date, then neither
Seller nor any such Subsidiary of Seller shall take any action regarding the
Required Election (except as may be directed by Buyer pursuant to Section 9.3,
if applicable).
(ii) If, in Seller's, the CB Parties' and Buyer's reasonable
judgment, the Determination Date is to occur on or prior to the Closing Date,
then Buyer shall (x) direct Seller, in writing and prior to the Determination
Date, either to elect to (A) purchase the Subject Interest or (B) sell the
Covered Interest, in each case, in such a manner as is consistent with the
requirements of the Required Election, and subject to the terms of clauses
(iii), (iv), (v) and (vi) below, and (y) remit to Seller, together with the
foregoing written direction, immediately available funds equal to the purchase
price for the Subject Interest, and Seller shall deposit such funds in an
interest bearing escrow account pursuant to an escrow arrangement that is
reasonably satisfactory to each of the Parties (the "PURCHASE DEPOSIT");
(iii) If Buyer directs Seller to purchase the Subject Interest
pursuant to clause (ii)(A) above, and the closing of such purchase is to occur
at or prior to the anticipated Closing hereunder, then:
C-9
(A) Seller shall take all such action as is necessary and
required to make the Required Election and arrange to purchase the Subject
Interest, and shall purchase the Subject Interest as contemplated herein
utilizing the Purchase Deposit, and
(B) if, in Buyer's and the CB Parties' reasonable judgment, any
required Consent to transfer to Buyer or its designee the Subject Interest
purchased by Seller or a Subsidiary of Seller (i) has been obtained, then Seller
or any applicable Subsidiary of Seller shall promptly transfer the Subject
Interest to Buyer or its designee, free and clear of all Encumbrances at the
Closing, or (ii) has not been obtained, then Seller or the applicable Subsidiary
of Seller shall hold the Subject Interest for the benefit of Buyer as if such
interest was a Restricted Interest under Section 9.3.
(iv) If Buyer directs Seller to purchase the Subject Interest
pursuant to clause (ii)(A) above, and the closing of such purchase is to occur
after the anticipated Closing hereunder, then:
(A) Seller shall take all such action as is necessary and
required to make the Required Election and to purchase the Subject Interest (but
not close the transaction to purchase such interest),
(B) If the Closing hereunder occurs and Seller has transferred to
Buyer at Closing the Transferred Entity that is party to the subject Existing
Transfer Obligation and the closing thereof has not occurred, Seller shall, at
the Closing, return to Buyer the Purchase Deposit, together with all accrued
interest thereon, and
(C) If the Closing hereunder occurs and Seller has not
transferred to Buyer at Closing the Transferred Entity that is party to the
subject Existing Transfer Obligation, but rather holds such Covered Interests
pursuant to Section 9.3, then Seller shall utilize the Purchase Deposit to
acquire the Subject Interest on behalf of Buyer and continue to hold the Subject
Interest pursuant to Section 9.3.
(v) If Buyer directs Seller to sell the Covered Interest pursuant
to clause (ii)(B) above, then (A) the applicable Covered Interest shall be
excluded from the sale to Buyer pursuant to this Agreement in all respects and
(B) the purchase price payable by Buyer pursuant to Section 1.2 of this
Agreement shall be reduced by an amount equal to the sale price specified in the
Required Election and Buyer's direction to Seller pursuant to clause (ii)(y)
above.
(vi) If Seller or any Subsidiary of Seller purchases a Subject
Interest as provided herein and the Closing hereunder shall not occur, then
Seller or any Subsidiary of Seller shall have the option, exercisable in its
sole discretion promptly after the time of determination that the Closing shall
not occur, to (x) retain the purchased Subject Interest and promptly reimburse
Buyer for the amount of the Purchase Deposit, together with all accrued interest
thereon, or (y) take action with respect to the Subject Interest as contemplated
by clause (iii)(B) above.
C-10
(vii) If Buyer fails to provide to Seller the written direction
required by clause (ii)(x) above, then (A) the applicable Covered Interest shall
be excluded from the sale to Buyer pursuant to this Agreement in all respects
and (B) the purchase price payable by Buyer pursuant to Section 1.2 of this
Agreement shall be reduced by an amount equal to the price specified in the
Required Election and related notices.
(d) In the event of any material damage to or the destruction of any
Asset that is real property (an "AFFECTED PROPERTY") prior to the Closing,
Seller shall promptly notify Buyer and the CB Parties thereof. Subject to the
terms of the following sentence, Buyer's obligation to consummate the
transactions set forth in this Agreement shall be unaffected by, and shall
continue regardless of, any damage to or destruction of any Affected Property
prior to Closing. Notwithstanding the foregoing, if any Affected Property shall
be damaged by a casualty which is not covered for its full replacement cost
(less any deductible) by the all risk insurance policy of the owner of such
Affected Property, then Buyer shall have the right to exclude from the
Designated Interests being acquired by Buyer pursuant to this Agreement the
Covered Interests relating to such Affected Property (the "AFFECTED INTERESTS"),
in which case: (i) the Purchase Price shall be reduced by an amount equal to the
Pro Rated Book Value of the Affected Property; and (ii) the Affected Interests
shall not be sold and transferred to Buyer (or to Newco) at the Closing (or, if
the Affected Interests were previously transferred into Newco by Seller or a
Subsidiary of Seller, then Newco shall transfer such Affected Interests back to
Seller or such Subsidiary of Seller prior to the Closing).
(e) Notwithstanding anything to the contrary contained in this
Agreement, the CB Parties shall have the right to exclude from the purchase and
sale of the Designated Interests pursuant to this Agreement some or all of the
Designated Interests listed on Schedule 1.6(e) of the Disclosure Schedules, in
which event the Purchase Price shall be decreased, on a dollar for dollar basis,
by the amount set forth on Schedule 1.6(e) of the Disclosure Schedules next to
each excluded Designated Interest (but without duplication, to the extent that
more than one excluded Designated Interest relates to the same Asset). The CB
Parties may exercise the right afforded in this Section 1.6(e) be delivery of
written notice to Buyer and Seller no less than ten (10) Business Days prior to
the Closing.
(f) Any increase or decrease in the Purchase Price pursuant to this
Section 1.6 shall be supported by documentation or other evidence reasonably
satisfactory to Buyer and Holding.
1.7 Assumption of Liabilities. At the Closing, Newco shall assume (in the
manner contemplated by Section 4.10 below) the liabilities and obligations of
the Surviving Corporation pursuant to certain existing agreements to which
Seller is a party, with the exact amount of such liabilities and obligations
being calculated at the Closing as described on Schedule 1.2(a) of the
Disclosure Schedules (the aggregate amount of
C-11
such liabilities and obligations assumed as of the Closing, the "FINAL ASSUMED
LIABILITIES AMOUNT"). As of the date hereof, the Parties estimate that the
aggregate amount of liabilities and obligations of the Surviving Corporation
pursuant to such existing agreements at the Closing will be $7,860,020 (such
estimated aggregate amount of liabilities and obligations, the "ESTIMATED
ASSUMED LIABILITIES AMOUNT"). If, and to the extent, the Final Assumed
Liabilities Amount exceeds the Estimated Assumed Liabilities Amount, the
Purchase Price shall be reduced dollar-for-dollar by the amount of such excess.
If, and to the extent, the Estimated Assumed Liabilities Amount exceeds the
Final Assumed Liabilities Amount, the Purchase Price shall be increased
dollar-for-dollar by the amount of such excess.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that:
2.1 Corporate Existence and Power. Seller 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. Seller 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, an Asset
Material Adverse Effect.
2.2 Corporate Authorization. The execution, delivery and performance by
Seller of this Agreement and the consummation by Seller of the transactions
contemplated hereby are within Seller's corporate powers and have been duly and
validly authorized by all necessary corporate action, and no other corporate
proceedings on the part of Seller are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. The Board of Directors and
the Special Committee thereof have approved this Agreement and the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Seller and, assuming that this Agreement constitutes the valid and
binding obligation of Buyer, this Agreement constitutes the legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with its
terms.
2.3 Non-Contravention. The execution, delivery and performance by Seller of
this Agreement do not and will not (a) contravene or conflict with Seller's
certificate of incorporation or by-laws, (b) contravene or conflict with or
constitute a violation of any provision of any Law binding upon or applicable to
Seller by which any of its properties or assets is bound or affected, (c) except
with respect to Consents required in connection with the transfer of the
Designated Interests hereunder or the failure to so obtain any such Consent or
any involuntary and automatic modification of the rights and obligations of
C-12
Seller and its Subsidiaries under any joint venture, limited liability company,
partnership agreement or similar agreement relating to the Assets (including,
without limitation, the requirement to purchase or sell Covered Interests or
Assets pursuant to an Existing Transfer Obligation), 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 company or partnership
agreement or other instrument binding upon Seller, Newco or any of their
respective properties or assets, or (d) result in the creation or imposition of
any Encumbrance on any Designated Interest, or other than, in the case of
clauses (b) and (c) taken together, any items that would not be reasonably
likely to have, individually or in the aggregate, an Asset Material Adverse
Effect.
2.4 Newco. Newco (i) is a Delaware limited liability company organized,
validly existing and in good standing under the Laws of the State of Delaware,
(ii) has all limited liability company powers and authority required to own,
lease or operate its properties and assets and to carry on its business, and
(iii) from its inception through the Closing, will be treated as a
"pass-through" entity for federal income tax purposes.
2.5 Ownership of Newco. Immediately prior to the Closing, Seller will own
one hundred percent (100%) of the Newco Interests. Immediately prior to the
Closing, the Newco Interests (i) will be owned free and clear of any Encumbrance
and free of any other limitation or restriction (including any limitation or
restriction on the right to vote, sell or otherwise dispose of the Newco
Interests) and (ii) will have been issued in compliance with all applicable
federal, state and foreign securities laws. Excluding the Newco Interests, as of
the Closing, Newco shall not have issued, or authorized the issuance of, (x)
Equity Interests of Newco, (y) securities of Newco convertible into or
exchangeable for Equity Interests of Newco or (z) options, warrants or other
rights to acquire from Newco, or obligations of Newco to issue, any Equity
Interests of Newco or securities convertible into or exchangeable for Equity
Interests of Newco (the items in clauses (x), (y) and (z) being referred to
collectively as the "NEWCO SECURITIES"). As of the Closing, there will be no
outstanding agreements or other obligations of Seller to repurchase, redeem or
otherwise acquire any Newco Securities.
2.6 No Liabilities. As of the Closing, Newco will have no liabilities
whatsoever, except as expressly contemplated by this Agreement, including,
without limitation, Section 1.2 and Article 7 hereof.
2.7 Governmental Authorization. The execution, delivery and performance by
Seller of this Agreement and the consummation by Seller of the transactions
contemplated hereby will not require any Consent, Permit of, or registration,
declaration or filing with, any Authority by Seller, except for (i) Consents
that may be required from the United States Department of Housing and Urban
Development or the New York City
C-13
Department of Housing Preservation and Development with respect to the transfers
of the entities listed in Schedule 2.7(i) of the Disclosure Schedules, (ii)
Consents that may be required from any Authority in connection with the Asset
listed on Schedule 2.7(ii) of the Disclosure Schedules and (iii) Consents,
Permits, registrations, declarations and filings which, if not obtained or made,
would not be reasonably likely to have, individually or in the aggregate, an
Asset Material Adverse Effect.
2.8 Merger Payment. Seller acknowledges and agrees that, provided the
Closing hereunder occurs prior to or simultaneously with the Merger and the
conditions under Section 9.4(b) of the Merger Agreement have been satisfied at
or prior to the Closing of the Merger, the Common Merger Consideration (as
defined in the Merger Agreement) will be $11.156, subject to adjustment as
contemplated by Section 7.4(c) of the Merger Agreement.
2.9 Disclaimer of Other Representations and Warranties. Seller does not
make, and has not made, any express or implied representations or warranties in
connection with this Agreement and the transactions contemplated hereby other
than those expressly set forth herein. Except as expressly set forth herein, no
Person has been authorized by Seller to make any representation or warranty
relating to Seller or its business, or otherwise in connection with this
Agreement and the transactions contemplated hereby and, if made, such
representation or warranty may not be relied upon as having been authorized by
Seller.
ARTICLE 2A
REPRESENTATIONS AND WARRANTIES OF THE CB PARTIES
The CB Parties jointly and severally represent and warrant to Buyer that:
2A.1 Corporate Existence and Power. Each of the CB Parties 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 the CB Parties 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 CB Parties Material Adverse Effect.
2A.2 Corporate Authorization. The execution, delivery and performance by
each of the CB Parties of this Agreement and the consummation by each of them of
the transactions contemplated hereby are within the corporate powers of each of
the CB Parties and have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of any CB Party
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 the CB Parties and assuming
C-14
that this Agreement constitutes the valid and binding obligation of Buyer, this
Agreement constitutes a valid and binding agreement of each of the CB Parties,
enforceable in accordance with its terms.
2A.3 Governmental Authorization. The execution, delivery and performance by
each of the CB Parties of this Agreement and the consummation by each of the CB
Parties of the transactions contemplated hereby will not require any Consent,
Permit of, or registration, declaration or filing with, any Authority by any CB
Party other than Consents, Permits, registrations, declarations and filings
which, if not obtained or made, would not be reasonably likely to have,
individually or in the aggregate, a CB Parties Material Adverse Effect.
2A.4 Non-Contravention. The execution, delivery and performance by the CB
Parties of this Agreement and the consummation by each of the CB Parties of the
transactions contemplated hereby do not and will not (a) contravene or conflict
with the certificate of incorporation or by-laws of any CB Party, (b) contravene
or conflict with, or constitute a violation of, any provision of Law, binding
upon or applicable to any CB Party or by which any of their respective
properties or assets is bound or affected, (c) except with respect to Consents
which are addressed in Section 9.3 below, 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 company or partnership
agreement or other instrument binding upon, any CB Party or their respective
properties or assets, or (d) result in the creation or imposition of any
Encumbrance on any asset of any of the CB Parties 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 CB Parties
Material Adverse Effect.
2A.5 Merger Payment. The CB Parties acknowledge and agree that, provided
the Closing hereunder occurs prior to or simultaneously with the Merger and the
conditions under Section 9.4(b) of the Merger Agreement have been satisfied at
or prior to the Closing of the Merger, the Common Merger Consideration (as
defined in the Merger Agreement) will be $11.156, subject to adjustment as
contemplated by Section 7.4(c) of the Merger Agreement.
2A.6 Disclaimer of Other Representations and Warranties. No CB Party makes,
or has made, any express or implied representations or warranties in connection
with this Agreement and the transactions contemplated hereby other than those
expressly set forth herein. Except as expressly set forth herein, no Person has
been authorized by any CB Party to make any representation or warranty relating
to any CB Party or their respective businesses, or otherwise in connection with
this Agreement and the transactions
C-15
contemplated hereby and, if made, such representation or warranty may not be
relied upon as having been authorized by any CB Party.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the CB Parties that:
3.1 Existence and Power. Buyer is a limited liability company, duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all limited liability company powers and authority required to
own, lease and operate its properties and assets and to carry on its business as
now conducted. Buyer 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 Buyer Material
Adverse Effect.
3.2 Authorization. The execution, delivery and performance by Buyer of this
Agreement and the consummation by Buyer of the transactions contemplated hereby
are within Buyer's limited liability company powers and have been duly and
validly authorized by all necessary limited liability company action, and no
other proceedings on the part of Buyer are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Buyer and assuming that this
Agreement constitutes the valid and binding obligation of Seller and each CB
Party, this Agreement constitutes the legal, valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms.
3.3 Non-Contravention. The execution, delivery and performance by Buyer of
this Agreement do not and will not (a) contravene or conflict with Buyer's
certificate of formation or limited liability company agreement, (b) contravene
or conflict with or constitute a violation of any provision of any Law binding
upon or applicable to Buyer by which any of its 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 company or partnership agreement or other instrument binding upon
Buyer or its properties or assets, or (d) result in the creation or imposition
of any Encumbrance on any asset of Buyer, or 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 Buyer Material Adverse Effect.
Buyer has provided to Seller and the CB Parties a true and complete copy of the
Consent and Release of Lehman Brothers Holdings Inc. ("LEHMAN") dated as of
May 27, 2003
C-16
relating to (i) the transfer of the mortgaged property or any interest therein
owned by IN-USVI, LLC ("IN-USVI") to Newco or to Buyer, in connection with the
Loan Agreement, dated as of July 10, 2002, between Lehman and IN-USVI (the "LOAN
AGREEMENT"), and (ii) the release by Lehman, effective upon the Closing, of the
guarantee by Seller of certain obligations of IN-USVI under the Loan Agreement
(the "NAUTICA CONSENT AND RELEASE"). The Nautica Consent and Release has not
been changed, amended or modified prior to the date hereof.
3.4 Accredited Investor. Buyer is acquiring the Designated Interests for
its own account. Buyer acknowledges that the Designated Interests have not been
registered under the Securities Act of 1933, as amended (the "SECURITIES ACT").
Buyer is an "accredited investor" as defined in Regulation D under the
Securities Act. Buyer understands that the Designated Interests have not been
approved or disapproved by the United States Securities and Exchange Commission,
by any federal or state agency or by any Authority outside of the United States.
3.5 Governmental Authorization. The execution, delivery and performance by
Buyer of this Agreement and the consummation by Buyer of the transactions
contemplated hereby will not require any Consent, Permit of, or registration,
declaration or filing with, any Authority by Buyer, except (i) for Consents that
may be required from the United States Department of Housing and Urban
Development or the New York City Department of Housing Preservation and
Development with respect to the transfers of the entities listed in Schedule
2.7(i) of the Disclosure Schedules, (ii) Consents that may be required from any
Authority in connection with the Asset listed on Schedule 2.7(ii) of the
Disclosure Schedules and (iii) Consents, Permits, registrations, declarations
and filings which, if not obtained or made, would not be reasonably likely to
have, individually or in the aggregate, a Buyer Material Adverse Effect.
3.6 No Knowledge of Seller Misrepresentation. To Buyer's Knowledge on the
date hereof, no representation or warranty of Seller contained in Article 2
hereof is untrue, incomplete or inaccurate.
3.7 No Knowledge of Pending Claims. Except as set forth in the Merger
Agreement or in any Company Disclosure Schedule to the Merger Agreement, or in
any filing made by Seller with the Securities and Exchange Commission under the
Exchange Act subsequent to December 31, 2002 and prior to the date of this
Agreement or in Schedule 3.7 of the Disclosure Schedules, to Buyer's Knowledge
on the date hereof, there is no (a) adverse claim, action or proceeding pending
or threatened in writing against Seller or any Subsidiary relating to the Assets
or the Covered Interests or (b) any outstanding guarantee, letter of credit,
cross-indemnification obligation or similar type of credit support provided by
Seller or any of its Subsidiaries (other than Transferred Entities) relating to
any of the Assets or the Covered Interests.
3.8 Financing. Buyer has received executed subscription agreements (the
"SUBSCRIPTION AGREEMENTS") pursuant to which the subscribers named therein have
C-17
committed, upon the terms and subject to the conditions set forth therein, to
provide to Buyer cash financing sufficient to pay the portion of the Purchase
Price described in Section 1.2(b) of this Agreement. It is the good faith belief
of Buyer that the financing contemplated by the Subscription Agreements will be
obtained. It is the good faith belief of Buyer that condition 4 of the Nautica
Consent and Release will be satisfied as of the Closing.
3.9 No Encumbrances. To Buyer's Knowledge on the date hereof, no Covered
Interest is subject to any Encumbrance other than Encumbrances under the Senior
Credit Agreement or the Senior Subordinated Credit Agreement.
3.10 Control of Buyer. At the time of the Closing, Andrew L. Farkas will
"control" (as such term is defined in the Nautica Consent and Release) Buyer.
3.11 Disclaimer of Other Representations and Warranties. Buyer does not
make, and has not made, any express or implied representations or warranties in
connection with this Agreement and the transactions contemplated hereby other
than those expressly set forth herein. Except as expressly set forth herein, no
Person has been authorized by Buyer to make any representation or warranty
relating to Buyer or its business, or otherwise in connection with this
Agreement and the transactions contemplated hereby and, if made, such
representation or warranty may not be relied upon as having been authorized by
Buyer.
ARTICLE 4
PRE-CLOSING COVENANTS
4.1 The Designated Interests. Not later than five (5) Business Days prior
to the Closing, Buyer shall send Seller and the CB Parties a written notice
identifying in reasonable detail the following information: (1) exactly which
Covered Interests Buyer has selected to acquire pursuant to this Agreement
(which must (i) include each of the Covered Interests listed on Schedule 4.1 of
the Disclosure Schedules, (ii) collectively constitute Seller's entire economic
interest in all of the Assets, subject to the provisions of Section 1.6 and
(iii) include any Transferred Entity that is party to an Existing Transfer
Obligation that has been triggered and is then subject to the provisions of
Section 1.6(c)); and (2) which of such selected Covered Interests (x) Buyer is
directing Seller to transfer or cause to be transferred to Newco prior to the
Closing, (y) Buyer is directing Seller to transfer or cause to be transferred
directly to Buyer at the Closing, and (z) will not be transferred and assigned
to Newco or to Buyer at the time of Closing, but rather will continue to be
held, directly or indirectly, by Seller after the Closing as contemplated by and
in accordance with the terms of Section 9.3 below; provided, however, that the
only Covered Interests that Buyer may require Seller to continue to hold
pursuant to the foregoing clause (z) are Covered Interests with respect to which
Buyer has reasonably concluded that a Consent to transfer pursuant to this
Agreement is required but has not been obtained on terms reasonably acceptable
to Buyer. Notwithstanding the foregoing, if the CB Parties reasonably determine
that a necessary Consent has not been obtained
C-18
with respect to the transfer of any Covered Interest, the CB Parties may elect
to have Seller continue to hold such Covered Interest in accordance with the
terms of Section 9.3. For the avoidance of doubt, nothing in this Section 4.1
shall in any way affect the Purchase Price payable by Buyer pursuant to this
Agreement.
4.2 Conduct of Business Generally. Except to the extent contemplated by
this Agreement, Seller shall in all material respects carry on its business
relating to the Assets and the Covered Interests consistent with past practices,
in good faith.
4.3 Absence of Material Changes. From and after the date hereof, except as
expressly set forth in this Agreement, without the prior written consent of
Buyer, Seller shall not cause or permit:
(a) the sale, assignment or transfer of any Covered Interest, any
direct or indirect economic interest in any Covered Interest or the real
property Asset known as "Brookhaven Village Shopping Center," other than
transfers (i) to Newco or Buyer as contemplated under this Agreement (including,
without limitation, as provided in Section 9.3 hereof), (ii) in connection with
an Acquisition Proposal as provided in Article 8 hereof, (iii) pursuant to an
Existing Transfer Obligation, and (iv) as permitted by clause (g) below;
(b) a knowing cancellation of any material debt or claim of Seller or
any Subsidiary of Seller (to the extent that Seller has the ability to control
such Subsidiary) relating to the Covered Interests;
(c) a knowing waiver by Seller or any Subsidiary of Seller (to the
extent that Seller has the ability to control such Subsidiary) of any material
right that would affect the value of the Covered Interests or otherwise relates
to the Assets, other than a material right that Seller, after consultation with
Buyer and in good faith, has concluded the waiver of which is reasonably likely
to increase or preserve the value of such Covered Interests;
(d) except as permitted under clause (g) below, any modification,
amendment, alteration or termination of any Contract that primarily relates to
any Asset or Covered Interest of a material value or is material in amount;
(e) the knowing taking of any action or the failure to act when action
was required if such action or inaction would result in a material breach or
default under any Contract related to any Asset or Covered Interest;
(f) any change to the membership of any investment committee or
approval body in respect of any Asset or Covered Interest (other than due to the
termination of the employment of any member of such committee or body); or
C-19
(g) the issuance of any additional or new Employee Profit Participation
Interests or other similar interests in respect of any Asset or Covered
Interest, except as permitted under the Merger Agreement as in effect on the
date hereof.
For the avoidance of doubt, nothing in this Section 4.3 shall prohibit
Seller from causing or permitting (by means of granting consent or otherwise)
the sale, financing or refinancing of any real property Asset other than the
real property Assets identified on Schedule 4.3 of the Disclosure Schedules.
4.4 Compliance with Laws. Seller shall, and shall cause Newco to, use
reasonable commercial efforts to comply in all material respects with all Laws
and regulations which are applicable to them, their ownership of the Covered
Interests and will perform and comply in all material respects with all
Contracts, commitments and obligations by which they are bound related to the
Assets and the Covered Interests, in each case consistent with Seller's past
practices.
4.5 Buyer Actions. Any misrepresentation or breach of any warranty or
covenant hereunder by Seller that is directly attributable to a knowing act or
failure to act when action is required by Buyer, any Island Principal or Jeffrey
P. Cohen (or any act or omission undertaken at the express direction, or with
the express consent, of any such Person) shall not be deemed to be a
misrepresentation or breach of warranty or covenant by Seller.
4.6 Consents and Releases. Buyer, Seller and the CB Parties agree that,
following the execution and delivery of this Agreement, (i) Buyer shall use its
Best Efforts to obtain as soon as reasonably practicable all Consents necessary
for Seller to effect the sale and transfer of the Designated Interests to Buyer
hereunder, (ii) each of Seller and the CB Parties shall reasonably cooperate
with Buyer with respect to, and use their respective Best Efforts to assist
Buyer or its representatives in, obtaining all such Consents and (iii) Buyer
shall reasonably cooperate with Seller and the CB Parties in their efforts to
obtain Releases, it being agreed, however, that the foregoing shall not require
any Party to pay any amount of money or assume any liability or obligation for
any such Consent or Release, except for (x) de minimis incremental expenses and
(y) in connection with any Release, if requested by any third party providing
such a Release, the assumption by Buyer or one or more of the Transferred
Entities of an existing underlying guarantee or indemnification obligation
(without enlargement of the scope or nature of such obligation) with respect to
such Release, but solely to the extent that the assumption of any such
obligation pertains to facts, circumstances or events that (A) occur or arise
after the Closing Date and (B) are in the control of Buyer or a Transferred
Entity and do not in any way relate to any property management or other matters
or actions or inactions of Holding or its Subsidiaries from and after the
Closing. Buyer agrees that it shall keep Seller and the CB Parties reasonably
informed of its progress in obtaining Consents and shall offer each of Seller
and the CB Parties an opportunity to have one representative of Seller and one
representative of the CB Parties attend and
C-20
observe all material meetings and telephone calls regarding the obtaining of
such Consents held between Buyer and/or its representatives, on the one hand,
and the party whose Consent is being sought, on the other hand. Each of Buyer,
Seller and the CB Parties acknowledges that, pursuant to Section 8.1 of the
Merger Agreement, Seller and the CB Parties are obligated to use commercially
reasonable efforts to obtain Consents from third parties with respect to the
consummation of the transactions contemplated by the Merger Agreement and that
such efforts by Seller and the CB Parties shall not be deemed to be a violation
by either Seller or the CB Parties of their obligations under this Section 4.6.
4.7 Restructuring of Covered Interests Prior to Closing. Between the date
of this Agreement and the Closing, Seller shall reasonably cooperate with a
request by the CB Parties that Seller transfer Covered Interests (other than in
respect of Transferred Entities) to one or more wholly-owned Subsidiaries of
Seller, but only if such transfer is necessary to facilitate the transfer of the
Designated Interests to Buyer or Newco pursuant to Section 4.1 or Section 9.3 of
this Agreement or to prevent any transfer of Designated Interests to Buyer or
Newco or any of its Subsidiaries after the Closing pursuant to Section 9.3 of
this Agreement from being covered by Section 4.06 of the Indenture, dated as of
June 7, 2001, among Parent (as successor by merger to BLUM CB Corp.), Holding,
the other guarantors party thereto and State Street Bank and Trust Company of
California, N.A., as Trustee. Notwithstanding the foregoing, in no event shall
Seller be required or permitted to effect the transfer of any Covered Interest
pursuant to this Section 4.7 if such transfer would, in the reasonable opinion
of Buyer or Seller: (a) require a Consent, (b) invalidate or nullify any Consent
that has been obtained in connection with this Agreement, (c) cause any
additional Consent to be required with respect to the consummation of the other
transactions contemplated by this Agreement, (d) constitute a breach or default
with respect to any joint venture, limited liability company, partnership
agreement or similar agreement relating to the Assets, or (e) impair the value
of any Asset or otherwise adversely affect any right of Buyer under this
Agreement.
4.8 Participation Interests. The Parties agree that Section 7.6(b) of the
Merger Agreement (Certain Existing Obligations) may not be amended without the
prior written consent of Buyer.
4.9 Certain Employees.
(a) Set forth on Schedule 4.9(a) of the Disclosure Schedules is a list
of certain employees of Seller to whom Buyer is expressly permitted to extend
offers to become employees of, or independent contractors to, Buyer (or an
Affiliate of Buyer) upon consummation of the Closing. Seller hereby waives (i)
effective immediately, any non-solicit provisions in favor of Seller and/or its
Subsidiaries that are applicable to Buyer (or any Affiliate or employee of
Buyer) and/or such individuals with respect to such solicitations of employment,
and (ii) effective upon the Closing, any non-hire and/or
C-21
non-compete provisions in favor of Seller and/or its Subsidiaries that are
applicable to Buyer, any of the Island Principals, Jeffrey P. Cohen and/or any
such individuals with respect to their hiring by Buyer (or an Affiliate of
Buyer) after the Closing, and agrees that such individuals shall be permitted to
be hired by Buyer (or an Affiliate of Buyer) upon the consummation of the
Closing. The Parties agree that Seller shall have the right, upon reasonable
request, to review (but not to approve) the terms and conditions of any such
offers of employment made by Buyer. With respect to each such individual who is
actually hired by Buyer or an Affiliate of Buyer at or within thirty (30) days
following the Closing: (i) Seller waives any non-compete and confidentiality
provisions contained in any employment agreement, retention agreement or similar
arrangement between Seller (or any Subsidiary of Seller) and such individual to
the extent any such provision relates to the Assets; (ii) Seller, the CB Parties
and the Surviving Corporation agree not to solicit to hire, or extend an offer
to hire, such individual as an employee, independent contractor, or otherwise
for a period of two (2) years from and after the Closing Date; (iii) Seller
agrees to pay to such individual the severance or other similar amount that such
Person would have received pursuant to the employment agreement, retention
agreement or similar arrangement between Seller (or any Subsidiary of Seller)
and such individual or, if none, Seller's severance policy as in effect on the
date hereof, in each case, as if such individual were terminated by Seller
without cause and in connection with the Merger as of the Closing; (iv) if such
employee elects to participate in any of the Surviving Corporation's or the CB
Parties' health insurance plans pursuant to COBRA, the CB Parties agree to waive
and not to charge any administrative fee permitted under COBRA with respect to
such employee; and (v) Buyer agrees to use its Best Efforts to obtain from such
individual a release in favor of Seller with respect to any Employee Profits
Participation Interest held by such individual, in the form of Exhibit A
attached hereto (a "PROFITS PARTICIPATION INTEREST RELEASE").
(b) Set forth on Schedule 4.9(b) of the Disclosure Schedules is the
name of an executive officer of Seller, which individual will continue to be a
party to an employment/consulting agreement with the Surviving Corporation after
the closing of the Merger. Seller and the CB Parties agree (i) to permit such
individual to become a principal and/or employee of Buyer (or an Affiliate of
Buyer), and/or an equity holder of Buyer or an Affiliate of Buyer (in each case,
waiving any applicable non-solicit, non-hire and/or non-compete provisions
applicable to Buyer (or any Affiliate or employee of Buyer) and/or such
individual with respect to such employment, and waiving any confidentiality
provisions applicable to such individual in respect of, and to the extent they
relate to, the Assets) and (ii) that such arrangements will not otherwise affect
any of the rights or obligations of the parties under such employment/consulting
agreement.
(c) For the purposes of this Section 4.9, the term "Affiliate of Buyer"
shall mean any Affiliate of Buyer that is not engaged in any commercial real
estate brokerage activities.
C-22
4.10 Executive Management Employment Agreements. The Parties acknowledge
that, simultaneously with the execution and delivery of this Agreement, Seller,
on the one hand, and each Island Principal, on the other hand, have executed and
delivered amendments to the respective employment agreements between the Island
Principals and Seller, in the forms of Exhibit B, Exhibit C and Exhibit D
attached hereto (each, an "ISLAND PRINCIPAL AMENDMENT").
4.11 Newco Foreign Qualification to Do Business. Seller shall take all
actions required to cause Newco to be duly qualified or licensed to do business
as a foreign entity in each jurisdiction that Buyer shall reasonably request at
least fifteen (15) Business Days prior to the Closing, and but for the passage
of time, Newco shall be so qualified prior to the Closing.
4.12 Certain Entities. Seller agrees to, in a manner and on terms
reasonably satisfactory to Buyer and the CB Parties, convert each entity to be
transferred pursuant to this Agreement from a corporation into a New York or
Delaware limited liability company taxable as a partnership prior to the
contribution of such entities to Newco (if applicable) or the transfer of such
entities directly to Buyer at the Closing or after the Closing pursuant to
Section 9.3 hereof, as the case may be, including, without limitation, the
entities identified on Schedule 4.12 of the Disclosure Schedules (but excluding
Insignia Yacht Haven Corp., Insignia USVI Corp. and Insignia Nautica, Inc.),
provided that Buyer provides written notice to Seller or the Surviving
Corporation, as applicable, requesting such conversion at least fifteen (15)
Business Days prior to the intended transfer pursuant to Section 4.1 or Section
9.3, as the case may be.
4.13 Information Rights. From and after the execution and delivery of this
Agreement, Seller shall provide to Buyer and the CB Parties, no later than ten
(10) Business Days following the end of each calendar month, statements
describing all activity during the month to Seller's Knowledge that would result
in a purchase price adjustment under Section 1.6 hereof, and shall further
provide to Buyer such other information and data relating to the Assets and the
Covered Interests as Buyer shall reasonably request.
4.14 Public Statements. Between the date of this Agreement and the Closing,
each of the Parties shall discuss and coordinate with respect to any public
filing or announcement required concerning any of the transactions contemplated
by this Agreement. No public filing or announcement concerning any of the
transactions contemplated by this Agreement shall be made by any Party without
the consent of the other Parties, except as otherwise required by law,
regulation, the rules of the New York Stock Exchange or fiduciary duty.
4.15 Voluntary Exercise of Certain Rights. Between the date of this
Agreement and the Closing, Seller shall not voluntarily elect to trigger any
buy/sell or similar contractual right of Seller or any Subsidiary of Seller in
respect of any Covered Interest.
C-23
4.16 No Amendments. Buyer shall not agree to or cause any change, amendment
or modification to be made to, or any waiver of any provision or remedy under,
the Nautica Consent and Release or any of the Island Principal Amendments
without the prior written consent of each of Seller and the CB Parties.
4.17 No Loans. Between the date of this Agreement and Closing, without the
prior consent of Buyer, neither Seller nor any of its Subsidiaries (other than a
Transferred Entity) shall directly or indirectly make any new loan to, or
guarantee any new obligation of, the Assets or any Entity that has issued a
Covered Interest; provided, however, that with respect to the refinancing of
existing indebtedness with respect to any Asset, Seller shall have the right to
enter into substitute recourse guarantees (by the same guarantors) that are
substantially the same as the prior recourse guarantees made by the same
guarantors in effect as of the date hereof with respect to such Asset. Nothing
in this Section 4.17 shall affect any rights of the CB Parties, or any
obligations of Seller, under the Merger Agreement.
4.18 Assumption Agreement. Buyer agrees to execute and deliver to Lehman
prior to the Closing the following: (a) the assumption agreements contemplated
by conditions 2 and 3 of the Nautica Consent and Release, in each case in a form
that is reasonably satisfactory to Lehman and Buyer, and (b) the Reaffirmation
of Loan Documents (as defined in condition 5 of the Nautica Consent and
Release), in a form that is reasonably satisfactory to Lehman and Buyer.
4.19 Distribution of Pre-2003 Cash. Prior to the Closing, Seller shall
cause all Pre-2003 Cash to be distributed to and held by any one or more
Subsidiaries of Seller (other than any Transferred Entity).
4.20 General. Each Party will use its Best Efforts to take all action and
to do all things necessary, proper or advisable in order to consummate and make
effective the transactions contemplated by this Agreement and cause its
representations and warranties to be true and its covenants and agreements to be
performed on and as of the Closing Date.
ARTICLE 5
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to effect the Closing under this Agreement are
subject to the fulfillment, on the Closing Date, of the following conditions
precedent, each of which may be waived in writing at the sole discretion of
Buyer.
5.1 Merger. Each of Seller and the CB Parties shall have determined, in its
reasonable judgment, that the conditions to the closing of the Merger, as set
forth in the Merger Agreement, shall have been satisfied or waived and the
Merger is ready to be consummated. The Merger, when consummated, shall be on
economic terms and
C-24
provisions no less favorable to the stockholders of Seller than the economic
terms and provisions of the Merger Agreement as in effect on the date hereof.
5.2 Continued Truth of Representations and Warranties; Compliance with
Covenants and Obligations. The representations and warranties of Seller and the
CB Parties shall be true and correct in all material respects (except that each
representation or warranty that is qualified by materiality or any similar
qualification shall be true and correct in all respects) on the date of this
Agreement and as of the Closing Date as though such representations and
warranties were made on and as of each such date (or, to the extent such
representations and warranties speak as of an earlier date, as of such earlier
date), except for any changes permitted or contemplated by the terms hereof or
consented to in writing by Buyer. Seller and the CB Parties shall have performed
and complied in all material respects with all terms, conditions, covenants,
obligations, agreements and restrictions required by this Agreement to be
performed or complied with by them prior to or on the Closing Date.
5.3 Corporate Proceedings. All corporate and other proceedings required to
be taken on the part of the CB Parties, Seller and Newco to authorize this
Agreement and the transactions contemplated hereby shall have been taken.
5.4 No Injunction; Adverse Proceedings. No Authority shall have issued any
Law or taken any action then in effect that restrains, enjoins or otherwise
prohibits or makes illegal the consummation of the transactions contemplated
hereby.
5.5 Required Consents. The Consents identified on Schedule 5.5 of the
Disclosure Schedules shall have been obtained and be in full force and effect.
5.6 No Material Adverse Change. As of the Closing and since the date of
this Agreement, no material adverse change in the financial condition or
operations of the Assets (the determination of whether there has occurred any
such material adverse change with respect to the Assets, taken as a whole, shall
be based solely upon the aggregate effect on the economic value of all of the
Covered Interests, taken as a whole) shall have occurred; provided, however,
that the foregoing shall exclude any material adverse change arising out of,
attributable to or resulting from:
(i) the announcement of discussions among the Parties
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, or any suit, action or
proceeding arising out of or in connection with this Agreement (other than
any cause of action brought by Buyer with respect to any breach of this
Agreement);
(ii) the failure to obtain any Consents to the transfer of the
Designated Interests to Buyer, other than the required Consents identified
on Schedule 5.5 of the Disclosure Schedules;
C-25
(iii) conditions generally affecting the business or industry
in which Seller or its controlled Affiliates or the Assets operate;
(iv) general economic, political or financial markets
conditions;
(v) any outbreak, continuation or escalation of hostilities
(including, without limitation, any declaration of war by the U.S.
Congress) or acts of terrorism;
(vi) the commencement of any action or proceeding by or before
any Authority, or by any Person which seeks to challenge, restrain or
prohibit or invalidate the transactions contemplated by this Agreement;
(vii) any action or inaction with respect to the Assets or
Covered Interests undertaken by Seller that is specifically waived or
consented to in writing by Buyer;
(viii) any adverse change in the financial condition or
operations of any Asset or Covered Interest resulting directly from the
intentional action or failure to act when action was required by Buyer, any
Island Principal or Jeffrey P. Cohen (or any act or omission undertaken at
the express direction, or with the express consent, of any such Person);
(ix) any adverse development regarding the pending litigation
described on Schedule 5.7(ix) of the Disclosure Schedules insofar as such
developments relate to the issues specifically identified on Schedule
5.7(ix) of the Disclosure Schedules, or any new litigation, claim or
dispute relating to such issues;
(x) any Existing Transfer Obligation;
(xi) the sale, financing or refinancing of any Asset or
Covered Interest if such sale, financing or refinancing is not within the
control of Seller; and
(xii) any damage to or destruction of any Asset, subject to
the provisions of Section 1.6(e) of this Agreement.
5.7 Closing Deliveries. Seller (and for purposes of clause (ix) below, the
CB Parties) shall do the following at or prior to the Closing:
(i) deliver to Buyer instruments of assignment, in form and
substance reasonably satisfactory to Buyer, evidencing the valid transfer
to Buyer of the Designated Interests being transferred;
C-26
(ii) to the extent in the control of Seller, deliver to Buyer
all financial records, equity ownership ledgers, minute books, corporate
seals and all other books and records of Newco and the entities in which
the Designated Interests represent equity interests, or otherwise relating
or pertaining to the Assets;
(iii) if requested by Buyer in a notice at least three (3)
Business Days prior to the Closing, deliver to Buyer resignations of some
or all of the managers and officers of Newco and/or the appointment of new
managers or officers, effective as of the Closing;
(iv) deliver to Buyer certificates of the Secretary of Seller
attesting to the incumbency of its officers and the authenticity of the
resolutions authorizing the transactions contemplated by the Agreement;
(v) deliver to Buyer a certificate of an executive officer of
Seller unaffiliated with Buyer affirming satisfaction of the conditions
specified in Sections 5.2 and 5.3.;
(vi) deliver to Buyer certificates of the Secretary of State
of Delaware as to the legal existence and good standing of Seller and Newco
respectively;
(vii) deliver to Buyer cross receipt executed by Seller;
(viii) deliver to Buyer an affidavit from Seller stating,
under the penalty of perjury, its United States taxpayer identification
number and that it is not a foreign person, pursuant to Section 1445(b)(2)
of the Code; and
(ix) deliver to Buyer such other certificates, documents,
instruments and agreements as Buyer shall deem necessary in its reasonable
discretion in order to effectuate the transactions contemplated herein, in
form and substance reasonably satisfactory to Buyer.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller to effect the Closing under this Agreement
are subject to the fulfillment, on the Closing Date, of the following conditions
precedent, each of which may be waived in writing at the sole discretion of
Seller (provided that Seller has obtained the prior written consent of the CB
Parties to grant such waiver).
6.1 Merger. Each of Seller and the CB Parties shall have determined, in its
reasonable judgment, that the conditions to the closing of the Merger, as set
forth in the
C-27
Merger Agreement, shall have been satisfied or waived and the Merger is ready to
be consummated.
6.2 Continued Truth of Representations and Warranties; Compliance with
Covenants and Obligations. The representations and warranties of Buyer shall be
true and correct in all material respects (except that each representation or
warranty that is qualified by materiality or any similar qualification shall be
true and correct in all respects) on the date of this Agreement and as of the
Closing Date as though such representations and warranties were made on and as
of each such date (or, to the extent such representations and warranties speak
as of an earlier date, as of such earlier date), except for any changes
permitted or contemplated by the terms hereof or consented to in writing by
Seller. Buyer shall have performed and complied with all terms, conditions,
covenants, obligations, agreements and restrictions required by this Agreement
to be performed or complied with by it prior to or on the Closing Date.
6.3 Corporate Proceedings. All limited liability company proceedings
required to be taken on the part of Buyer to authorize this Agreement and the
transactions contemplated hereby shall have been taken.
6.4 No Injunction; Adverse Proceedings. No Authority shall have issued any
Law or taken any action then in effect that restrains, enjoins or otherwise
prohibits or makes illegal the consummation of the transactions contemplated
hereby.
6.5 Nautica Consent and Release. Seller and the CB Parties shall have
received reasonable evidence that the conditions to the Nautica Consent and
Release have been satisfied or waived and the Nautica Consent and Release will
be effective as of the Closing.
6.6 Releases. Each of the Island Principals and Jeffrey P. Cohen shall have
delivered to Seller and the CB Parties a release in the form attached hereto as
Exhibit E at or prior to the Closing.
6.7 Closing Deliveries. Buyer shall do the following at or prior to the
Closing:
(i) deliver the Purchase Price to Seller, as provided in
Section 1.2(b) hereof;
(ii) deliver to Seller the Profits Participation Interest
Releases (to the extent such releases have been obtained);
(iii) deliver to Seller a certificate of the managing member
of Buyer attesting to the authorization of Buyer to consummate the
transactions contemplated by this Agreement;
C-28
(iv) deliver to Seller a certificate of the managing member of
Buyer affirming satisfaction of each the conditions specified in Section
6.2 and Section 6.3.;
(v) a certificate of the Secretary of State of the State of
Delaware as to the good standing of Buyer;
(vi) deliver to Seller a cross receipt executed by Buyer;
(vii) execute and deliver the Cash Collateral Agreement; and
(viii) deliver to Seller such other certificates, documents,
instruments and agreements as each of Seller or the CB Parties shall deem
necessary in their reasonable discretion in order to effectuate the
transactions contemplated herein, in form and substance reasonably
satisfactory to Seller and the CB Parties.
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification.
(a) Subject to Section 7.1(e), from and after the date of this
Agreement Seller (and following the closing of the Merger (if any) the Surviving
Corporation) shall indemnify and hold harmless the Buyer Indemnified Parties
from and against all Losses:
(i) arising out of, caused by or resulting from (x) any
misrepresentation or breach of any representation or warranty made by
Seller in this Agreement, (y) any breach of, or failure to perform, any
covenant, agreement or obligation of Seller contained in this Agreement or
(z) the facts that (1) any Buyer Indemnified Party is or was an officer,
director or employee of Seller and (2) this Agreement was entered into by
the Parties and/or any or all of the transactions contemplated by this
Agreement were consummated; provided, however, that nothing in this
Agreement is intended to, shall be construed to or shall release, waive or
impair any rights of Seller to make any claim under any directors' and
officers' insurance policy that is or has been in existence with respect to
Seller or any of its officers, directors or employees; or
(ii) incurred by any Buyer Indemnified Party as a result of any
third party claim against any Buyer Indemnified Party or Asset Owner if,
but only to the extent that, such claim and the resultant Losses arise out
of, are caused by or result from (A) the ownership, use or operation of the
Designated Interests or Assets at or prior to the Closing (but solely to
the extent of such ownership, use or operation at or prior to the Closing)
or any action or failure to act when action was required at or prior to the
Closing (but solely to the extent such action or failure to
29
act occurred at or prior to the Closing) by Seller or any of its Affiliates
(or any of their respective employees or other agents), it being understood
and agreed that with respect to the Asset known as "Yacht Haven" any
physical condition (including, without limitation, contamination or other
latent defects) ("PHYSICAL CONDITIONS") existing at such Asset at the time
of or prior to the Closing shall not in and of itself give rise to any
indemnification claim pursuant to this clause (A) unless and only to the
extent such condition (x) came into existence as a result of any action by
Seller or any of its Affiliates (or any of their respective employees or
agents) or failure to act when action was legally or contractually required
on the part of Seller or any Affiliate of Seller (or any of their
respective employees or agents) or (y) was exacerbated by any action of any
employee or agent of Seller or any Affiliate of Seller, (B) the failure to
obtain any Consent required in connection with the Merger (other than those
Consents identified in Schedule 7.1(a) of the Disclosure Schedules) or (C)
the matters set forth on Schedule 7.1(b) of the Disclosure Schedules, but
only to the extent therein described; except in the case of either clause
(A) or (B) for Losses arising out of, caused by or resulting from any of
the following: (1) the failure of Seller or the Surviving Corporation to
obtain any Consent that may have been required to transfer any Designated
Interest hereunder (but not excepting any Consent required in connection
with the Merger); (2) the continued ownership, use or operation, or action
or failure to act when action was required, by Seller of any Restricted
Interests after the Closing pursuant to Section 9.3 of this Agreement (but
not excepting any Losses resulting from a breach by Seller, the Surviving
Corporation or any CB Party of their respective obligations under this
Agreement); (3) an act or failure to act when action was required prior to
the Closing by Buyer, any Island Principal or Jeffrey P. Cohen (or any act
or failure to act undertaken at the express direction, or with the express
consent, of any such Person); (4) matters with respect to which any SC
Indemnified Party is entitled to be indemnified by Buyer pursuant to
Section 7.1(c) below; (5) the matters identified on Schedule 5.7(ix) of the
Disclosure Schedules (but only to the extent so identified); (6) any
matter, event or circumstance that constitutes a breach of the
representations and warranties in Section 3.6, Section 3.7 or Section 3.9
of this Agreement (regardless of whether such representations and
warranties have terminated pursuant to Section 7.2 of this Agreement); or
(7) any third party claim relating to the operation of an Asset in the
ordinary course of business so long as the resulting Losses to the Buyer
Indemnified Parties are not material.
(b) Subject to Section 7.1(e), from and after the Closing and the
closing of the Merger, the CB Parties, jointly and severally with the Surviving
Corporation, shall indemnify and hold harmless the Buyer Indemnified Parties
from and against all Losses:
(i) arising out of, caused by or in any way resulting from (x) any
misrepresentation or breach of any representation or warranty made by
Seller
30
or any CB Party in this Agreement, (y) any breach of, or failure to
perform, any covenant, agreement or obligation of Seller or any CB Party
contained in this Agreement, or (z) the facts that (1) any Buyer
Indemnified Party is or was an officer, director or employee of Seller and
(2) this Agreement was entered into by the Parties and/or any or all of the
transactions contemplated by this Agreement were consummated; provided,
however, that the obligation of the CB Parties to indemnify the Buyer
Indemnified Parties pursuant to this Section 7.1(b)(i)(z) shall be
secondary to such obligation of the Surviving Corporation and shall arise
only if the Surviving Corporation shall fail to promptly provide such
indemnification to the Buyer Indemnified Parties; and provided, further
that nothing in this Agreement is intended to, shall be construed to or
shall release, waive or impair any rights of Seller to make any claim under
any directors' and officers' insurance policy that is or has been in
existence with respect to Seller, the Surviving Corporation, the CB Parties
or any of their respective officers, directors or employees.
(ii) incurred by any Buyer Indemnified Party as a result of any
third party claim against any Buyer Indemnified Party or Asset Owner if,
but only to the extent that, such claim and the resultant Losses arise out
of, are caused by or result from (A) the ownership, use or operation of the
Designated Interests or Assets at or prior to the Closing (but solely to
the extent of such ownership, use or operation at or prior to the Closing)
or any action or failure to act when action was required at or prior to the
Closing (but solely to the extent such action or failure to act occurred at
or prior to the Closing) by the Surviving Corporation, any CB Parties or
any of their respective Affiliates (or any of their respective employees or
other agents), it being understood and agreed that with respect to the
Asset known as "Yacht Haven" any Physical Condition existing at such Asset
at the time of or prior to the Closing shall not in and of itself give rise
to any indemnification claim pursuant to this clause (A) unless and only to
the extent such condition (x) came into existence as a result of any action
by the Surviving Corporation, any CB Party or any of their respective
Affiliates (or any of their respective employees or agents) or failure to
act when action was legally or contractually required on the part of the
Surviving Corporation, any CB Party or any of their respective Affiliates
(or any of their respective employees or agents) or (y) was exacerbated by
any action of any employee or agent of the Surviving Corporation, any CB
Party or any of their respective Affiliates, (B) the failure to obtain any
Consent required in connection with the Merger (other than those identified
in Schedule 7.1(a) of the Disclosure Schedules) or (C) the matters set
forth on Schedule 7.1(b) of the Disclosure Schedules, but only to the
extent therein described; except in the case of either clause (A) or (B)
for Losses arising out of, caused by or resulting from any of the
following: (1) the failure of Seller or the Surviving Corporation to obtain
any Consent that may have been required to transfer any Designated Interest
hereunder (but not excepting any Consent required in connection with the
Merger); (2) the continued ownership, use or
31
operation, or action or failure to act when action was required, by Seller
of any Restricted Interests after the Closing pursuant to Section 9.3 of
this Agreement (but not excepting any Losses resulting from a breach by
Seller, the Surviving Corporation or any CB Party of their respective
obligations under this Agreement); (3) an act or failure to act when action
was required prior to the Closing by Buyer, any Island Principal or Jeffrey
P. Cohen (or any act or failure to act undertaken at the express direction,
or with the express consent, of any such Person); (4) matters with respect
to which any SC Indemnified Party is entitled to be indemnified by Buyer
pursuant to Section 7.1(c) below; (5) the matters identified on Schedule
5.7(ix) of the Disclosure Schedules (but only to the extent so identified);
(6) any matter, event or circumstance that constitutes a breach of the
representations and warranties in Section 3.6, Section 3.7 or Section 3.9
of this Agreement (regardless of whether such representations and
warranties have terminated pursuant to Section 7.2 of this Agreement); or
(7) any third party claim relating to the operation of an Asset in the
ordinary course of business so long as the resulting Losses to the Buyer
Indemnified Parties are not material.
(c) Subject to Section 7.1(e), following the Closing, Buyer shall
indemnify and hold harmless the SC Indemnified Parties from and against all
Losses:
(i) arising out of, caused by or resulting from: (w) any
misrepresentation or breach of any representation or warranty made by Buyer
in this Agreement; (x) any breach of, or failure to perform, any covenant,
agreement or obligation of Buyer contained in this Agreement; (y) any of
the obligations expressly assumed by Newco or Buyer pursuant to, or in
accordance with, this Agreement; or (z) the continued ownership, use or
operation, or action or failure to act when action was required, by Seller
or the Surviving Corporation or any of their Subsidiaries of any Restricted
Interest after the Closing pursuant to Section 9.3, including the
compliance by Seller or the Surviving Corporation with any written
directive of Buyer to transfer any Restricted Interest to Buyer or its
designee after the Closing (except to the extent any such Losses arise out
of, are caused by or result from a breach by Seller, the Surviving
Corporation or any CB Party of any of their respective obligations under
this Agreement); and
(ii) incurred by any SC Indemnified Party as a result of any third
party claim against any SC Indemnified Party, if, but only to the extent
that, such claims and the resultant Losses arise out of, are caused by or
result from (w) except for any third party claim relating to the operation
of an Asset in the ordinary course of business so long as the resulting
Losses to the SC Indemnified Parties are not material, the ownership, use
or operation of the Designated Interests or the Assets by Buyer or any of
its Affiliates (or any of their respective employees or other agents) after
the Closing (but solely to the extent of such post-Closing ownership, use
or operation) or any action or failure to act when action was required
after the Closing (but solely to the extent such action or failure to act
32
occurred after the Closing) by Buyer or any of its Affiliates (or any of
their respective employees or other agents), it being understood and agreed
that with respect to the Asset known as "Yacht Haven" any Physical
Condition existing at such Asset after the Closing shall not in and of
itself give rise to any indemnification claim pursuant to this clause (w)
unless and only to the extent such condition (1) came into existence as a
result of any action by Buyer or any Affiliate of Buyer (or any of their
respective employees or agents) or failure to act when action was legally
or contractually required on the part of Buyer or any Affiliate of Buyer
(or any of their respective employees or agents) or (2) was exacerbated by
any action of any employee or agent of Buyer or any Affiliate of Buyer
following the Closing, (x) the issues and matters identified on Schedule
5.7(ix) of the Disclosure Schedules, but only for the period ending on the
later of six months following the Closing or such time as Buyer (or an
Affiliate of Buyer) no longer owns a controlling interest in the subject
Asset, (y) the improper use by Buyer or any Affiliate of Buyer of the
Technology Services and (z) the matters set forth on Schedule 7.1(b) of the
Disclosure Schedules, but only to the extent therein described; provided,
however, that the indemnification set forth in this clause (ii) shall not
extend to any matter addressed in Section 9.7 below.
(d) (i) In the event that any indemnified party is made a defendant in
or party to any action, suit, proceeding or claim, judicial or administrative,
instituted by any third party for Losses, or otherwise receives any demand from
any third party for Losses (any such third party action, suit, proceeding or
claim being referred to as a "CLAIM"), the indemnified party (referred to in
this clause (d)(i) as the "NOTIFYING PARTY") shall give the indemnifying party
prompt notice thereof. The failure to give such notice shall not affect whether
an indemnifying party is liable for reimbursement unless such failure has
resulted in the loss of substantive rights with respect to the notifying party's
ability to defend such Claim, and then only to the extent of such loss. The
indemnifying party shall be entitled to contest and defend such Claim; provided
that the indemnifying party (A) diligently contests and defends such Claim and
(B) acknowledges in writing that it will contest or defend such Claim, it being
understood that the indemnifying party may reserve its rights as to whether or
not it is in fact liable for indemnification hereunder. Notice of the intention
to contest and defend shall be given by the indemnifying party to the notifying
party within twenty (20) Business Days after the notifying party's notice of
such Claim. Such contest and defense shall be conducted by attorneys employed by
the indemnifying party and reasonably satisfactory to the indemnified party. The
notifying party shall be entitled at any time, at its own cost and expense
(which expense shall not constitute a Loss unless the notifying party reasonably
determines that the indemnifying party is not adequately representing or,
because of a conflict of interest, may not adequately represent, any interests
of the notifying party, and only to the extent that such expenses are
reasonable), to participate in such contest and defense and to be represented by
attorneys of its or their own choosing, and, in the absence of any conflict, to
assert any counterclaims or cross-claims such notifying party may have, at the
expense of such notifying party. The notifying party will cooperate with
C-33
the indemnifying party in the conduct of such defense. Neither the notifying
party nor the indemnifying party may concede, settle or compromise any Claim
without the prior written consent of the other party, unless such concession,
settlement or compromise involves no cost or liability to the other party and
includes an unconditional release of the other party from all liability with
respect to such Claim.
(ii) In the event any indemnified party has a claim against any
indemnifying party that does not involve a Claim, the indemnified party
shall deliver a notice of such claim with reasonable promptness to the
indemnifying party. Except as provided in Section 7.2, relating to survival
of representations and warranties, failure to give such notice shall not
affect whether an indemnifying party is liable for reimbursement unless
such failure has resulted in the loss of substantive rights with respect to
the indemnifying party's ability to defend such claim, and then to the
extent of such loss. If the indemnifying party notifies the indemnified
party that it does not dispute the claim described in such notice or fails
to notify the indemnified party within sixty (60) days after delivery of
such notice by the indemnified party whether the indemnifying party
disputes the claim described in such notice, the Loss in the amount
specified in the indemnified party's notice will be conclusively deemed a
liability of the indemnifying party (subject to the limitations set forth
in this Section 7.1) and the indemnifying party shall pay the amount of
such Loss to the indemnified party on demand.
(iii) Nothing herein shall prevent any of the indemnified parties
from bringing an action based upon allegations of fraud or willful
misconduct in connection with this Agreement. In the event an action is
brought in accordance with this subsection (iii), the prevailing party's
reasonable attorneys' fees and costs shall be paid by the non-prevailing
party.
(e) Notwithstanding anything to the contrary in this Agreement,
(i) in no event shall any indemnifying party be required to
indemnify any indemnified party against any exemplary, special or punitive
damages in connection with any breach of this Agreement (as opposed to
Losses resulting from third party claims);
(ii) Buyer agrees and acknowledges that in no event shall any of
the CB Parties, their Affiliates or any of their managers, officers,
directors, employees, members, representatives or agents have any liability
or obligations to Buyer with respect to the transactions contemplated by
this Agreement (including, without limitation, pursuant to Section 7.1(b))
if the closing of the Merger does not occur;
(iii) Seller and the CB Parties agree and acknowledge that in no
event shall Buyer, its Affiliates or any of its managers, officers,
directors,
C-34
employees, members, representatives or agents have any liability or
obligations to Seller or the CB Parties with respect to the transactions
contemplated by this Agreement (including, without limitation, pursuant to
Section 7.1(c)) if the closing of the Merger does not occur;
(iv) (x) in no event shall any Buyer Indemnified Party be permitted
to assign or transfer any rights to indemnification under this Section 7.1
with respect to Physical Conditions to any Person, (y) the right of any
Buyer Indemnified Person to assert claims for indemnification hereunder
with respect to any Physical Conditions regarding an Asset shall terminate
immediately on the second anniversary of the Closing Date and (z) Buyer may
not assert any indemnification claim under this Section 7.1 with respect to
Physical Conditions to the extent such indemnification claim relates to a
third party claim asserted against any Buyer Indemnified Party by any
Person that, directly or indirectly, acquired (A) the Asset from Buyer or
an Affiliate of Buyer or (B) any direct or indirect interest of Buyer in
the subject Asset;
(v) the maximum indemnification obligation of the CB Parties,
Seller and the Surviving Corporation regarding Losses of all the Buyer
Indemnified Parties pursuant to Section 7.1(a)(ii) and Section 7.1(b)(ii),
together, shall be limited as follows:
(A) the maximum amount of Losses that shall be indemnifiable in
respect of any third party claim against a Category A Entity is the Adjusted Pro
Rated Book Value of the applicable Asset owned by such Category A Entity at the
time such Loss is to be paid; and
(B) the maximum amount of Losses that shall be indemnifiable in
respect of any third party claim against a Category B Entity is the aggregate
Attributable Pro Rated Book Value of the Assets owned by the applicable Asset
Owners in which such Category B Entity owns direct or indirect Equity Interests
at the time such Loss is to be paid.
(vi) The aggregate indemnification obligations of the CB Parties
and Seller under Sections 7.1(a) and 7.1(b) to all of the Buyer Indemnified
Parties, on the one hand, and the aggregate indemnification obligations of
Buyer under Section 7.1(c) to all of the SC Indemnified Parties, on the
other hand, each shall not exceed sum of the Purchase Price and the Final
Assumed Liabilities Amount (the "TOTAL INDEMNIFICATION LIMIT"); provided,
however that the Total Indemnification Limit shall not apply to any
indemnification obligations under Section 7.1(a)(i)(z) or (b)(i)(z).
(f) No Claim can be made pursuant to this Section 7.1 for breach of
a representation or warranty beyond the period of survival set forth in Section
7.2 herein; provided, however, that any indemnification provision that otherwise
would terminate in
C-35
accordance with this paragraph (f) will continue to survive, if such notice
shall have been timely given under Section 7.1(d) herein on or prior to such
termination date, until the related Claim has been satisfied or otherwise
resolved as provided in Section 7.1(d) herein.
7.2 Survival of Representations and Warranties. The representations and
warranties contained herein shall survive the Closing Date for a period of one
(1) year, except that the representations and warranties set forth in Sections
2.5 and 2.6 shall survive without limitation.
7.3 Indemnification as Sole Remedy. Following the Closing, the indemnities
provided in this Article 7 shall be the sole and exclusive remedy of the Parties
and their successors and assigns with respect to any and all claims arising out
of or relating to this Agreement, except to the extent otherwise provided under
Article 10, Article 12 and Sections 13.4, 13.13 and 13.14.
ARTICLE 8
THIRD PARTY OFFERS
8.1 Third Party Acquisition Proposals.
(a) Subject to Section 12.9 below, Seller, at the direction of the
Board of Directors of Seller or the Special Committee thereof, may terminate
this Agreement as contemplated by Section 12.3 below if (i) Seller has received
one or more Acquisition Proposals, (ii) Seller has complied in all material
respects with this Section 8.1, and (iii) Seller shall have delivered to Buyer a
written notice (a "NOTICE OF ACQUISITION PROPOSAL") of such Acquisition
Proposal(s) at least two (2) Business Days in advance of its intention to effect
such termination.
(b) Seller, at the direction of the Board of Directors of Seller or the
Special Committee thereof, may, in response to an Acquisition Proposal that did
not otherwise result from a breach of this Section 8.1, terminate this Agreement
pursuant to Section 8.1(a) and concurrently enter into an agreement regarding
such Acquisition Proposal; provided, however, that Seller shall not terminate
this Agreement pursuant to Section 8.1(a), and any purported termination
pursuant to Section 8.1(a) shall be void and of no force or effect (and Seller
may not enter into such agreement regarding such Acquisition Proposal), unless
Seller shall have complied in all material respects with all the provisions of
this Section 8.1, including the notification provisions in this Section 8.1, and
with all applicable requirements of Section 12.9 (including the payment of the
Termination Fee (as defined in Section 12.9(b)) prior to or concurrently with
such termination) in connection with such Acquisition Proposal; and further
provided, that Seller shall not exercise its right to terminate this Agreement
pursuant to Section 8.1(a) until after the second Business Day following Buyer's
receipt of a Notice of Acquisition Proposal from Seller advising Buyer that the
Board of Directors of Seller or the Special Committee has received an
Acquisition Proposal, specifying the terms and conditions of
C-36
the Acquisition Proposal, identifying the person making such Acquisition
Proposal and stating that the Board of Directors of Seller or the Special
Committee thereof intends to exercise its right to terminate this Agreement
pursuant to Section 8.1(a) (it being understood and agreed that, prior to any
such termination taking effect, any amendment to the price or any other material
term of an Acquisition Proposal shall require a new Notice of Acquisition
Proposal and the commencement of a new two (2) Business Day period).
(c) Upon receipt of a Notice of Acquisition Proposal, Buyer shall have
the right during the two (2) Business Day notice period to submit to Seller a
proposal that the Board of Directors of Seller or the Special Committee thereof
determines would result in a transaction, if consummated, that would be more
favorable to its stockholders (taking into account, among other things, and
giving dollar for dollar credit for, the Termination Fee that would not be
payable to Buyer in the event a transaction with Buyer is consummated hereunder)
and, in such case, Seller shall enter into definitive agreements with Buyer in
respect of its subsequent proposal and simultaneously terminate and abandon
pursuit of such third party Acquisition Proposal that was subject to the Notice
of Acquisition Proposal.
(d) Seller shall notify Buyer promptly (but in no event later than the
next Business Day) after receipt by Seller of one or more Acquisition Proposals
or any request for information relating to Seller, the Assets or the Covered
Interests in connection with an Acquisition Proposal or for access to the
properties, books or records of Seller 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 Seller that it is
considering making, an Acquisition Proposal; provided, however, that prior to
participating in any discussions or negotiations or furnishing any such
information, Seller shall receive from such Person an executed confidentiality
agreement substantially in the form of Exhibit F attached hereto (the
"CONFIDENTIALITY AGREEMENT"). The notice shall indicate the terms and conditions
of the proposal or request and the identity of the Person making it, and Seller
will promptly notify Buyer 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. Seller shall keep Buyer informed, on a
reasonably current basis, of the status of any negotiations, discussions and
documents with respect to such Acquisition Proposal or request.
ARTICLE 9
POST-CLOSING AND CERTAIN OTHER AGREEMENTS
9.1 Further Assurances. The CB Parties, Buyer and Seller each agree (a)
to furnish upon request to each other such further information, (b) to execute
and deliver to
C-37
each other such other documents, and (c) to do all such other acts and things,
all as each Party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to in this Agreement and
consummating the transactions contemplated hereby and thereby.
9.2 E-mail and Technical Support Services. Following Closing and for a
period of up to one year following the Closing Date, the CB Parties and/or the
Surviving Corporation shall reserve and make available to and for the benefit of
Buyer and its Affiliates, free of charge, a portion of their computer server(s)
and Internet connectivity to (i) host and access files and (ii) host e-mail
addresses (no more than 2 domains) and store, maintain and access electronic
mail (for no more than 50 users) (the "TECHNOLOGY SERVICES"). The CB Parties
and/or the Surviving Corporation shall make available to Buyer and its
Affiliates the CB Parties' and/or the Surviving Corporation's technology staff
and support to arrange and maintain such Technology Services to the same extent
the CB Parties provide for their own business. Buyer agrees and acknowledges
that all Technology Services provided pursuant to this Section 9.2 will be
provided "as is/where is" and without representation or warranty of any kind.
9.3 Consents.
(a) If the Closing occurs and any Consent to a transfer of Designated
Interests to Newco or Buyer has not been obtained (or is not in full force and
effect), then following the Closing, Buyer, the Surviving Corporation and the CB
Parties shall use their respective Best Efforts, and reasonably cooperate with
one another, to obtain any and all such Consents as quickly as practicable
following the Closing.
(b) Except as provided in Section 9.3(c) below, with respect to each
Designated Interest described in clause (2)(z) of the first sentence of Section
4.1 and each Covered Interest that Seller shall continue to hold following the
Closing pursuant to the penultimate sentence of Section 4.1 (each, a "RESTRICTED
INTEREST"), neither this Agreement nor any other document related to the
consummation of the transactions contemplated by this Agreement shall constitute
a sale, assignment, assumption, transfer, conveyance or delivery or an attempted
sale, assignment, assumption, transfer, conveyance or delivery of such
Restricted Interest, and until all Consents relating to the transfer of such
Restricted Interest have been obtained, Seller, the CB Parties and Buyer shall
cooperate, as reasonably directed by Buyer, in any lawful arrangements designed
to provide to Buyer the full and complete economic and other benefits and costs
of and use and ownership of such Restricted Interest (or any right or benefit
arising thereunder, including the enforcement for the benefit of Buyer of any
and all rights of the Surviving Corporation against a third party thereunder).
Seller's, the CB Parties' and Buyer's obligations in such respect shall include,
without limitation, (i) the prompt remittance to Buyer of any monies or other
assets received in respect of such Restricted Interest, (ii) the obligation to
obtain Buyer's prior approval of any material action taken or not taken in
respect of such Restricted Interest, (iii) the general obligation to hold and
own such
C-38
Restricted Interest in trust and for the sole and exclusive benefit of
Buyer and (iv) the indemnification obligations of Buyer pursuant to Section
7.1(c)(i)(z) hereto. If and when all Consents that in the reasonable opinion of
Buyer and the CB Parties are necessary for the sale, assignment, assumption,
transfer, conveyance and delivery of such Restricted Interest are obtained,
Seller and/or the CB Parties shall promptly assign, transfer, convey and deliver
such Restricted Interest to Buyer or its designee, free and clear of all
Encumbrances. In addition, Seller and the CB Parties shall (x) take all such
action as is necessary to appoint a designee of Buyer (each, a "BUYER DESIGNEE")
as an officer or manager of the Entity owning or controlling such Restricted
Interest, with complete authority to manage the affairs thereof in all respects
relating to such Restricted Interest (provided, however, that Buyer agrees not
to take any action, and will cause each Buyer Designee not to take any action,
in connection with this Section 9.3(b) that could reasonably be expected to
result in Losses to the CB Parties, the Surviving Corporation or any of their
respective Affiliates), and (y) grant to Buyer a first priority security
interest in such Restricted Interest to secure Buyer's rights and interests
hereunder, and Buyer shall be entitled, and Seller shall cooperate with Buyer,
to take all such action as is reasonably necessary for Buyer to establish and
perfect such first priority security interest, including effecting appropriate
filings under the Uniform Commercial Code and otherwise; provided, however, that
if the grant of any such security interest shall require a Consent (other than
any Consent required as a result of action or inaction on the part of any CB
Party or required as a result of any facts or circumstances which relate to any
CB Party (as opposed to Seller or any Subsidiary of Seller)), then (x) Buyer,
Seller and the CB Parties shall use their respective Best Efforts, and
reasonably cooperate with one another, to obtain such Consent as quickly as
practicable following the Closing, and (y) Seller and the CB Parties shall not
be obligated to grant such first priority security interest unless and until
such Consent is obtained. If Seller or any of its Subsidiaries is required to
make any determination or decision following the Closing regarding any
Restricted Interest that would require the expenditure of funds by Seller or any
of its Subsidiaries as the record holder of a Restricted Interest, then Seller
or such Subsidiary shall only be obligated to expend such funds if Buyer
authorizes the same and agrees to promptly reimburse Seller for the funds so
expended on behalf of Buyer pursuant to this Section 9.3(b). Nothing in this
Section 9.3 shall affect or in any way reduce the Purchase Price payable at
Closing under this Agreement or limit the rights or obligation of the Parties
under Article 7 hereof.
(c) Notwithstanding anything in Sections 9.3(a) and (b) to the
contrary, with respect to each Restricted Interest that is also a Covered
Interest identified on Schedule 4.12 to the Disclosure Schedules and one for
which a Consent to transfer to Buyer hereunder has not been obtained, neither
this Agreement nor any other document related to the consummation of the
transactions contemplated by this Agreement shall constitute a sale, assignment,
assumption, transfer, conveyance or delivery or an attempted sale, assignment,
assumption, transfer, conveyance or delivery of such Restricted Interest, and
until all Consents relating to the transfer of such Restricted Interest have
been obtained, Seller, the CB Parties and Buyer shall cooperate, as
C-39
reasonably directed by Buyer, in any lawful arrangements designed to effect the
intent and purposes of this Agreement in respect of the acquisition of such
Restricted Interest by Buyer as of the Closing Date. If and when all Consents
that in the reasonable opinion of Buyer and the CB Parties are necessary for the
sale, assignment, assumption, transfer, conveyance and delivery of such
Restricted Interest are obtained, Seller and/or the CB Parties shall promptly
assign, transfer, convey and deliver such Restricted Interest to Buyer or its
designee, free and clear of all Encumbrances. Nothing in this Section 9.3 shall
affect or in any way reduce the Purchase Price payable at Closing under this
Agreement or limit the rights or obligations of the Parties under Article 7
hereof.
9.4 Office Space. Following the Closing and for a period of eighteen months
following the Closing Date, the CB Parties and/or the Surviving Corporation
shall make available to Buyer (or an Affiliate of Buyer) reasonable office space
selected by the CB Parties in their sole discretion, free of charge, in the
greater metropolitan area of Greenville, South Carolina (space for up to nine
persons), Dallas, Texas (space for up to four persons), Chicago, Illinois (space
for up to two persons) and Houston, Texas (space for up to one person) under
leases or subleases in effect in such metropolitan areas on the date hereof (or
comparable alternative space in such locations) and shall make available to
them, free of charge, the reasonable use of telephone systems, copy machines,
facsimile machines, coffee service, conference room and similar office
equipment, services and amenities, in each case, in accordance with a Shared
Space Agreement in the form of Exhibit G attached hereto. In addition, the
Surviving Corporation and the CB Parties agree that each Island Principal,
Jeffrey P. Cohen and each individual hired by Buyer following the Closing
pursuant to Section 4.9 hereof shall be entitled to remain in their respective
offices, as currently constituted, or another reasonably similar office, at 200
Park Avenue, New York, New York (if applicable) for a period not to exceed sixty
(60) days following the Closing.
9.5 Employee Interests.
(a) Buyer is aware and expressly acknowledges that certain current and
former employees of, or independent contractors to, Seller or a Subsidiary of
Seller (each, a "COVERED EMPLOYEE") are entitled to receive a portion of any
proceeds distributed to Seller (or a Subsidiary of Seller) in respect of certain
of the Covered Interests in the event that certain specified investment return
thresholds are satisfied, pursuant to either (i) an express written assignment
of an economic interest in a Covered Interest made by Seller (or a Subsidiary of
Seller) to a Covered Employee or (ii) a written agreement by Seller (or a
Subsidiary of Seller) to pay to a Covered Employee an amount equal to a
specified portion of the amounts received by Seller (or a Subsidiary of Seller)
in respect of a Covered Interest (each, a "LETTER AGREEMENT") (the interests of
the Covered Employees described in the foregoing clauses (i) and (ii) are
collectively referred to herein as "EMPLOYEE PROFIT PARTICIPATION INTERESTS").
Effective as of the Closing, Buyer hereby assumes and agrees to be liable for,
and indemnify and hold Seller (and any Subsidiary of Seller that is a party to a
Letter Agreement) and the CB Parties
C-40
harmless from and against, the obligations of Seller (or any Subsidiary of
Seller) with respect to payments due and payable from and after the Closing
under the Employee Profit Participation Interests that exist on the date of the
Closing, except for any Employee Participation Interest that relates to any
Covered Interest excluded by the CB Parties from the purchase and sale hereunder
pursuant to Section 1.6(c)(v), Section 1.6(d) or Section 1.6(e). In addition,
following the Closing, Buyer agrees to use commercially reasonable efforts to
provide for the Employee Participation Interests (except for any Employee
Participation Interest that relates to any Covered Interest excluded by the CB
Parties from the purchase and sale hereunder pursuant to Section 1.6(c)(v),
Section 1.6(d) or Section 1.6(e)) to be cashed out only when the related
Asset(s) are sold (rather than on a sale by Buyer (or a Subsidiary of Buyer) of
its direct or indirect interest(s) in any such Asset(s)).
(b) Each of Seller and Buyer acknowledges and agrees that for purposes
of calculating the amount payable to any Covered Employee by Buyer pursuant to
any Letter Agreement:
(i) The term "Insignia Minimum Return" as used in such Letter
Agreement shall mean the sum of (a) all capital contributions directly or
indirectly made by Seller to the entity that owns the applicable real
property Asset that is the subject of the Letter Agreement (the "Asset
Entity") at any time prior to the Closing, plus (b) all capital
contributions directly or indirectly made by Buyer to the Asset Entity at
any time after the Closing, plus (c) any allocated costs, plus (d) a return
on the foregoing amounts equal to 10% per annum.
(ii) The term "Proceeds" as used in such Letter Agreement shall
mean (a) the aggregate amount that would have been received by Seller and
its wholly-owned Subsidiaries (without duplication) from the applicable
Asset Entity if the applicable Designated Interests had not been
transferred to Buyer pursuant to this Agreement, minus (b) the applicable
Insignia Minimum Return.
(iii) Notwithstanding the foregoing: (a) with respect to the
obligations owed to James A. Aston, Andrew L. Farkas, Frank M. Garrison,
and Ronald Uretta under Letter Agreements dated February 18, 2000 relating
to the development Asset known as Gateway Commerce, the terms "Proceeds"
shall mean the difference between (i) the aggregate amount that would have
been received by Seller and its wholly-owned Subsidiaries (without
duplication) from the applicable Asset Entity if the applicable Designated
Interests had not been transferred to Buyer pursuant to this Agreement,
minus (ii) all capital contributions directly or indirectly made by Seller
to the Asset Entity at any time prior to the Closing, minus (iii) all
capital contributions directly or indirectly made by Buyer to the Asset
Entity at any time after the Closing, minus (iv) any allocated costs; and
(b) with respect to certain Letter Agreements relating to other development
Assets, the term "Net Profits" is utilized and as used in such Letter
C-41
Agreement shall mean the aggregate amount that would have been received by
Seller and its wholly-owned Subsidiaries (without duplication) from the
applicable Asset Entity (assuming for this purpose that the applicable
Designated Interests had not been transferred to Buyer pursuant to this
Agreement) in respect of their "promotional" Equity Interests in such Asset
Entity (as opposed to in respect of their actual cash investments in such
Asset Entity).
(iv) Nothing in this Section 9.5(b) shall have any effect on the
obligations of Buyer under Section 9.5(a).
(c) The holders of Employee Profit Participation Interests are express,
intended third party beneficiaries of this Section 9.5.
9.6 Property Management. With respect to each real property Asset that is
listed on Schedule 9.6 of the Disclosure Schedules and has not been sold prior
to the Closing (each, a "MANAGED PROPERTY"), following the Closing and until
such time as either such Managed Property is sold to a Person that is not an
Affiliate of Buyer or Buyer or Newco sells or otherwise disposes of its indirect
Equity Interest in such Managed Property to a Person that is not an Affiliate of
Buyer, Buyer shall use its Best Efforts and shall cooperate with the CB Parties
and the Surviving Corporation, to provide that Insignia/ESG, Inc. continues to
be engaged to provide property management and/or leasing services for such
Managed Property for one year following the Closing.
9.7 Letters of Credit. The Parties agree that each of the Parties' rights
and obligations with respect to the existing letters of credit listed on
Schedule 9.7(i) of the Disclosure Schedules (together with any replacement
letters of credit permitted by Section 9.7(f), the "SELLER L/CS") and the
guaranty issued by Seller listed on Schedule 9.7(ii) of the Disclosure Schedules
(the "CENTENNIAL GUARANTY" and together with the "Seller L/Cs," the "TRAILING
OBLIGATIONS") after the Closing shall be solely as set forth in this Section
9.7.
(a) Subject to Buyer's compliance with Section 9.7(c), (d) and (e), the
CB Parties agree that with respect to each Seller L/C, for the period commencing
on the Closing Date and ending on the earlier of (i) the third anniversary of
the Closing, (ii) the date on which such Seller L/C is no longer required to be
maintained pursuant to the terms of the underlying agreement that calls for such
Seller L/C as in effect on the date of this Agreement (but subject to changes
contemplated by Section 9.7(d)) (the "UNDERLYING AGREEMENT") or (iii) the
completion of an Encumbered Asset Sale of the relevant Encumbered Asset with
respect to such Seller L/C, the CB Parties shall cause such Seller L/C to be
maintained in full force and effect and remain outstanding in accordance with
the terms of the Underlying Agreement (as such underlying agreement is in effect
at the time of the Closing); provided, however, that if the beneficiary with
respect to such Seller L/C (together with such Person's successors and assigns,
the "BENEFICIARY") agrees to reduce the face amount of such Seller L/C
(including, without limitation, in connection with an amendment to the
Underlying Agreement), then the CB
C-42
Parties' obligation to cause such Seller L/C to be maintained shall continue to
apply only with respect to such reduced face amount; and further, provided that
under no circumstances will the CB Parties be required to increase the face
amount of such Seller L/C. With respect to each Seller L/C, (x) each Party
agrees to promptly notify the other upon receipt of any notice from the
Beneficiary that such obligation to maintain the Seller L/C has been released or
reduced and (y) Buyer agrees to replace such Seller L/C at or prior to the third
anniversary of the Closing with an equivalent letter of credit in the name of
the Buyer or one of its Affiliates and issued by a banking institution
reasonably acceptable to the Beneficiary.
(b) Buyer agrees to reimburse the CB Parties in respect of the Trailing
Obligations, but only in the manner and to the extent provided in this Section
9.7(b):
(i) In the event that any amount is drawn under, or otherwise paid
to a Beneficiary pursuant to, a Trailing Obligation, Buyer shall (subject
to Section 9.7(b)(iii)), promptly (but in any event within 10 days) after
receipt of written notice (a "REIMBURSEMENT NOTICE") from the CB Parties
stating the amount that has been drawn or otherwise paid (the "FUNDED
AMOUNT"), reimburse the CB Parties an amount equal to 50% of the Funded
Amount, payable by wire transfer to the Person or account designated by the
CB Parties in such notice; provided, however, that to the extent any amount
drawn under a Seller L/C is drawn as a result of the failure of the CB
Parties to cause such Seller L/C to be renewed or extended in a timely
manner as required by Section 9.7(a), then such amount shall not constitute
a "Funded Amount" for purposes of this Section 9.7(b) and the CB Parties
shall not be entitled to any reimbursement from Buyer in respect of such
amount. Upon the receipt by Seller (or its successor or assign) of a demand
for payment by the Beneficiary with respect to the Centennial Guaranty,
Seller (or such successor or assign) shall be entitled to pay the amount
demanded by such Beneficiary without any obligation to contest or oppose
such demand, but only after notifying and reasonably consulting with Buyer
in advance of such payment and any such payment shall not affect the
obligations of Buyer under this Section 9.7(b) with respect to
reimbursement of the CB Parties in connection with such payment. The
portion of any Funded Amount actually reimbursed by Buyer pursuant to this
Section 9.7(b)(i) shall be referred to as a "BUYER CONTRIBUTED AMOUNT" and
the corresponding balance of such Funded Amount (i.e., the amount not
actually reimbursed by Buyer, including, without limitation, any such
amounts not actually reimbursed that are a breach of this Section
9.7(b)(i)) shall be referred to as the "CB CONTRIBUTED AMOUNT," and the
Asset to which such Funded Amount relates shall be referred to as the
"ENCUMBERED ASSET." If, and to the extent, Buyer fails to reimburse the CB
Parties after receipt of a Reimbursement Notice pursuant to this Section
9.7(b)(i) and the CB Parties dispute the failure of Buyer to provide such
reimbursement, the CB Parties may challenge and dispute the same in the
manner provided in Section 13.4 hereof. If the CB Parties are the
prevailing party in any such action,
C-43
claim or proceeding, then (i) Buyer shall promptly (x) pay to the CB
Parties the amount of the reimbursement obligation applicable to such
Reimbursement Notice, plus 10% interest thereon, compounded annually, from
the date of the delivery of the Reimbursement Notice through and including
the date such payment is made and (y) reimburse the CB Parties for all
reasonable and accountable legal and other expenses incurred by the CB
Parties in connection with such action, claim or proceeding.
(ii) Upon payment of any Funded Amount, the CB Parties, on the one
hand, and Buyer, on the other hand, shall automatically, without the need
for any further action by either of them or any other Person, have the
right to receive their respective pro rata shares (based on the respective
ratios of the CB Contributed Amount and the Buyer Contributed Amount to the
Funded Amount) of all distributions payable to Buyer or any wholly-owned
Subsidiary of Buyer in respect of any direct or indirect Equity Interest in
the applicable Encumbered Asset, until such time as the CB Parties have
received an aggregate amount equal to the CB Contributed Amount plus a 9%
simple annual return thereon. Buyer agrees that neither Buyer nor any of
its controlled Affiliates will enter into any agreement or understanding
whereby they receive any direct or indirect economic or other benefit as a
result of the payment of any Funded Amount (other than the interest in
distributions provided in this Section 9.7(b)(ii)).
(iii) To secure the obligations of Buyer under this Section 9.7(b)
(but only under this Section 9.7(b)), Buyer agrees that at the Closing it
will, at its sole election, either deposit an amount of cash (the
"RESTRICTED CASH COLLATERAL") in the Cash Collateral Account (as defined in
the Cash Collateral Agreement) and/or deliver to the CB Parties one or more
letters of credit by a banking institution that each are in the form
attached hereto as Exhibit H (any such letters of credit, "BUYER L/CS"),
which Restricted Cash Collateral and/or the aggregate face amount of such
Buyer L/Cs (the "BUYER COLLATERAL") shall on the date hereof be equal to
$2,931,250, in the aggregate. The Buyer Collateral, and Buyer's obligation
to provide same, shall be reduced from time to time by (i) an amount equal
to 100% of any Buyer Contributed Amounts paid to the CB Parties by Buyer
(directly or by application of Buyer Collateral) pursuant to Section
9.7(b)(i), and (ii) an amount equal to 25% of the face amounts of any
Trailing Obligations which are permanently released, terminated or are
otherwise no longer the responsibility of the CB Parties (the amount of the
Buyer Collateral, after taking into account any and all reductions
contemplated in this sentence, is referred to as the "REDUCED BUYER
COLLATERAL AMOUNT"). To the extent that there is a reduction in the amount
of the Buyer Collateral that Buyer is obligated to maintain, as provided
for in the previous sentence, Buyer shall be entitled to an immediate
return of the amount by which the Buyer Collateral actually held exceeds
the Reduced Buyer Collateral Amount (the "REFUNDABLE BUYER COLLATERAL"). In
order to return to Buyer the Refundable Buyer Collateral, at
C-44
Buyer's election Buyer will be entitled to a return of Restricted Cash
Collateral and/or a reduction in the amount of any Buyer L/C equal in an
aggregate amount to the amount of the Refundable Buyer Collateral. Further,
Buyer will be permitted to withdraw Restricted Cash Collateral from the
Cash Collateral Account and replace such Restricted Cash Collateral with a
Buyer L/C and/or replace a Buyer L/C with Restricted Cash Collateral. Any
Buyer L/C delivered to the CB Parties must permit the CB Parties to draw
upon such Buyer L/C upon delivery by the CB Parties of notice that an Event
of Withdrawal has occurred. In the event that (x) a Reimbursement Notice is
delivered to Buyer pursuant to Section 9.7(b)(i) at a time when Buyer is
required to maintain Buyer Collateral pursuant to this Section 9.7(b)(iii)
and (y) Buyer does not pay the CB Parties out of its own funds, in the
manner set forth in Section 9.7(b)(i), an amount equal to 50% of the Funded
Amount set forth in such Reimbursement Notice within 10 days after receipt
of such Reimbursement Notice (provided that Buyer shall not be obligated to
so pay the CB Parties out of its own funds if and to the extent Buyer
Collateral is then available), then an "Event of Withdrawal" will be deemed
to have occurred at the expiration of such 10-day period and the CB Parties
agree to, first, draw upon any Buyer L/Cs and/or withdraw from the
Restricted Cash Collateral, in each case to the extent then available, in
satisfaction of such reimbursement obligation of Buyer set forth in such
Reimbursement Notice, and second, if and to the extent such reimbursement
obligation set forth in such Reimbursement Notice is greater than the
aggregate amount then available under all Buyer L/Cs and the Restricted
Cash Collateral, seek reimbursement directly from Buyer pursuant to Section
9.7(b)(i).
(c) Buyer (itself, or through any controlled Affiliates) agrees that it
shall not, in bad faith, either intentionally take any action, or to fail to
take any action that it is required to take (but that it is reasonably capable
of taking), that results in the Beneficiary drawing under, or demanding payment
with respect to, any Trailing Obligation. With respect to each Trailing
Obligation, Buyer agrees to promptly deliver, or cause to be delivered, to the
CB Parties the following documents and information promptly after receipt by
Buyer or any of its Subsidiaries: (i) the Underlying Agreement, as amended,
supplemented or modified from time to time, (ii) any financial statements or
information with respect to the Encumbered Asset that are provided to the
Beneficiary and (iii) any other information reasonably requested by the CB
Parties in connection with monitoring the Encumbered Asset and the Trailing
Obligation to the extent in the possession of Buyer.
(d) Buyer agrees that neither it nor any of its controlled Affiliates
shall voluntarily amend, supplement or modify, or agree to, the amendment,
supplement or modification by any other Person (including, without limitation,
granting any consent, approval or authority), any Underlying Agreement in a
manner that would (i) increase the amount of any Trailing Obligations, (ii)
result in an extension of the period of time that a Trailing Obligation is
required to be outstanding or (iii) expressly change the
C-45
circumstances under which liability with respect to the Trailing Obligations
could be incurred. Buyer agrees that it will give prompt notice to the CB
Parties of any amendment to an Underlying Agreement that is permitted hereunder
and shall provide the CB Parties with a copy of the same.
(e) Buyer agrees that neither it nor any of its controlled Affiliates
shall, directly or indirectly (including, without limitation, by the sale,
assignment, transfer or other conveyance of an interest in any Subsidiary of
Buyer that directly or indirectly owns an interest in an Encumbered Asset),
sell, assign, transfer or otherwise convey any direct or indirect interest of
Buyer in an Encumbered Asset (excluding, for all purposes of this Section
9.7(e), the grant or sale by Buyer or its Subsidiaries to current or former
employees or independent contractors of Buyer or its Subsidiaries of rights to
receive a portion of any proceeds distributed to Buyer or its Subsidiaries with
respect to the Encumbered Asset) to any Person other than a wholly-owned
Subsidiary of Buyer (an "ENCUMBERED ASSET SALE"), or otherwise facilitate an
Encumbered Asset Sale by any other Person (including, without limitation,
granting any consent, approval or authority), unless the Trailing Obligation
shall be irrevocably and unconditionally terminated, or replaced by one or more
Persons other than the CB Parties and their Subsidiaries, at or prior to the
completion of such Encumbered Asset Sale.
(f) With respect to any Seller L/C, at any time during the period in
which the CB Parties are required to maintain such L/C (including, without
limitation, on the Closing Date), the CB Parties may cause such Seller L/C to be
replaced by an equivalent letter of credit in the name of CB Richard Ellis
Services, Inc., any of its Subsidiaries or any of their respective successors
and assigns that has been issued (i) under the Credit Agreement among CB Richard
Ellis Services, Inc., CBRE Holding, Inc., the other guarantor parties thereto,
Credit Suisse First Boston and the other lenders thereto that will be entered
into at or prior to the closing of the Merger or (ii) by any other banking
institution, provided that in either case same shall be permitted by the
Underlying Agreement or otherwise be consented to by the Beneficiary. Buyer
agrees to use it Best Efforts to assist the CB Parties in obtaining any such
Consent of any Beneficiary.
9.8 Restricted Cash and Pre-2003 Cash. Buyer agrees that if it or any of
its wholly-owned Subsidiaries is in possession of any Pre-2003 Cash after the
Closing or receives any distribution of Restricted Cash following the Closing,
then it shall promptly notify the CB Parties of the possession or receipt
thereof and remit such proceeds (net of all incentive, profit sharing, promote,
participation or similar payments that are actually paid or required to be paid
to current or former employees or consultants of Seller, Buyer or any of their
respective Affiliates) to the CB Parties.
C-46
ARTICLE 10
TAX MATTERS
The following provisions shall govern the allocation of responsibility
between Buyer and the Surviving Corporation for certain tax matters following
the Closing Date and the allocations of certain tax liabilities.
10.1 Tax Periods Ending on or Before the Closing Date. Seller shall prepare
or cause to be prepared and timely file or cause to be timely filed all tax
returns of Newco and any Assets that are entities wholly-owned (directly or
indirectly) by, or in the control group of, Seller (the "SELLER TAX
SUBSIDIARIES") for all periods ending on or prior to the Closing Date that are
filed after the Closing Date. Seller shall within a reasonable time prior to
filing give Buyer the opportunity to review and comment upon each such tax
return (to the extent relevant to Newco or any Seller Tax Subsidiary) described
in the preceding sentence; provided, however, that Seller shall not be obligated
to incorporate the comments of Buyer with respect to such tax returns. Seller
shall pay Taxes of Newco and any Seller Tax Subsidiary due for all periods
ending on or prior to the Closing Date and for the pre-Closing portion of the
period in which the Closing occurs. Seller shall pay directly, or reimburse
Buyer for any Taxes incurred by Buyer with respect to, all tax returns of Newco
and any Seller Tax Subsidiary for tax periods ending on or before the Closing
Date.
10.2 Buyer Returns Including Pre-Closing Periods. If Buyer is required by
law to file, and does timely file, a tax return that relates to Newco or any
Seller Tax Subsidiary for a period prior to the Closing, Seller shall pay Buyer
the cost incurred by Buyer in preparing such tax return multiplied by a
fraction, the numerator of which is the number of days in the pre-Closing period
and the denominator of which is the number of days in the period. If any such
tax returns show an amount of Tax due that was not paid by Seller, Seller shall
pay to Buyer at least five (5) days before the date on which Taxes are paid by
Buyer the portion of the Taxes shown due on the tax return which relate to the
pre-Closing portion of the period. Buyer shall, within a reasonable time prior
to filing, give Seller the opportunity to review and comment upon each tax
return for which the Surviving Corporation shall be required to make a payment
to Buyer under this Section 10.2 and will not file any such tax returns without
the prior written consent of Seller (which shall not be unreasonably withheld).
10.3 Cooperation on Tax Matters; Control of Proceedings.
(a) Buyer and Seller shall cooperate fully, as and to the extent
reasonably requested by the other Party, in connection with the filing of tax
returns pursuant to this Article 10, and any audit, litigation or other
proceeding relating to such tax returns. Such cooperation shall include the
retention and (upon the other Party's request) the provision of records and
information that are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material
C-47
provided hereunder. Buyer and Seller agree (1) to retain all books and records
with respect to Tax matters pertinent to Newco and any Seller Tax Subsidiary
relating to any taxable period beginning before the Closing Date until the
expiration of the statute of limitations (and, to the extent notified by Buyer
and Seller, any extensions thereof) of the respective taxable periods, and to
abide by all record retention agreements entered into with any taxing authority,
and (2) to give the other Party reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the other Party so
requests, Buyer and Seller shall allow the other Party to take possession of
such books and records.
(b) Buyer and Seller further agree, upon request, to use their Best
Efforts to obtain any certificate or other document from any governmental
authority or any other Person as may be necessary to mitigate, reduce or
eliminate any Tax that could be imposed (including, but not limited to, with
respect to the transactions contemplated hereby) unless the Party requested to
obtain such certificate or other document would incur additional Tax liability
by obtaining such certificate or other document.
(c) Seller shall have the sole right to represent the interests of
Newco or any Seller Tax Subsidiary in any Tax audit or administrative or court
proceeding relating to any Tax covered by Section 10.1. With respect to any
taxable period of Newco or a Seller Tax Subsidiary beginning before and ending
after the Closing Date, Buyer and Seller shall jointly control the defense and
settlement of any Tax audit or administrative or court proceeding relating to
any Tax covered by Section 10.2 and each party shall cooperate with the other
party at its own expense and there shall be no settlement or closing with
respect thereto without the consent of the other party.
10.4 Certain Taxes. (a) All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement (including any tax imposed
in any state or subdivision) shall be paid by Seller when due, and Seller shall,
at its own expense, file all necessary tax returns and other documentation with
respect to all such transfer, documentary, use, stamp, registration and other
Taxes and fees, and, if required by applicable law, Buyer shall, and shall cause
its Affiliates to, join in the execution of any such tax returns and other
documentation. Seller shall indemnify Buyer and its Affiliates for any liability
pursuant to Treasury Reg. ss. 1.1502-6 and corresponding provisions of state,
local and foreign law with respect to any Covered Interest that was a
corporation included in a consolidated or combined group the common parent of
which is Seller. Prior to Closing, any tax sharing agreements to which any of
the Seller Tax Subsidiaries are subject shall be terminated without liability
against the Designated Interests.
(b) Buyer shall timely withhold and remit all Taxes, if applicable ,
that are related, directly or indirectly, to payments that are made pursuant to
all Employee Profits Participation Interests after the Closing. Buyer shall
timely withhold and remit all Taxes, if any, that are related, directly or
indirectly, to the obligations listed in Schedule
C-48
1.2(a) of the Disclosure Schedules, regardless of which Party may be obligated
to so withhold and remit under applicable Tax Laws. To the extent Buyer is
required to indemnify Seller under Article 7 pursuant to this Section 10.4(b),
the amount of such indemnity shall be reduced by an amount equal to the Tax
benefit to Seller (assuming the amount of any such Tax benefit is equal to the
income Tax deductions of Seller resulting from the payments giving rise to such
withholding tax obligation multiplied by 0.40).
10.5 Certain Entities' Taxes. Notwithstanding anything in this Agreement to
the contrary, the Parties acknowledge and agree that any Tax liability resulting
from any conversion effected following the Closing pursuant to Section 4.12 and
Section 9.3 of this Agreement shall be the Surviving Corporation's or the CB
Parties' responsibility.
ARTICLE 11
BROKERS
11.1 For Buyer. Buyer represents and warrants that Buyer has not engaged
any broker or finder or incurred any liability for brokerage fees, commissions
or finder's fees in connection with the transactions contemplated by this
Agreement. Buyer agrees to indemnify and hold harmless Seller and the CB Parties
against any claims or liabilities asserted against it by any Person acting or
claiming to act as a broker or finder on behalf of Buyer.
11.2 For Seller. Seller agrees to pay all fees, expenses and compensation
owed to any Person who has acted in the capacity of broker or finder on its
behalf in connection with the transactions contemplated by this Agreement.
Seller agrees to indemnify and hold harmless Buyer and the CB Parties against
any claims or liabilities asserted against them, jointly or severally, by any
Person acting or claiming to act as a broker or finder on behalf of Seller.
11.3 For the CB Parties. Each of the CB Parties represents and warrants
that it has not engaged any broker or finder or incurred any liability for
brokerage fees, commissions or finder's fees in connection with the transactions
contemplated by this Agreement. Each of the CB Parties agrees to indemnify and
hold harmless Buyer and Seller against any claims or liabilities asserted
against it by any Person acting or claiming to act as a broker or finder on
behalf of such CB Party.
ARTICLE 12
TERMINATION
12.1 Termination by Agreement of the Parties. This Agreement may be
terminated by mutual written agreement of Seller, the CB Parties and Buyer.
12.2 Termination by Buyer Under Certain Circumstances. This Agreement may
be terminated by Buyer if Seller or any Subsidiary of Seller directly or
indirectly
C-49
transfers, or enters into any definitive, written agreement to transfer, any
Covered Interest other than to Buyer or a permitted assignee of Buyer, unless
such transfer or agreement to transfer is (i) made pursuant to an Existing
Transfer Obligation or Section 4.7 of this Agreement or (ii) expressly
conditioned on (x) the failure of the Closing hereunder to occur other than as a
result of the breach of this Agreement by Seller or (y) the failure of the
Merger to occur.
12.3 Termination by Seller Pursuant to Article 8. Seller may terminate this
Agreement as provided in, and in compliance with the provisions of, Article 8
hereof.
12.4 Termination by Reason of Breach of Other Party.
(a) Buyer may terminate this Agreement if a breach of or failure to
perform in any material respect any representation, warranty, covenant or
agreement set forth in this Agreement on the part of Seller or any CB Party
shall have occurred and, as a result thereof, any of the conditions set forth in
Article 5 is incapable of being satisfied by the Closing.
(b) Seller may terminate this Agreement if a breach of or failure to
perform in any material respect any representation, warranty, covenant or
agreement set forth in this Agreement on the part of Buyer shall have occurred
and, as a result thereof, any of the conditions set forth in Article 6 is
incapable of being satisfied by the Closing.
12.5 Termination by Reason of Passage of Time. Buyer may terminate this
Agreement for any reason if the Closing shall not have occurred on or before
December 31, 2003; provided, however, that Buyer's right to terminate the
Agreement under this Section 12.5 shall not be available to Buyer if its failure
to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur on or before such date.
12.6 Termination by Reason of Termination of Merger Agreement. This
Agreement shall automatically terminate, without any further action by any Party
hereto, in the event the Merger Agreement is terminated in accordance with its
terms.
12.7 Termination by the CB Parties. If (i) the Merger is consummated and
(ii) the Closing hereunder shall not have occurred (except as a result of a
breach by any CB Party of this Agreement), the CB Parties may terminate this
Agreement.
12.8 Manner of Exercise. In the event of the termination of this Agreement
pursuant to this Article 12 prior to the Closing (other than a termination
pursuant to Section 12.6), written notice thereof shall be given to the
non-terminating Parties, and this Agreement shall terminate and the transactions
contemplated hereunder shall be abandoned without further action by any Party
hereto.
C-50
12.9 Effects of Termination. In the event of a termination of this
Agreement pursuant to Section 12.1, 12.2, 12.3, 12.4, 12.5, 12.6 or 12.7, no
Party shall have any further obligation or liability to any other Party, except
that:
(a) the provisions of Article 7 (with respect to Section 7.1(a)(i)(z),
Section 7.2(b)(i)(z) and Section 7.1(d), in their entirety, and otherwise solely
with respect to willful breaches of this Agreement), Section 1.6(c) (to the
extent such provisions are executory at the time of termination, and including
any applicable provisions of Section 9.3), Article 11, Article 13, this Section
12.9 and Section 12.10 shall survive and shall continue to be in full force and
effect;
(b) if this Agreement is terminated by Seller pursuant to Section 12.3
or by Buyer pursuant to Section 12.2 or Section 12.4(a) (but solely with respect
to willful breaches), Seller shall pay to Buyer (in immediately available funds
by wire transfer to an account designated by Buyer) on the next Business Day
following such termination $2,250,000 (the "Termination Fee"), and the receipt
of such Termination Fee shall be the sole and exclusive remedy of Buyer against
Seller or the CB Parties with respect to any such termination of this Agreement;
and
(c) if this Agreement is terminated by Buyer pursuant to Section
12.4(a) (except with respect to willful breaches which are addressed in Section
12.9(b) above and in Section 12.10 below), or Section 12.5, automatically
pursuant to Section 12.6 or by the CB Parties pursuant to Section 12.7, then
Seller shall reimburse Buyer for all reasonable and accountable third party
expenses incurred by Buyer and its Affiliates in connection with (i) the
negotiation and documentation of this Agreement and (ii) the efforts of Buyer
and its Affiliates to fulfill Buyer's obligations hereunder; provided, however,
that the aggregate amount to be reimbursed shall not exceed $1,000,000.
12.10 Buyer Actions for Willful Breach, Fraud and Willful Misconduct.
Notwithstanding anything herein to the contrary, if Buyer has not terminated
this Agreement pursuant to Article 12 and the Closing has not occurred, nothing
herein shall prevent Buyer from bringing an action against any Party hereto
based on allegations of a willful breach of, or fraud or willful misconduct
committed in connection with, this Agreement (it being understood and agreed
that such other Party will only have liability to Buyer for a willful breach,
fraud or willful misconduct and any such liability shall take into account any
amounts received by Buyer pursuant to Section 12.9), and in such case, Buyer
shall be entitled to seek any and all remedies available to it, including,
without limitation, the remedy set forth in Section 13.13 hereof; provided,
however that in no event shall any CB Party be liable to Buyer pursuant to this
Section 12.10 unless and until the closing of the Merger shall have occurred.
C-51
ARTICLE 13
MISCELLANEOUS
13.1 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
permitted assigns, except that no Party hereto may assign its obligations
hereunder without the prior written consent of the other Parties; provided,
however, that Buyer may assign its rights and obligations hereunder to any
Person provided that (i) Buyer remains primarily liable for (and is not in any
way released from any such primary liability) such obligations together with any
such assignee, (ii) any such assignment does not cause or result in the Nautica
Consent and Release ceasing to be effective for any reason or the failure of any
condition set forth in Article 5 and (iii) all assignments of any part of the
obligation of Buyer to deliver the Purchase Price to Seller, taken together, do
not exceed $25,000,000 in the aggregate.
13.2 Entire Agreement; Amendments; Attachments. This Agreement, together
with all Schedules and Exhibits hereto, all other agreements and instruments to
be delivered by the Parties pursuant hereto and the Merger Agreement represent
the entire understanding and agreement between the Parties hereto with respect
to the subject matter hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings between such
Parties. The Parties, by the consent of their respective boards of directors or
managing members, or officers authorized by such boards of directors or managing
members, may amend or modify this Agreement, in such manner as may be agreed
upon, by a written instrument executed by each of the Parties.
13.3 Expenses. Except as otherwise expressly provided herein, each Party
shall pay its own expenses in connection with this Agreement and the
transactions contemplated hereby.
13.4 Governing Law; Jurisdiction; Waiver of Jury Trial. This Agreement
shall be governed by and construed in accordance with the substantive laws of
the State of Delaware applicable to contracts executed and fully performed
within such State. The Parties 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 (or, if such court does not have jurisdiction
over the subject matter of such proceeding or if such jurisdiction is not
available, in the Superior Court 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
C-52
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 13.10 shall be deemed effective
service of process. EACH OF THE PARTIES 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.
13.5 Waiver. Any waiver by any Party of a breach of any term of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of that term or of any breach of any other term of this Agreement. The
failure of a Party to insist upon strict adherence to any term of this Agreement
on one or more occasions will not be considered a waiver or deprive that Party
of the right thereafter to insist upon strict adherence to that term or any
other term of this Agreement. Any waiver must be in writing and signed by the
Party charged therewith.
13.6 Section Headings. The section headings are for the convenience of the
Parties and in no way alter, modify, amend, limit, or restrict the contractual
obligations of the Parties.
13.7 Severability; "Blue Pencil" Provision. To the extent that any of the
agreements or other provisions set forth herein shall be found to be illegal or
unenforceable for any reason by any court of competent jurisdiction, then such
agreement or other provision shall be deemed modified or deleted in such a
manner so as to make this Agreement, as modified, legal and enforceable under
applicable Laws, in all cases, without changing the original intent of the
Parties as reflected in the express terms of this Agreement. Moreover, if any
one or more of the provisions contained in this Agreement shall for any reason
be held by any court of competent jurisdiction to be excessively broad as to
time, duration, geographical scope, activity or subject, it shall be construed,
by limiting or reducing the time, duration, geographical scope, activity or
subject, as applicable, so as to be enforceable to the extent compatible with
the applicable Law as it shall then appear.
13.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
13.9 No Third Party Beneficiaries. Except as otherwise set forth in Section
4.8, Section 9.5 and Article 7, nothing expressed or referred to in this
Agreement will be construed to give any Person other than the Parties to this
Agreement any legal or
C-53
equitable right, remedy or claim under or with respect to this Agreement or any
provision of this Agreement, and this Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the Parties to this
Agreement and their permitted successors and assigns.
13.10 Notices. Any notice, request, demand or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been
given if delivered or sent by facsimile transmission, upon receipt, or if sent
by registered or certified mail, upon the sooner of the date on which receipt is
acknowledged or the expiration of three (3) days after deposit in United States
post office facilities properly addressed with postage prepaid. All notices to a
Party will be sent to the addresses set forth below or to such other address or
Person as such Party may designate by written notice to each other Party
hereunder:
TO BUYER: Island Fund I LLC
c/o Paul, Hastings, Janofsky & Walker LLP
75 East 55th Street
New York, New York 10022
Attn: Martin L. Edelman, Esq.
Facsimile: (212) 319-4090
With a copy (which shall not constitute notice)
to:
Thomas E. Kruger, Esq.
Paul, Hastings, Janofsky & Walker LLP
75 East 55th Street
New York, New York 10022
Facsimile: (212) 319-4090
TO SELLER: Insignia Financial Group, Inc.
200 Park Avenue
New York, New York 10166
Attn: Adam B. Gilbert, Esq.
Facsimile: (212) 984-6655
With copies (which shall not constitute notice)
to:
Arnold S. Jacobs, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Facsimile: (212) 969-2900
and
G. Daniel O'Donnell, Esq.
C-54
Dechert LLP
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103
Facsimile: (215) 994-2222
TO ANY CB PARTY: CB Richard Ellis Services, Inc.
335 S. Grand Avenue, Suite 3100
Los Angeles, California 90071
Attn: Raymond Wirta
Facsimile: (213) 613-3100
With a copy (which shall not constitute notice)
to:
Richard Capelouto, Esq.
Simpson Thacher & Bartlett
3330 Hillview Avenue
Palo Alto, California 94304
Facsimile: (650) 251-5002
Any notice given hereunder may be given on behalf of any Party by its
counsel or other authorized representatives.
13.11 No Personal Liability. Except as provided in Section 13.14, this
Agreement shall not create or be deemed to create or permit any personal
liability or obligation on the part of any direct or indirect stockholder of
Seller or any CB Party, member of Buyer or any officer, director, employee,
agent, representative or investor of any such Party.
13.12 Mutual Drafting. This Agreement is the result of the joint efforts of
each Party and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of the Parties and there shall be no
construction against any Party based on any presumption of that Party's
involvement in the drafting thereof.
13.13 Equitable Remedies. Seller and the CB Parties agree that if (i) this
Agreement has not been validly terminated by Seller or the CB Parties pursuant
to Article 12, (ii) the Merger is consummated, (iii) the Closing hereunder has
not occurred, (iv) each of the conditions set forth in Sections 6.1, 6.2, 6.3,
6.4, 6.5 and 6.6 hereof was satisfied or waived at the time of the Merger and
(v) Buyer was ready and willing to proceed with the Closing immediately prior to
the closing of the Merger (including, without limitation, being prepared to
satisfy the conditions set forth in Section 6.7), then Buyer shall be entitled,
in addition to any other available remedies, to equitable relief (including,
without limitation, specific performance and injunctive relief). In such event,
Seller and the CB Parties hereby irrevocably waive the defense that an adequate
remedy
C-55
at law exists and further waive any requirement that Buyer post any bond in
order to pursue any such remedy.
13.14 Exclusive Pre-Closing Remedy for Seller and CB Parties.
(a) If the closing of the Merger occurs and (i) the Closing does not
occur and Seller or the CB Parties reasonably determine that the Closing did not
occur prior to or simultaneously with the Merger solely as a result of a breach
by Buyer of its obligations under this Agreement or (ii) this Agreement is
terminated by Seller pursuant to Section 12.4(b) hereof, then Seller and the CB
Parties shall be entitled to withhold $5,000,000 (the "DEPOSIT") from amounts
payable to Andrew L. Farkas in connection with the closing of the Merger (as
described in Sections 1 and 2 of Schedule 1.2(a) of the Disclosure Schedules);
provided, however that if, and to the extent, such amounts payable to Mr. Farkas
in connection with the Merger are less than $5,000,000, then Seller and the CB
Parties also shall be entitled to withhold from such other amounts payable to
Mr. Farkas pursuant to the Farkas Employment Agreement and the related estoppel
letter, dated as of February 17, 2003 and amended as of the date hereof,
delivered by Mr. Farkas to the CB Parties (the Farkas Employment Agreement and
such estoppel letter, the "FARKAS AGREEMENTS") an amount equal to such
difference, which amount shall be deemed to be included in the Deposit for all
purposes of this Section 13.14. Subject to Section 13.14(b), if the Deposit has
been properly withheld by Seller and the CB Parties, Andrew L. Farkas agrees
that the aggregate amount of the payments the CB Parties and Seller are
obligated to pay to Mr. Farkas in connection with the Merger pursuant to the
Farkas Agreements shall be reduced by the amount of the Deposit.
(b) If Buyer disputes the withholding of the Deposit by Seller and
the CB Parties, Buyer and/or Andrew L. Farkas may challenge and dispute the same
in the manner provided in Section 13.4 hereof. If Buyer is not the prevailing
party in any such action, claim or proceeding, then Seller and the CB Parties
shall be entitled to retain the Deposit as contemplated by Section 13.14(c)
below. If Buyer is the prevailing party in any such action, claim or proceeding,
then (i) the Surviving Corporation and/or the CB Parties shall promptly (x) pay
to Mr. Farkas the amount of the Deposit, plus 10% interest thereon, compounded
annually, from the date of the closing of the Merger through and including the
date such payment is made and (y) reimburse each of Buyer and Mr. Farkas for all
reasonable and accountable legal and other expenses incurred by Buyer or Mr.
Farkas in connection with such action, claim or proceeding. Nothing contained in
this Section 13.14 shall limit or otherwise affect Buyer's rights under this
Agreement, including, without limitation, Buyer's right to pursue equitable
remedies pursuant to Section 13.13 of this Agreement.
(c) The Parties hereby acknowledge and agree that it would be
impractical and/or extremely difficult to fix or establish the actual damage
sustained by Seller and the CB Parties as a result of such a breach or default
by Buyer established as contemplated by this Section 13.14, and agree that the
Deposit is a reasonable
C-56
approximation thereof. Accordingly, the Deposit shall constitute, and is agreed
by the Parties to be, liquidated damages of Seller and the CB Parties, and shall
be retained by Seller and the CB Parties as their sole and exclusive remedy
hereunder. The payment of the Deposit as liquidated damages is not intended to
be, and shall not be deemed, a forfeiture or penalty, but is intended to
constitute liquidated damages to Seller and the CB Parties.
13.15 Definitions. As used in this Agreement the following terms shall have
the meanings set forth below:
(a) "ACQUIROR" shall have the meaning set forth in the preface.
(b) "ACQUISITION PROPOSAL" shall mean any bona fide written offer or
proposal from any third party (other than any CB Party or any of their
respective controlled Affiliates) regarding a transaction that would result in a
third party acquiring by any means all or any portion of the Covered Interests
subject to this Agreement, except for any acquisition pursuant to any Existing
Transfer Obligation and in accordance with the terms of this Agreement.
(c) "ADJUSTED PRO RATED BOOK VALUE" shall mean, with respect to any
given Asset at any given time, the Pro Rated Book Value of such Asset less the
aggregate amount of all Losses that have been indemnified and paid prior to such
time pursuant to Section 7.1(a)(ii) and 7.1(b)(ii) in respect of third party
claims that relate to such Asset (regardless of whether such claims were made
against the applicable Asset Owner or one or more Buyer Indemnified Parties).
(d) "AFFECTED INTERESTS" shall have the meaning set forth in Section
1.6(d) hereof.
(e) "AFFECTED PROPERTY" shall have the meaning set forth in Section
1.6(d) hereof.
(f) "AFFILIATE" shall mean, with respect to any Person, (a) any other
Person at the time directly or indirectly controlling, controlled by or under
direct or indirect common control with such Person, (b) any other Person of
which such Person at the time owns, or has the right to acquire, directly or
indirectly, ten percent (10%) or more of any class of the capital stock or
beneficial interest, (c) any other Person which at the time owns, or has the
right to acquire, directly or indirectly, ten percent (10%) or more of any class
of the capital stock or beneficial interests of such Person, (d) any executive
officer or director of such Person, and (e) if such Person is an individual, any
member of such individual's immediate family.
(g) "AGREEMENT" shall mean this Agreement as originally in effect,
including, unless the context otherwise specifically requires, all schedules and
exhibits
C-57
hereto, as the same may from time to time be supplemented, amended, modified or
restated in the manner herein or therein provided.
(h) "ASSET OWNER" shall mean any Entity that directly owns an Asset.
(i) "ASSETS" shall have the meaning set forth in the Recitals.
(j) "ASSET MATERIAL ADVERSE EFFECT" shall mean any material adverse
effect on the Assets and/or the Covered Interests, taken as a whole, or on
Seller's ability to consummate the transaction contemplated hereby.
(k) "ATTRIBUTABLE PRO RATED BOOK VALUE" shall mean, with respect to
any direct or indirect Equity Interest in any Asset Owner at any given time, the
portion of the Adjusted Pro Rated Book Value of the underlying Asset of such
Asset Owner at such time attributable to such direct or indirect Equity
Interest.
(l) "AUTHORITY" shall mean any governmental or quasi-governmental
authority, whether administrative, executive, judicial, legislative or other, or
any combination thereof, any federal, state, territorial, county, municipal or
other government or governmental or quasi-governmental agency, authority, board,
body, branch, bureau, central bank or comparable agency or Entity, commission,
court, department, instrumentality, or other political unit or subdivision or
other Entity of any of the foregoing, whether domestic or foreign.
(m) "BENEFICIARY" shall have the meaning set forth in Section 9.7(a)
hereof.
(n) "BEST EFFORTS" shall mean the efforts that a prudent Person
desirous of achieving a result would use in similar circumstances to achieve
that result as expeditiously as possible, provided, however, that a Person
required to use "Best Efforts" under this Agreement will not be thereby required
to take actions that would result in a material adverse change in the benefits
to such Person of this Agreement and the transactions contemplated by this
Agreement or to dispose of or make any change to its business, expend any funds
(other than de minimis incremental expenses) or incur any other material burden.
(o) "BUSINESS DAY" shall mean 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.
(p) "BUYER" shall have the meaning set forth in the preface.
(q) "BUYER COLLATERAL" shall have the meaning set forth in Section
9.7(b) hereof.
C-58
(r) "BUYER CONTRIBUTED AMOUNT" shall have the meaning set forth in
Section 9.7(b) hereof.
(s) "BUYER DESIGNEE" shall have the meaning set forth in Section
9.3(b) hereof.
(t) "BUYER INDEMNIFIED PARTY" shall mean each of Buyer and its
Affiliates and each Entity in which Buyer directly or indirectly acquires Equity
Interests pursuant to this Agreement, and their respective managers, officers,
directors, employees, members, representatives and agents; provided, however,
that in no event shall a Buyer Indemnified Party include any Asset Owner or any
manager, officer, director, employee, member, representative or agent of an
Asset in its, his or her capacity as such.
(u) "BUYER L/C" shall have the meaning set forth in Section 9.7(b)
hereof.
(v) "BUYER MATERIAL ADVERSE EFFECT" shall mean any material adverse
effect on the ability of Buyer to perform its obligations under this Agreement
or the other agreements and transactions contemplated hereby to which it is a
party.
(w) "BUYER'S KNOWLEDGE" shall mean the actual knowledge of any Island
Principal or Jeffrey P. Cohen, without independent investigation or inquiry.
(x) "CASH COLLATERAL AGREEMENT" shall mean the form of Cash
Collateral Agreement, dated as of the Closing Date, among Buyer, CB Richard
Ellis Services, Inc. and Bank of New York, as Deposit Bank, attached as Exhibit
I to this Agreement.
(y) "CASH DISTRIBUTION" shall mean a cash distribution or payment
(without duplication), excluding (i) Pre-2003 Cash and (ii) any distribution or
payment directly or indirectly made with the proceeds of any indebtedness
(including any refinancing) unless such indebtedness is (x) non-recourse to
Seller and its Subsidiaries (excluding Transferred Entities) or (y) non-recourse
to Seller and its Subsidiaries (excluding Transferred Entities) with exceptions
to such non-recourse provisions that are no less favorable to Seller and its
Subsidiaries (and are applicable only to the same Subsidiaries) as the
indebtedness of the Asset (but which in no event would generally be
characterized as full recourse). For the avoidance of doubt, management fees,
advisory fees or other similar fees or payments made to Seller or any Subsidiary
of Seller will not be deemed to constitute a Cash Distribution under any
circumstances.
(z) "CATEGORY A ENTITY" shall mean an Asset Owner.
(aa) "CATEGORY B ENTITY" shall mean any Buyer Indemnified Party that
does not own any material assets other than direct or indirect Equity Interests
in one or
C-59
more Asset Owners (and such Buyer Indemnified Party's managers, officers,
directors, employees, members, representatives and agents).
(bb) "CB CONTRIBUTED AMOUNT" shall have the meaning set forth in
Section 9.7(b) hereof.
(cc) "CB PARTIES" shall have the meaning set forth in the preface.
(dd) "CB PARTIES MATERIAL ADVERSE EFFECT" shall mean any material
adverse effect on the ability of any CB Party to perform its obligations under
this Agreement or the other agreements and transactions contemplated hereby to
which it is a party.
(ee) "CENTENNIAL GUARANTY" shall have the meaning set forth in
Section 9.7 hereof.
(ff) "CONTRACT" shall mean, with respect to any Person, any
instrument, contract, lease, or other contractual undertaking to which such
Person is a party or to which such Person or any of its business is subject or
property or assets are bound.
(gg) "CLAIM" shall have the meaning set forth in Section 7.1(d)(i)
hereof.
(hh) "CLOSING" shall have the meaning set forth in Section 1.3
hereof.
(ii) "CLOSING DATE" shall have the meaning set forth in Section 1.3
hereof.
(jj) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(kk) "CONFIDENTIALITY AGREEMENT" shall have the meaning set forth in
Section 8.1(d) hereof.
(ll) "CONSENT" shall mean any approval, consent, ratification, waiver
or other authorization of any Person that is not a Party or a controlled
Affiliate of a Party.
(mm) "COVERED EMPLOYEE" shall have the meaning set forth in Section
9.5(a) hereof.
(nn) "COVERED INTERESTS" shall have the meaning set forth in the
Recitals.
(oo) "DEPOSIT" shall have the meaning set forth in Section 13.14(a)
hereof.
C-60
(pp) "DESIGNATED INTERESTS" shall have the meaning set forth in the
Recitals.
(qq) "DETERMINATION DATE" shall have the meaning set forth in Section
1.6(c) hereof.
(rr) "DISCLOSURE SCHEDULES" shall mean the disclosures schedules
delivered by the respective Parties hereto concurrent with the execution and
delivery of this Agreement.
(ss) "EMPLOYEE PROFIT PARTICIPATION INTERESTS" shall have the meaning
set forth in Section 9.5(a) hereof.
(tt) "ENCUMBERED ASSET" shall have the meaning set forth in Section
9.7(b) hereof.
(uu) "ENCUMBERED ASSET SALE" shall have the meaning set forth in
Section 9.7(e) hereof.
(vv) "ENCUMBRANCE" shall mean any of the following: mortgage, lien
(statutory or other), preference, priority or other security agreement,
arrangement or interest, hypothecation, pledge or other deposit arrangement,
assignment, charge, levy, executory seizure, attachment, garnishment,
encumbrance, right of first offer, right of first refusal, conditional sale,
title retention or other similar agreement, arrangement, device or restriction,
any financing lease involving substantially the same economic effect as any of
the foregoing, or the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction; provided, however, that
no Permitted Encumbrance shall constitute an "Encumbrance."
(ww) "ENTITY" shall mean any corporation, firm, unincorporated
organization, association, partnership, limited partnership, limited liability
company, trust (inter vivos or testamentary) estate of a deceased, insane or
incompetent individual, business trust, joint stock company, joint venture or
other organization, entity or business, whether acting in an individual,
fiduciary or other capacity, or any Authority.
(xx) "EQUITY INTEREST" shall mean, 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.
(yy) "ESTIMATED ASSUMED LIABILITIES AMOUNT" shall have the meaning
set forth in Section 1.7 hereof.
C-61
(zz) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
(aaa) "EXISTING TRANSFER OBLIGATION" shall mean any right of first
refusal, right of first offer, buy/sell or other contractual arrangement that
exists on the date of this Agreement and is binding upon Seller (or any
Subsidiary of Seller) pursuant to which Seller (or a Subsidiary of Seller) may
become obligated (i) to sell a Covered Interest to another Person or (ii) to
purchase an Equity Interest in an Entity that directly or indirectly owns an
Asset from another Person.
(bbb) "FARKAS AGREEMENTS" shall have the meaning set forth in Section
13.14(a) hereof.
(ccc) "FINAL ASSUMED LIABILITIES AMOUNT" shall have the meaning set
forth in Section 1.7 hereof.
(ddd) "FUNDED AMOUNT" shall have the meaning set forth in Section
9.7(b) hereof.
(eee) "HOLDING" shall have the meaning set forth in the preface.
(fff) "IN-USVI" shall have the meaning set forth in Section 3.3
hereof.
(ggg) "ISLAND PRINCIPAL" shall mean each of Andrew L. Farkas, Ronald
Uretta and James A. Aston.
(hhh) "ISLAND PRINCIPAL AMENDMENT" shall have the meaning set forth
in Section 4.10 hereof.
(iii) "LAW" shall mean 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.
(jjj) "LEHMAN" shall have the meaning set forth in Section 3.3
hereof.
(kkk) "LETTER AGREEMENT" shall have the meaning set forth in Section
9.5(a) hereof.
(lll) "LOAN AGREEMENT" shall have the meaning set forth in Section
3.3 hereof.
(mmm) "LOSSES" shall mean all claims, damages (including incidental
and/or consequential damages), losses, liabilities, taxes (including penalties
and interest), costs and reasonable expenses including, without limitation,
settlement costs and any reasonable legal, accounting or other expenses incurred
in connection with investigating or defending any action or threatened action.
C-62
(nnn) "MANAGED PROPERTY" shall have the meaning set forth in Section
9.6 hereof.
(ooo) "MERGER" shall have the meaning set forth in the Recitals.
(ppp) "MERGER AGREEMENT" shall have the meaning set forth in the
Recitals.
(qqq) "NAUTICA CONSENT AND RELEASE" shall have the meaning set forth
in Section 3.3 hereof.
(rrr) "NEWCO" shall have the meaning set forth in the Recitals.
(sss) "NEWCO INTERESTS" shall have the meaning set forth in the
Recitals.
(ttt) "NEWCO SECURITIES" shall have the meaning set forth in Section
2.5 hereof.
(uuu) "NOTICE OF ACQUISITION PROPOSAL" shall have the meaning set
forth in Section 8.1(a) hereof.
(vvv) "NOTIFYING PARTY" shall have the meaning set forth in Section
7.1(d)(i) hereof.
(www) "PARENT" shall have the meaning set forth in the preface.
(xxx) "PARTY" or "PARTIES" shall have the meaning set forth in the
preface.
(yyy) "PERMIT" shall mean any permit, license, easement, variance,
exemption, consent, certificate, approval, authorization or registration.
(zzz) "PERSON" shall mean any natural individual or any Entity.
(aaaa) "PERMITTED ENCUMBRANCES" shall mean (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 real property interests which do
not interfere with, or increase the cost of operation of, the business of Seller
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 Seller and
its Subsidiaries in any material respect, (f) Employee Profit Participation
Interests and (g) Existing Transfer Obligations.
C-63
(bbbb) "PHYSICAL CONDITIONS" shall have the meaning set forth in
Section 7.1(a) hereof.
(cccc) "PRE-2003 CASH" shall mean any cash that was, at any time on
or prior to December 31, 2002, in the possession of any wholly-owned Subsidiary
of Seller other than an Asset Owner (and for purposes of determining whether a
Subsidiary of Seller is wholly-owned, not taking into account any Employee
Profit Participation Interest).
(dddd) "PRO RATED BOOK VALUE" shall mean, with respect to any Asset,
an amount equal to (x) the Purchase Price (assumed to be $43,939,980 solely for
purposes of this definition) plus the Estimated Assumed Liabilities Amount,
divided by the aggregate book value of the Assets as reflected on Schedule
13.15(dddd) of the Disclosure Schedules, with the quotient thereof being
multiplied by (y) the book value of such Asset as reflected on Schedule
13.15(dddd) of the Disclosure Schedules.
(eeee) "PROFITS PARTICIPATION INTEREST RELEASE" shall have the
meaning set forth in Section 4.9(a) hereof.
(ffff) "PURCHASE DEPOSIT" shall have the meaning set forth in Section
1.6(c) hereof.
(gggg) "PURCHASE PRICE" shall have the meaning set forth in Section
1.2 hereof.
(hhhh) "REDUCED BUYER COLLATERAL AMOUNT" shall have the meaning set
forth in Section 9.7(b) hereof.
(iiii) "REFUNDABLE BUYER COLLATERAL" shall have the meaning set forth
in Section 9.7(b) hereof.
(jjjj) "REIMBURSEMENT NOTICE" shall have the meaning set forth in
Section 9.7(b) hereof.
(kkkk) "RELEASE" shall mean a release of the CB Parties, Seller and
their respective Subsidiaries from, or the termination of, any guarantee or
indemnification obligation set forth in Schedule 13.15(kkkk) of the Disclosure
Schedules.
(llll) "REQUIRED ELECTION" shall have the meaning set forth in
Section 1.6(c) hereof.
(mmmm) "RESTRICTED CASH" shall mean cash sale proceeds that (i) were
generated by a sale of a real property Asset prior to January 1, 2003 and (ii)
were in the possession of the applicable Asset Owner prior to January 1, 2003
(or would have been in
C-64
the possession of the Asset Owner but for an escrow, hold-back or similar
arrangement relating to the sale of the Asset).
(nnnn) "RESTRICTED CASH COLLATERAL" shall have the meaning set forth
in Section 9.7(b) hereof.
(oooo) "RESTRICTED INTEREST" shall have the meaning set forth in
Section 9.3 hereof.
(pppp) "SC INDEMNIFIED PARTY" shall mean Seller (including the
Surviving Corporation following the closing of the Merger, if applicable), the
CB Parties, and each of their respective Affiliates, and their respective
managers, officers, directors, employees, members, stockholders, representatives
and agents.
(qqqq) "SECURITIES ACT" shall have the meaning set forth in Section
3.4 hereof.
(rrrr) "SELLER" shall have the meaning set forth in the preface and
shall include, following the Merger, the Surviving Corporation; where applicable
or the context requires, references to "Seller" shall also include Seller's
subsidiaries.
(ssss) "SELLER L/C" shall have the meaning set forth in Section 9.7
hereof.
(tttt) "SELLER'S KNOWLEDGE" shall mean the actual knowledge of Frank
M. Garrison or Adam B. Gilbert, without independent investigation or inquiry.
(uuuu) "SELLER TAX SUBSIDIARY" shall have the meaning set forth in
Section 10.1 hereof.
(vvvv) "SENIOR CREDIT AGREEMENT" shall mean the Senior Credit
Agreement dated as of May 4, 2001, among Seller, 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.
(wwww) "SENIOR SUBORDINATED CREDIT AGREEMENT" shall mean the Senior
Subordinated Credit Agreement dated as of June 7, 2002, by and among Seller,
Madeleine LLC, as administrative agent, and certain other financial institutions
party thereto.
(xxxx) "SUBJECT INTEREST" shall have the meaning set forth in Section
1.6(c) hereof.
(yyyy) "SUBSCRIPTION AGREEMENTS" shall have the meaning set forth in
Section 3.8 hereof.
C-65
(zzzz) "SUBSIDIARY" shall mean, with respect to a Person, any Entity
a majority of the capital stock ordinarily entitled to vote for the election of
directors of which, or if no such voting stock is outstanding, a majority of the
Equity Interests of which, is owned directly or indirectly, legally or
beneficially, by such Person or any other Person controlled by such Person.
(aaaaa) "SURVIVING CORPORATION" shall have the meaning set forth in
the Recitals and shall include, prior to the Merger, Seller.
(bbbbb) "TAX" or "TAXES" means any and all taxes, fees, levies,
duties, tariffs, imposts, and other charges of any kind (together with any and
all interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any government or taxing authority, including
without limitation, taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes;
license, registration and documentation fees; and customs' duties, tariffs and
similar charges.
(ccccc) "TECHNOLOGY SERVICES" shall have the meaning set forth in
Section 9.2 hereof.
(ddddd) "TERMINATION FEE" shall have the meaning set forth in Section
12.9(b) hereof.
(eeeee) "TOTAL INDEMNIFICATION LIMIT" shall have the meaning set
forth in Section 9.1(e) hereof.
(fffff) "TRAILING OBLIGATIONS" shall have the meaning set forth in
Section 9.7 hereof.
(ggggg) "TRANSFERRED ENTITY" shall mean any Entity with respect to
which all of the Equity Interests in such Entity owned by Seller or a
wholly-owned Subsidiary of Seller are either (i) directly (or indirectly)
transferred to Buyer or a permitted assignee of Buyer at the Closing pursuant to
this Agreement or (ii) retained by the Surviving Corporation following the
Closing pursuant to clause (z) of the first sentence of Section 4.1 of this
Agreement.
(hhhhh) "UNDERLYING AGREEMENT" shall have the meaning set forth in
Section 9.7(a) hereof.
[SIGNATURE PAGES FOLLOW]
C-66
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the date first above written.
BUYER:
ISLAND FUND I LLC
By: Island Capital Group LLC,
its Managing Member
By: /s/ Jeffrey P. Cohen
-----------------------------------
Name: Jeffrey P. Cohen
Title: Vice President
SELLER:
INSIGNIA FINANCIAL GROUP, INC.
By: /s/ Frank M. Garrison
--------------------------------------
Name: Frank M. Garrison
Title: Office of the Chairman
CB PARTIES:
CBRE HOLDING, INC.
By: /s/ Raymond E. Wirta
---------------------------------------
Name: Raymond E. Wirta
Title: Chief Executive Officer
CB RICHARD ELLIS SERVICES, INC.
By: /s/ Raymond E. Wirta
---------------------------------------
Name: Raymond E. Wirta
Title: Chief Executive Officer
C-67
APPLE ACQUISITION CORP.
By: /s/ Raymond E. Wirta
-------------------------------------
Name: Raymond E. Wirta
Title: President
Acknowledged and agreed, solely with
respect to Section 13.14 hereof:
/s/ Andrew L. Farkas
---------------------------------
Andrew L. Farkas
C-68
APPENDIX D
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.
D-1
(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
D-2
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
D-3
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.
D-4
APPENDIX E
CBRE HOLDING'S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF CBRE HOLDING, INC. AND FINANCIAL STATEMENT SCHEDULE
PAGE
-----
Consolidated Balance Sheets at March 31, 2003 (Unaudited) and December 31, 2002 ....... E-2
Consolidated Statements of Operations for the three months ended March 31, 2003 and
2002 (Unaudited) ..................................................................... E-3
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and
2002 (Unaudited) ..................................................................... E-4
Notes to Consolidated Financial Statements (Unaudited) ................................ E-5
Independent Auditors' Report .......................................................... E-19
Report of Independent Public Accountants .............................................. E-20
Consolidated Balance Sheets at December 31, 2002 and 2001 ............................. E-21
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 .................................................................... E-22
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 .................................................................... E-23
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 .............................................................. E-24
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 ....................................................... E-26
Notes to Consolidated Financial Statements ............................................ E-27
Quarterly Results of Operations (Unaudited) ........................................... E-68
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.
E-1
CBRE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................................ $ 19,370 $ 79,701
Receivables, less allowance for doubtful accounts of $10,164 and $10,892 at March 31,
2003 and December 31, 2002, respectively ........................................... 144,365 166,213
Warehouse receivable ................................................................. 11,625 63,140
Prepaid expenses ..................................................................... 18,912 9,748
Deferred tax assets, net ............................................................. 19,674 18,723
Other current assets ................................................................. 9,470 8,415
----------- -----------
Total current assets ............................................................... 223,416 345,940
Property and equipment, net ........................................................... 66,706 66,634
Goodwill .............................................................................. 577,137 577,137
Other intangible assets, net of accumulated amortization of $8,680 and $7,739 at March
31, 2003 and December 31, 2002, respectively ......................................... 90,245 91,082
Deferred compensation assets .......................................................... 63,396 63,642
Investments in and advances to unconsolidated subsidiaries ............................ 53,980 50,208
Deferred tax assets, net .............................................................. 36,297 36,376
Other assets .......................................................................... 85,119 93,857
----------- -----------
Total assets ....................................................................... $ 1,196,296 $ 1,324,876
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................................................ $ 102,891 $ 102,415
Compensation and employee benefits payable ........................................... 57,737 63,734
Accrued bonus and profit sharing ..................................................... 33,223 103,858
Income taxes payable ................................................................. -- 15,451
Short-term borrowings:
Warehouse line of credit ........................................................... 11,625 63,140
Revolver and swingline credit facility. ............................................ 13,500 --
Other .............................................................................. 48,768 47,925
----------- -----------
Total short-term borrowings ........................................................ 73,893 111,065
Current maturities of long-term debt ................................................. 10,933 10,711
----------- -----------
Total current liabilities .......................................................... 278,677 407,234
Long-Term Debt:
11 1/4% senior subordinated notes, net of unamortized discount of $3,002 and $3,057 at
March 31, 2003 and December 31, 2002, respectively ................................. 225,998 225,943
Senior secured term loans ............................................................ 208,350 211,000
16% senior notes, net of unamortized discount of $5,040 and $5,107 at March 31, 2003
and December 31, 2002, respectively ................................................ 62,599 61,863
Other long-term debt ................................................................. 12,319 12,327
----------- -----------
Total long-term debt ............................................................... 509,266 511,133
Deferred compensation liability ....................................................... 106,549 106,252
Other liabilities ..................................................................... 45,048 43,301
----------- -----------
Total liabilities .................................................................. 939,540 1,067,920
Minority interest ..................................................................... 5,727 5,615
Commitments and contingencies
Stockholders' Equity:
Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,835,123 and
1,793,254 shares issued and outstanding (including treasury shares) at March 31,
2003 and December 31, 2002, respectively ........................................... 18 17
Class B common stock; $0.01 par value; 25,000,000 shares authorized; 12,624,813
shares issued and outstanding at March 31, 2003 and December 31, 2002 .............. 127 127
Additional paid-in capital ........................................................... 241,510 240,574
Notes receivable from sale of stock .................................................. (4,823) (4,800)
Accumulated earnings ................................................................. 34,806 36,153
Accumulated other comprehensive loss ................................................. (18,877) (18,998)
Treasury stock at cost, 110,174 shares at March 31, 2003 and December 31, 2002 ....... (1,732) (1,732)
----------- -----------
Total stockholders' equity ......................................................... 251,029 251,341
----------- -----------
Total liabilities and stockholders' equity ......................................... $ 1,196,296 $ 1,324,876
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
E-2
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
-------------- --------------
Revenue ................................................................ $ 263,724 $ 223,990
Costs and expenses:
Cost of services ...................................................... 123,599 99,054
Operating, administrative and other ................................... 126,175 115,853
Depreciation and amortization ......................................... 6,171 7,592
Equity income from unconsolidated subsidiaries ........................ (3,063) (2,005)
Merger-related and other nonrecurring charges ......................... -- 582
----------- -----------
Operating income ....................................................... 10,842 2,914
Interest income ........................................................ 1,075 864
Interest expense ....................................................... 14,324 16,017
----------- -----------
Loss before benefit for income tax ..................................... (2,407) (12,239)
Benefit for income tax ................................................. (1,060) (6,144)
----------- -----------
Net loss ............................................................... $ (1,347) $ (6,095)
=========== ===========
Basic loss per share ................................................... $ (0.09) $ (0.40)
=========== ===========
Weighted average shares outstanding for basic loss per share ........... 15,029,219 15,050,633
=========== ===========
Diluted loss per share ................................................. $ (0.09) $ (0.40)
=========== ===========
Weighted average shares outstanding for diluted loss per share ......... 15,029,219 15,050,633
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
E-3
CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (1,347) $ (6,095)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 6,171 7,592
Deferred compensation plan deferrals ........................................ 2,111 2,817
Equity income from unconsolidated subsidiaries .............................. (3,063) (2,005)
Decrease in receivables ...................................................... 21,169 25,998
Increase in prepaid expenses and other assets ................................ (2,365) (2,799)
Decrease in compensation and employee benefits and accrued bonus and
profit sharing .............................................................. (77,994) (77,720)
Increase in accounts payable and accrued expenses ............................ 1,112 9,798
Decrease in income taxes payable ............................................. (15,728) (14,734)
Other operating activities, net .............................................. (827) 602
--------- ---------
Net cash used in operating activities ....................................... (70,761) (56,546)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions received ............................ (4,000) (2,145)
Acquisition of businesses including net assets acquired, intangibles and
goodwill .................................................................... (22) (8,364)
Other investing activities, net .............................................. 1,528 (821)
--------- ---------
Net cash used in investing activities ....................................... (2,494) (11,330)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit facility ......................... 33,750 50,500
Repayment of revolver and swingline credit facility .......................... (20,250) (13,000)
Proceeds from (repayment of) senior notes and other loans, net ............... 68 (3,195)
Repayment of senior secured term loans ....................................... (2,338) (2,338)
Other financing activities, net .............................................. 526 (880)
--------- ---------
Net cash provided by financing activities ................................... 11,756 31,087
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (61,499) (36,789)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD ............................ 79,701 57,450
Effect of currency exchange rate changes on cash ............................ 1,168 (664)
--------- ---------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD .................................. $ 19,370 $ 19,997
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ...................................... $ 5,823 $ 8,454
========= =========
Income taxes, net of refunds .............................................. $ 14,532 $ 6,867
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
E-4
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Blum
Strategic Partners, L.P. (Blum Strategic), formerly known as RCBA Strategic
Partners, LP, 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.
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.
Currently, the transaction is valued at approximately $430.0 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.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (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
E-5
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
3. BASIS OF PREPARATION
The accompanying consolidated financial statements have been prepared in
accordance with the rules applicable to Form 10-Q and include all information
and footnotes required for interim financial statement presentation. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ materially
from those estimates. All significant inter-company transactions and balances
have been eliminated, and certain reclassifications have been made to prior
periods' consolidated financial statements to conform to the current period
presentation. The results of operations for the three months ended March 31,
2003 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 2003. The consolidated financial statements
and notes to the consolidated financial statements should be read in
conjunction with the Company's filing on form 10-K, which contains the latest
available audited consolidated financial statements and notes thereto, as of
and for the period ended December 31, 2002.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company engages a third-party valuation firm to perform an annual
assessment of its goodwill and other intangible assets deemed to have
indefinite lives for impairment as of the beginning of the fourth quarter of
each year. The Company also assesses its goodwill and other intangible assets
deemed to have indefinite useful lives for impairment when events or
circumstances indicate that their carrying value may not be recoverable from
future cash flows.
There were no changes in the carrying value of goodwill for the three
months ended March 31, 2003.
Other intangible assets totaled $90.2 million and $91.1 million, net of
accumulated amortization of $8.7 million and $7.7 million, as of March 31, 2003
and December 31, 2002, respectively and are comprised of the following (dollars
in thousands):
AS OF MARCH 31, 2003 AS OF DECENBER 31, 2002
--------------------------------- --------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- -------------- ---------------- -------------
Amortizable intangible assets
Management contracts. .......... $ 18,913 $ 6,118 $ 18,887 $ 5,605
Loan servicing rights. ......... 16,312 2,562 16,234 2,134
-------- ------- -------- -------
Total. ......................... $ 35,225 $ 8,680 $ 35,121 $ 7,739
======== ======= ======== =======
Unamortizable intangible assets
Trademark ...................... $ 63,700 $ 63,700
======== ========
In accordance with Statement of Financial Accounting Standards (SFAS) No.
141, the trademark was separately identified as a result of the 2001 Merger and
has an indefinite life. The management contracts and loan servicing rights are
amortized over useful lives ranging up to ten years. Amortization expense
related to these intangible assets was $1.0 million for the three months ended
March 31, 2003. 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.
E-6
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Combined condensed financial information for the entities accounted for
using the equity method is as follows (dollars in thousands):
Condensed Balance Sheets Information:
MARCH 31, DECEMBER 31,
2003 2002
-------------- -------------
Current assets ................. $ 116,024 $ 127,635
Noncurrent assets .............. $ 1,615,216 $ 1,552,546
Current liabilities ............ $ 199,930 $ 108,463
Noncurrent liabilities ......... $ 591,199 $ 664,241
Minority interest .............. $ 4,165 $ 3,938
Condensed Statements of Operations Information:
THREE MONTHS ENDED MARCH
31,
-------------------------
2003 2002
----------- -----------
Net revenue ..................... $ 99,031 $ 80,331
Income from operations .......... $ 23,604 $ 17,205
Net income ...................... $ 21,077 $ 13,226
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 $0.6 million as of March 31, 2003. 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 together with clients,
including its equity investments in CB Richard Ellis Strategic Partners, LP,
Global Innovation Partners, L.L.C. 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.
6. DEBT
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 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 amount of the Notes included in the
accompanying consolidated balance sheets, net of unamortized discount, was
$226.0 million and $225.9 million as of March 31, 2003 and December 31, 2002,
respectively.
The Company also entered into a $325.0 million Senior Credit Facility (the
Credit Facility) with Credit Suisse First Boston (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 their assets. The
Credit Facility includes the Tranche A term facility of $50.0 million, maturing
on July 20, 2007; the
E-7
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 the applicable 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 the
applicable 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 at March 31, 2003 had an outstanding
balance on the line of credit of $13.5 million. The total amount outstanding
under the credit facility included in senior secured term loans, current
maturities of long-term debt and short-term borrowings in the accompanying
consolidated balance sheets was $232.1 million and $221.0 million as of March
31, 2003 and December 31, 2002, respectively.
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, October 20,
2002 and January 20, 2003. 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 March 31, 2003, 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 total amount of the Senior notes included in the accompanying consolidated
balance sheets, net of unamortized discount, was $62.6 million and $61.9
million as of March 31, 2003 and December 31, 2002, respectively.
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 cash flow 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.
E-8
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company has short-term borrowings of $73.9 million and $111.1 million
with related weighted average interest rates of 5.0% and 3.9% as of March 31,
2003 and December 31, 2002, 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. On March 28, 2003, the Company was notified that effective May
1, 2003, the RFC base rate would be lowered to the greater of one-month LIBOR
or 1.5%.
During the quarter ended March 31, 2003, the Company had a maximum of
$93.9 million revolving line of credit principal outstanding with RFC. At March
31, 2003 and December 31, 2002, respectively, the Company had a $11.6 million
and a $63.1 million warehouse line of credit outstanding, which are included in
short-term borrowings in the accompanying consolidated balance sheets.
Additionally, the Company had a $11.6 million and a $63.1 million warehouse
receivable, which are also included in the accompanying consolidated balance
sheets as of March 31, 2003 and December 31, 2002, 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% in excess of the bank's cost of funds
and expires on May 28, 2003. At March 31, 2003 and December 31, 2002 the
Company had no revolving line of credit principal outstanding with JP Morgan
Chase.
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. At March 31, 2003 and December
31, 2002, respectively, the Company had $39.4 million and $40.0 million of
non-recourse debt outstanding, which is included in short-term borrowings in
the accompanying consolidated balance sheets.
7. 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.
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
E-9
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
The Company had outstanding letters of credit totaling $17.4 and $7.8
million as of March 31, 2003 and December 31, 2002, respectively, including the
Fannie Mae letter of credit discussed in the preceding paragraph. The letters
of credit expire at varying dates through March 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 March 31, 2003, the Company had
committed an additional $20.8 million to fund future co-investments.
8. COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and other comprehensive income
(loss). Accumulated other comprehensive income (loss) consists of foreign
currency translation adjustments and unfunded pension liability. Foreign
currency translation adjustments exclude income tax expense (benefit) given
that the earnings of non-US subsidiaries are deemed to be reinvested for an
indefinite period of time.
The following table provides a summary of the comprehensive loss (dollars
in thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
------------- -------------
Net loss .......................................... $ (1,347) $ (6,095)
Foreign currency translation gain (loss) .......... 121 (252)
--------- ---------
Comprehensive loss ................................ $ (1,226) $ (6,347)
========= =========
9. 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.
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 loss and per share
information would have been as follows on a pro-forma basis (dollars in
thousands, except per share data):
E-10
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
------------- -------------
Net Loss:
As Reported ......... $ (1,347) $ (6,095)
Pro Forma ........... (1,495) (6,233)
Basic EPS:
As Reported ......... (0.09) (0.40)
Pro Forma ........... (0.10) (0.41)
Diluted EPS:
As Reported ......... (0.09) (0.40)
Pro Forma ........... (0.10) (0.41)
These pro forma amounts may not be representative of future pro forma
results.
The weighted average fair value of options and warrants granted was $1.63
and $2.39 for the three months ended March 31, 2003 and 2002, respectively.
Dividend yield is excluded from the calculation since it is the present
intention of the Company to retain all earnings. The fair value 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:
THREE MONTHS ENDED MARCH
31,
-----------------------
2003 2002
---------- ----------
Risk-free interest rate .......... 3.04% 4.14%
Expected volatility .............. 0.00% 0.00%
Expected life .................... 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.
10. PER SHARE INFORMATION
Basic and diluted loss per share for the Company was computed by dividing
the net loss by the weighted average number of common shares outstanding of
15,029,219 and 15,050,633 for the three months ended March 31, 2003 and 2002,
respectively. As a result of operating losses incurred for the three months
ended March 31, 2003 and 2002, diluted weighted average shares outstanding did
not give effect to common stock equivalents, as to do so would have been
anti-dilutive.
11. FIDUCIARY FUNDS
The consolidated balance sheets do not include the net assets of escrow,
agency and fiduciary funds, which amounted to $390.8 million and $414.6 million
at March 31, 2003 and December 31, 2002, respectively.
12. 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 senior
E-11
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 domestic subsidiaries.
The following condensed consolidating financial information includes:
(1) Condensed consolidating balance sheets as of March 31, 2003 and
December 31, 2002; condensed consolidating statements of operations for the
three months ended March 31, 2003 and 2002, and condensed consolidating
statements of cash flows for the three months ended March 31, 2003 and
2002, 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; and (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 inter-company balances and transactions.
E-12
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2003
(UNAUDITED)
(DOLLARS IN THOUSANDS)
GUARANTOR
PARENT CBRE SUBSIDIARIES
------------ ------------ --------------
Current Assets:
Cash and cash equivalents. ...................... $ 82 $ 276 $ 12,455
Receivables, less allowance for doubtful
accounts ....................................... 30 37 52,835
Warehouse receivable ............................ -- -- 11,625
Prepaid and other current assets. ............... 21,048 17,695 14,884
--------- --------- ---------
Total current assets ........................... 21,160 18,008 91,799
Property and equipment, net ...................... -- -- 52,184
Goodwill ......................................... -- -- 442,965
Other intangible assets, net ..................... -- -- 88,332
Deferred compensation assets ..................... -- 63,396 --
Investment in and advances to unconsolidated
subsidiaries .................................... -- 4,798 42,419
Investment in consolidated subsidiaries .......... 280,987 314,867 65,723
Inter-company loan receivable .................... -- 438,818 --
Deferred taxes, net .............................. 36,297 -- --
Other assets ..................................... 4,733 16,549 13,305
--------- --------- ---------
Total assets. .................................. $ 343,197 $ 856,436 $ 796,727
========= ========= =========
Current Liabilities:
Accounts payable and accrued expenses ........... $ 2,104 $ 10,764 $ 34,455
Inter-company payable ........................... 15,741 -- --
Compensation and employee benefits
payable ........................................ -- -- 30,555
Accrued bonus and profit sharing ................ -- -- 10,182
Short-term borrowings:
Warehouse line of credit ....................... -- -- 11,625
Revolving credit and swingline facility ........ -- 13,500 --
Other .......................................... -- -- 876
--------- --------- ---------
Total short-term borrowings .................... -- 13,500 12,501
Current maturities of long-term debt ............ -- 10,288 --
--------- --------- ---------
Total current liabilities ...................... 17,845 34,552 87,693
Long-term debt:
111/4% senior subordinated notes,
net of unamortized discount .................... -- 225,998 --
Senior secured term loans ....................... -- 208,350 --
16% senior notes, net of unamortized
discount ....................................... 62,599 -- --
Other long-term debt ............................ -- -- 12,129
Inter-company loan payable ...................... -- -- 362,614
--------- --------- ---------
Total long-term debt ........................... 62,599 434,348 374,743
Deferred compensation liability ................. -- 106,549 --
Other liabilities ............................... 11,724 -- 19,424
--------- --------- ---------
Total liabilities .............................. 92,168 575,449 481,860
Minority interest ............................... -- -- --
Commitments and contingencies
Stockholders' Equity: ........................... 251,029 280,987 314,867
--------- --------- ---------
Total liabilities and stockholders' equity ..... $ 343,197 $ 856,436 $ 796,727
========= ========= =========
NONGUARANTOR CONSOLIDATED
SUBSIDIARIES ELIMINATION TOTAL
-------------- ------------------- -------------
Current Assets:
Cash and cash equivalents. ...................... $ 6,557 $ -- $ 19,370
Receivables, less allowance for doubtful
accounts ....................................... 91,463 -- 144,365
Warehouse receivable ............................ -- -- 11,625
Prepaid and other current assets. ............... 10,170 (15,741) 48,056
--------- ------------ -----------
Total current assets ........................... 108,190 (15,741) 223,416
Property and equipment, net ...................... 14,522 -- 66,706
Goodwill ......................................... 134,172 -- 577,137
Other intangible assets, net ..................... 1,913 -- 90,245
Deferred compensation assets ..................... -- -- 63,396
Investment in and advances to unconsolidated
subsidiaries .................................... 6,763 -- 53,980
Investment in consolidated subsidiaries .......... -- (661,577) --
Inter-company loan receivable .................... -- (438,818) --
Deferred taxes, net .............................. -- -- 36,297
Other assets ..................................... 50,512 -- 85,119
--------- ------------ -----------
Total assets. .................................. $ 316,072 $ (1,116,136) $ 1,196,296
========= ============ ===========
Current Liabilities:
Accounts payable and accrued expenses ........... $ 55,568 $ -- $ 102,891
Inter-company payable ........................... -- (15,741) --
Compensation and employee benefits
payable ........................................ 27,182 -- 57,737
Accrued bonus and profit sharing ................ 23,041 -- 33,223
Short-term borrowings:
Warehouse line of credit ....................... -- -- 11,625
Revolving credit and swingline facility ........ -- -- 13,500
Other .......................................... 47,892 -- 48,768
--------- ------------ -----------
Total short-term borrowings .................... 47,892 -- 73,893
Current maturities of long-term debt ............ 645 -- 10,933
--------- ------------ -----------
Total current liabilities ...................... 154,328 (15,741)-- 278,677
Long-term debt:
111/4% senior subordinated notes,
net of unamortized discount .................... -- -- 225,998
Senior secured term loans ....................... -- -- 208,330
16% senior notes, net of unamortized
discount ....................................... -- -- 62,599
Other long-term debt ............................ 190 -- 12,319
Inter-company loan payable ...................... 76,204 (438,818) --
--------- --------------- -----------
Total long-term debt ........................... 76,394 (438,818) 509,266
Deferred compensation liability ................. -- -- 106,549
Other liabilities ............................... 13,900 -- 45,048
--------- --------------- -----------
Total liabilities .............................. 244,622 (454,559) 939,540
Minority interest ............................... 5,727 -- 5,727
Commitments and contingencies
Stockholders' Equity: ........................... 65,723 (661,577) 251,029
--------- --------------- -----------
Total liabilities and stockholders' equity ..... $ 316,072 $ (1,116,136) $ 1,196,296
========= =============== ===========
E-13
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
Deferred compensation assets ..................... -- 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:
111/4 % 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
Deferred compensation assets ..................... -- -- 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:
111/4 % 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
========= ============= ===========
E-14
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(DOLLARS IN THOUSANDS)
GUARANTOR
PARENT CBRE SUBSIDIARIES
------------- ----------- --------------
Revenue ........................................ $ -- $ -- $ 190,490
Costs and expenses:
Cost of services .............................. -- -- 89,697
Operating, administrative and other ........... 100 1,968 83,035
Depreciation and amortization ................. -- -- 4,234
Equity (income) loss from unconsolidated
subsidiaries ................................. -- (24) (3,249)
--------- --------- ---------
Operating (loss) income ........................ (100) (1,944) 16,773
Interest income ................................ 36 9,313 455
Interest expense ............................... 2,909 10,066 8,855
Equity income (loss) of consolidated
subsidiaries .................................. 331 3,378 (4,649)
--------- --------- ---------
(Loss) income before (benefit) provision for
income tax .................................... (2,642) 681 3,724
(Benefit) provision for income tax ............. (1,295) 350 346
--------- --------- ---------
Net (loss) income .............................. $ (1,347) $ 331 $ 3,378
========= ========= =========
NONGUARANTOR CONSOLIDATED
SUBSIDIARIES ELIMINATION TOTAL
-------------- ------------- -------------
Revenue ........................................ $ 73,234 $ -- $ 263,724
Costs and expenses:
Cost of services .............................. 33,902 -- 123,599
Operating, administrative and other ........... 41,072 -- 126,175
Depreciation and amortization ................. 1,937 -- 6,171
Equity (income) loss from unconsolidated
subsidiaries ................................. 210 -- (3,063)
--------- --------- ---------
Operating (loss) income ........................ (3,887) -- 10,842
Interest income ................................ 566 (9,295) 1,075
Interest expense ............................... 1,789 (9,295) 14,324
Equity income (loss) of consolidated
subsidiaries .................................. -- 940 --
--------- --------- ---------
(Loss) income before (benefit) provision for
income tax .................................... (5,110) 940 (2,407)
(Benefit) provision for income tax ............. (461) -- (1,060)
--------- --------- ---------
Net (loss) income .............................. $ (4,649) $ 940 $ (1,347)
========= ========= =========
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(DOLLARS IN THOUSANDS)
PARENT CBRE
------------- -------------
Revenue ........................................ $ -- $ --
Costs and expenses:
Cost of services .............................. -- --
Operating, administrative and other ........... 100 2,378
Depreciation and amortization ................. -- --
Equity income from unconsolidated
subsidiaries ................................. -- (167)
Merger-related and other nonrecurring
charges ...................................... -- 582
--------- ---------
Operating (loss) income ........................ (100) (2,793)
Interest income ................................ 45 9,815
Interest expense ............................... 2,794 10,467
Equity losses of consolidated subsidiaries ..... (5,211) (1,831)
--------- ---------
Loss before benefit for income tax ............. (8,060) (5,276)
Benefit for income tax ......................... (1,965) (65)
--------- ---------
Net loss ....................................... $ (6,095) $ (5,211)
========= =========
GUARANTOR NONGUARANTOR CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
-------------- -------------- ------------- -------------
Revenue ........................................ $ 168,560 $ 55,430 $ -- $ 223,990
Costs and expenses:
Cost of services .............................. 71,655 27,399 -- 99,054
Operating, administrative and other ........... 81,162 32,213 -- 115,853
Depreciation and amortization ................. 5,201 2,391 -- 7,592
Equity income from unconsolidated
subsidiaries ................................. (1,278) (560) -- (2,005)
Merger-related and other nonrecurring
charges ...................................... -- -- -- 582
--------- --------- -------- ---------
Operating (loss) income ........................ 11,820 (6,013) -- 2,914
Interest income ................................ 703 86 (9,785) 864
Interest expense ............................... 9,355 3,186 (9,785) 16,017
Equity losses of consolidated subsidiaries ..... (7,256) -- 14,298 --
--------- --------- -------- ---------
Loss before benefit for income tax ............. (4,088) (9,113) 14,298 (12,239)
Benefit for income tax ......................... (2,257) (1,857) -- (6,144)
--------- --------- -------- ---------
Net loss ....................................... $ (1,831) $ (7,256) $ 14,298 $ (6,095)
========= ========= ======== =========
E-15
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(DOLLARS IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT CBRE SUBSIDIARIES SUBSIDIARIES TOTAL
----------- ------------ -------------- -------------- -------------
CASH FLOWS (USED IN) PROVIDED
BY OPERATING ACTIVITIES: ................... $ (678) $ 4,924 $ (45,078) $ (29,929) $ (70,761)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures, net of concessions
received ................................... -- -- (3,228) (772) (4,000)
Acquisition of businesses including net
assets acquired, intangibles and
goodwill ................................... -- -- (22) -- (22)
Other investing activities, net ............. -- -- 1,866 (338) 1,528
-------- --------- ---------- ---------- ----------
Net cash used in investing activities ...... -- -- (1,384) (1,110) (2,494)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from revolver and swingline
credit facility ............................ -- 33,750 -- -- 33,750
Repayment of revolver and swingline
credit facility ............................ -- (20,250) -- -- (20,250)
Repayment of senior secured term loans..
-- (2,338) -- -- (2,338)
Repayment of senior secured term loans ...... -- -- -- -- --
(Increase) decrease in intercompany
receivables, net ........................... -- (15,864) (15,256) 31,120 --
Other financing activities, net ............. 633 -- -- (39) 594
-------- --------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ................................. 633 (4,702) (15,256) 31,081 11,756
-------- --------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS .................. (45) 222 (61,718) 42 (61,499)
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF PERIOD ..................... 127 54 74,173 5,347 79,701
Effect of currency exchange rate changes
on cash .................................... -- -- -- 1,168 1,168
-------- --------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD ........................... $ 82 $ 276 $ 12,455 $ 6,557 $ 19,370
======== ========= ========== ========== ==========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ..... $ 2,009 $ 3,160 $ 406 $ 248 $ 5,823
Income taxes, net of refunds ............. $ 14,532 $ -- $ -- $ -- $ 14,532
E-16
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(DOLLARS IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT CBRE SUBSIDIARIES SUBSIDIARIES TOTAL
----------- ------------- -------------- -------------- -------------
CASH FLOWS PROVIDED BY (USED
IN) OPERATING ACTIVITIES: .................. $ 650 $ (2,780) $ (40,203) $ (14,213) $ (56,546)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures, net of concessions
received ................................... -- -- (1,622) (523) (2,145)
Acquisition of businesses including net
assets acquired,intangibles and goodwill
-- (8,339) (25) -- (8,364)
Other investing activities, net ............. -- -- (1,006) 185 (821)
------- --------- ---------- ---------- ----------
Net cash used in investing activities ...... -- (8,339) (2,653) (338) (11,330)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from revolver and swingline
credit facility ............................ -- 50,500 -- -- 50,500
Repayment of revolver and swingline
credit facility ............................ -- (13,000) -- -- (13,000)
Repayment of senior notes and other
loans, net ................................. -- -- (2,534) (661) (3,195)
Repayment of senior secured term loans ...... -- (2,338) -- -- (2,338)
(Increase) decrease in intercompany
receivables, net ........................... -- (24,639) 18,979 5,660 --
Other financing activities, net.. ........... (641) (151) (40) (48) (880)
------- --------- ---------- ---------- ----------
Net cash (used in) provided by
financing activities ..................... (641) 10,372 16,405 4,951 31,087
------- --------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS .................. 9 (747) (26,451) (9,600) (36,789)
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF PERIOD ..................... 3 931 42,204 14,312 57,450
Effect of currency exchange rate changes
on cash .................................... -- -- -- (664) (664)
------- --------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD ........................... $ 12 $ 184 $ 15,753 $ 4,048 $ 19,997
======= ========= ========== ========== ==========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (net of amount capitalized) ..... $ 2,600 $ 3,301 $ 477 $ 2,076 $ 8,454
Income taxes, net of refunds ............. $ 6,867 $ -- $ -- $ -- $ 6,867
E-17
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. INDUSTRY SEGMENTS
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 consist of operations in the U.S., Canada, Mexico and
South America. EMEA mainly consists of Europe, while Asia Pacific includes
operations in Asia, Australia and New Zealand. The following table summarizes
the revenue and operating income (loss) by operating segment (dollars in
thousands):
THREE MONTHS ENDED MARCH
31,
-------------------------
2003 2002
----------- -------------
REVENUE
Americas .................................. $199,950 $ 178,613
EMEA ...................................... 45,478 30,073
Asia Pacific .............................. 18,296 15,304
-------- ---------
$263,724 $ 223,990
======== =========
OPERATING INCOME (LOSS)
Americas .................................. $ 14,464 $ 8,132
EMEA ...................................... (784) (3,003)
Asia Pacific .............................. (2,838) (2,215)
-------- ---------
10,842 2,914
Interest income ............................ 1,075 864
Interest expense ........................... 14,324 16,017
-------- ---------
Loss before benefit for income tax ......... $ (2,407) $ (12,239)
======== =========
E-18
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
E-19
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.
E-20
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:
111/4% 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.
E-21
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.
E-22
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 87/8% senior subordinated notes ........................... -- (175,000)
Proceeds from 111/4% 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 87/8% senior subordinated notes ........................... -- --
Proceeds from 111/4% 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.
E-23
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.
E-24
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.
E-25
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.
E-26
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).
E-27
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
E-28
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
E-29
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
E-30
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.
E-31
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
E-32
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
E-33
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 111/4%
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 87/8%
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
E-34
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
E-35
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):
E-36
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
E-37
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
E-38
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.
E-39
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
E-40
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.
E-41
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):
E-42
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
========= ======== =========
E-43
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
======== ======== ======== ========
E-44
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:
111/4% 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 111/4%
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 1111/4% of par, plus accrued and unpaid interest,
solely with the net cash proceeds from public equity
E-45
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.
E-46
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):
E-47
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.
E-48
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
E-49
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
E-50
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
=========== ========== ======= ======== ========== ======
E-51
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 111/4% 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).
E-52
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.
E-53
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:
111/4% 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:
111/4% 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
======== ============ ==========
E-54
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:
111/4 % 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:
111/4 % 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
======== =========== ==========
E-55
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
======== ======= ======== ======== ========= ==========
E-56
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
======== ======== ======== ======== ========= ========
E-57
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)
========= ========= ========== ========= ==========
E-58
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
======== ========= ======== ========= ==========
E-59
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
E-60
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 87/8% senior subordinated
notes ........................................... -- (175,000)
Proceeds from 111/4% 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 87/8% senior subordinated
notes ........................................... -- -- -- (175,000)
Proceeds from 111/4% 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
E-61
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
E-62
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
E-63
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)
========== ======== ========= ===========
E-64
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
E-65
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
E-66
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.
E-67
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
E-68
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
======== ======== ======== ======
E-69
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
INSIGNIA FINANCIAL GROUP, INC.
The undersigned hereby appoints Andrew L. Farkas and Adam B. Gilbert, 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.
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 Amended and Restated Agreement and Plan of Merger,
dated as of May 28, 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
---------------------------------
---------------------------------
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 Amended and Restated Agreement and Plan of
Merger, dated as of May 28, 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.
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 May 19, 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 D 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. You may also vote by telephone by calling
1-866-580-7645 or through the Internet at http://www.proxyvotenow.com/ifs.
Failure to return a properly executed proxy card, to vote by telephone or
through the Internet 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 or voted by telephone or through the Internet. Your prompt
cooperation will be greatly appreciated.
By Order of the Board of Directors
/s/ Adam B. Gilbert
-------------------------------
Adam B. Gilbert
Secretary