-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BPnq62jkb9LJShfFhUGu7roYj9PA+oDiqLlKUT4Wd9S5dHspPmmQcA2S1qNuN2Vl hTbHQF9eAXrjiUaWRUC8Rw== 0000898430-96-005074.txt : 19961106 0000898430-96-005074.hdr.sgml : 19961106 ACCESSION NUMBER: 0000898430-96-005074 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961104 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CB COMMERCIAL HOLDINGS INC CENTRAL INDEX KEY: 0000852203 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521616016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12757 FILM NUMBER: 96653638 BUSINESS ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 BUSINESS PHONE: 2136133123 MAIL ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 FORMER COMPANY: FORMER CONFORMED NAME: CB ACQUISITION CORP DATE OF NAME CHANGE: 19890731 S-1/A 1 AMENDMENT #1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1996 REGISTRATION NO. 333-12757 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- CB COMMERCIAL HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6531 52-1616016 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION ORGANIZATION) CODE NUMBER) 533 SOUTH FREMONT AVENUE LOS ANGELES, CALIFORNIA 90071-1798 (213) 613-3123 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- JAMES J. DIDION CHIEF EXECUTIVE OFFICER CB COMMERCIAL HOLDINGS, INC. 533 SOUTH FREMONT AVENUE LOS ANGELES, CALIFORNIA 90071-1798 (213) 613-3123 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: RICHARD S. GREY, ESQ. GREGG A. NOEL, ESQ. PETER V. LEPARULO, ESQ. RAND S. APRIL, ESQ. PILLSBURY MADISON & SUTRO LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP P.O. BOX 7880 300 GRAND AVENUE, SUITE 3400 SAN FRANCISCO, CALIFORNIA 94120 LOS ANGELES, CALIFORNIA 90071 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE ======================================================================================================
PROPOSED TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value................................. $117,477,675 $39,205(2) ======================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). (2) $29,741 of this filing fee has previously been paid. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 1996 PROSPECTUS 4,347,000 SHARES [LOGO OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.] CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. COMMON STOCK ----------- All of the 4,347,000 shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), of CB Commercial Real Estate Services Group, Inc. (the "Company") offered hereby (the "Offering") are being sold by the Company. Prior to the Offering, there has been no established public market for the Common Stock. It is currently estimated that the initial public offering price of the Common Stock offered hereby will be between $21.50 and $23.50 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price of the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CBCG." SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES. ----------- THESE SECURITIES HAVE 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 ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share..................................... $ $ $ - -------------------------------------------------------------------------------- Total(3)...................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the several Underwriters an option, exercisable within 30 days after the date of the Prospectus, to purchase up to an additional 652,050 shares of Common Stock to cover over-allotments, if any. If all of such shares of Common Stock are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------- The Shares are offered by the several Underwriters, subject to prior sale when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York on or about , 1996. ----------- MERRILL LYNCH & CO. MONTGOMERY SECURITIES ----------- The date of this Prospectus is November , 1996. [MAP OF U.S. WITH LOCATION OF OFFICES AND BAR CHART] A bar graph which depicts the Company's revenue for each of the four quarters and the trailing four quarters in the years 1992-1995 and for the first two quarters of 1996. Photographs of directors and officers along the left side of the fold out. Graphic depiction of World Map showing location of Company's offices. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and related notes appearing elsewhere in this Prospectus. Prospective investors should carefully consider the matters set forth in "Risk Factors." Except as set forth in the consolidated financial statements and notes thereto or otherwise as specified herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Effective upon consummation of the Offering, the Company will change its name from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group, Inc. Unless the context requires otherwise, the term the "Company" or "CB Commercial" means CB Commercial Real Estate Services Group, Inc. and each of its consolidated subsidiaries. COMPANY OVERVIEW Founded in 1906, the Company believes that it is the largest vertically- integrated commercial real estate services company in the United States with aggregate 1995 revenue of $468.5 million and 231 business unit offices in 107 locations. In addition, the Company has established exclusive alliances with international commercial real estate services firms which have offices in an additional 109 locations in 30 countries. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research (collectively, "Property and User Services"), and (ii) mortgage banking (mortgage loan origination and servicing), investment management and advisory services, and valuation and appraisal services (collectively, "Investor Services"). The Company believes that, on the basis of revenues, its brokerage and independent commercial mortgage origination businesses are the largest such businesses in the United States, and that the Company is among the top ten providers of commercial property management, investment management and advisory services and commercial mortgage loan servicing in the United States. The Company's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. The Company believes that it enjoys a variety of competitive advantages in the commercial real estate services industry, including the Company's-- . Significant deal flow and strong market presence in its core brokerage and property management businesses, both of which are employed for the benefit of all of the Company's business disciplines; . 90-year tradition and history of providing high-quality services and client coverage and internationally recognized "brand" identity which the Company believes is widely respected in the real estate services industry; . Experienced and trained professionals in all business disciplines, including almost 2,000 sales professionals in Property and User Services who have an average tenure of more than eight years with the Company; . Multi-discipline capabilities and extensive multi-market network; . State-of-the-art technology and professional education programs which enable the Company to deliver superior services; . Experienced management team, the members of which have an average tenure of more than 16 years with the Company and will own approximately 15.9% of the Company's Common Stock (including exercisable stock options and shares held through the Company's Deferred Compensation Plan) after the Offering; and . Employees who will own more than 40% of the Company's Common Stock after the Offering. 3 As part of its growth strategy, the Company is continually assessing acquisition opportunities. Management believes that there are significant opportunities in the fragmented and consolidating real estate services industry to acquire additional companies to complement and expand the Company's existing operations. Since the beginning of 1995, the Company has completed three strategic acquisitions. In July 1996, the Company acquired L.J. Melody & Company and L.J. Melody & Company of California (collectively "L.J. Melody"), a nationally-known mortgage banking firm, for $15 million. The L.J. Melody acquisition provides the Company with leadership for its own mortgage banking business, access to loan sources not previously available to the Company and an enhanced ability to access the Company's deal flow in its investment properties and brokerage businesses as a source of mortgage originations. In June 1995, the Company acquired Westmark Realty Advisors L.L.C. ("Westmark"), an investment management and advisory business with approximately $3.0 billion of assets under management, for $37.5 million, plus a supplemental purchase price component of up to $18.0 million based upon Westmark's adjusted operating income. The Westmark acquisition has moved the Company into a business area which the Company believes has the potential for significant growth. In April 1995, the Company acquired Langdon Rieder Corporation ("Langdon Rieder"), a nationally-known tenant representation firm, for $1.5 million in cash and a deferred payment of $1.9 million payable over three years. The deferred payment is subject to forfeiture under certain circumstances. The Langdon Rieder acquisition strengthened the Company's ability to provide sophisticated tenant representation services to its corporate clients. INDUSTRY TRENDS Over the last ten years, the commercial real estate industry has experienced various structural changes and more recently has been experiencing a broad recovery from the real estate "depression" of the early 1990s. The Company believes that these factors and the resulting trends, which are summarized below, create an opportunity for the Company to leverage its experience, multi- discipline integrated services, multi-market presence and brand equity to its competitive advantage-- . CHANGING COMPOSITION AND NEEDS OF INVESTORS AND OWNERS. Investors in and owners of commercial real estate assets have become increasingly institutional with geographically diverse portfolios. This change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for, and growth of, sophisticated multi-service, nationally-oriented real estate service providers. . CONTINUING OUTSOURCING TREND. The Company believes that the combination of corporate managements' heightened awareness that corporate real estate assets are a major component of corporate net worth and competitive pressures encouraging a greater focus on core businesses has caused corporations to downsize and, as a result, outsource their non-core activities to third-parties. As a consequence, the demand for multi- disciplined, multi-market professional real estate services firms that provide integrated services capable of supplementing a corporate real estate department has increased significantly. . ONGOING INDUSTRY CONSOLIDATION. The Company also believes that the combination of institutional and corporate real estate service needs and demands, together with the real estate "depression" of the early 1990s, has made it necessary for real estate services firms to (i) provide comprehensive, high-quality services, (ii) make significant investments in corporate infrastructure, including information technology and professional education, and (iii) have access to sufficient capital to support these service and investment 4 needs. These factors have fueled the consolidating industry environment, which the Company believes will motivate local and regional real estate service providers to sell to, or form alliances with, major national and international companies. . EXPANDING CMBS MARKET. Wall Street firms and financial institutions have recently been providing a significant amount of third-party commercial mortgage financing and have been accessing the public debt markets by issuing commercial mortgage-backed securities ("CMBS") in order to securitize their portfolios and avoid holding mortgage loans for the long- term, resulting in increasing liquidity in the real estate markets. The Company's access to real estate transaction deal flow and national mortgage origination capabilities enable it to benefit from this expansion of the CMBS market which creates demand for mortgage originations. . RECOVERING MARKETS. Coincident with the long term structural shifts in the commercial real estate industry, commercial real estate markets in the United States have been recovering over the last several years, experiencing increased leasing and sale activity in many product types and geographic market areas. As a result, brokerage and property management fees, which are based upon a percentage of transaction value and total rent collections, respectively, have begun to increase. THE COMPANY'S BUSINESSES PROPERTY AND USER SERVICES Property and User Services include a broad range of services, delivered primarily to users and owners of commercial real estate, including brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research. These services are provided with respect to a wide range of commercial real estate properties, including, but not limited to, office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Brokerage. Brokerage, the Company's original and core business, advises buyers, sellers, landlords and tenants in connection with the leasing and sale of office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Brokerage employs approximately 1,640 sales professionals nationally generating significant deal flow and real-time market data. This market presence provides the Company with a competitive advantage in developing business opportunities and client contacts and in developing CB Commercial's brand identity for the Company's other business disciplines. The Company believes its commercial brokerage business is the market-leader in the United States based upon both 1995 revenue, which totaled approximately $294.3 million, and the number of completed transactions, which totaled approximately 19,800. Investment Properties. The Company provides sophisticated strategic planning for, and execution of, acquisitions and sales of income-producing commercial properties for its clients through its investment properties sales professionals. In 1995, approximately 1,000 sales transactions were completed with some of the country's largest and most sophisticated investors, including, as examples, Prudential Insurance Co., RREEF and Security Capital. With aggregate estimated sales consideration of more than $4.0 billion in 1995, the Company believes that it is one of the largest providers of investment properties sales services in the United States. Corporate Services. Corporate services, which generally operates through the CBC/Madison Advisory Group, addresses the multiple-market domestic and international real estate needs of corporate America by providing comprehensive, quality services on a cost efficient basis through a single point-of-contact at the Company. Corporate services coordinates the utilization of all the Company's various disciplines to deliver an integrated service to some of the largest and most sophisticated companies in the United States, including, as examples, Eastman Kodak, Ford Motor Company, and Allstate Insurance Company. CBC/Madison Advisory 5 Group directly addresses client demand driven by corporate downsizing, outsourcing, and alliance partnering, expanding a client's real estate department and performing most of the functions involved in corporate real estate administration. CBC/Madison Advisory Group has been one of the Company's fastest growing services, with revenue having increased at a compound annual rate of 50% from 1993 through 1995. Property Management. Property management provides operations, maintenance, marketing and leasing services for income-producing properties owned primarily by institutional investors. The Company provides asset management-oriented services to its clients to implement their specific goals and objectives, focusing on the enhancement of property values through maximization of cash flow. The Company was recently ranked the eighth largest property management firm in the United States by National Real Estate Investor's 1996 Annual Survey based on square footage under management during 1995. As of September 30, 1996, the Company managed 792 properties aggregating approximately 104 million square feet. Real Estate Market Research. The Company provides its research and forecasting services to its other businesses as well as outside corporate and institutional investor clients through CB Commercial/Torto Wheaton Research, the widely-recognized research division of the Company based in Boston, Massachusetts. The Company's research reports and forecasts are utilized by all of the Company's businesses to assist clients with analysis and interpretation of market data in order to provide them with a competitive edge in the rapidly changing real estate marketplace. The Company's publications and products provide real estate data for more than 50 of the largest Metropolitan Statistical Areas ("MSAs") in the United States and are sold on a subscription basis to many of the largest portfolio managers, insurance companies and pension funds in the United States. INVESTOR SERVICES Investor Services includes mortgage banking (mortgage loan origination and servicing), investment management and advisory services, and valuation and appraisal services relating primarily to office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Mortgage Banking. The Company provides its mortgage origination and servicing through L.J. Melody, a wholly-owned subsidiary of the Company acquired in July 1996 and based in Houston, Texas. On a combined basis including originations by L.J. Melody prior to its acquisition, the Company originated $2.3 billion, $2.0 billion and $1.1 billion of mortgage loans in 1995, 1994 and 1993, respectively. As part of these origination activities, the Company originates mortgages through special conduit arrangements with affiliates of Merrill Lynch, Citicorp, and Lehman Brothers which permit it to service the mortgage loans that it originates and is currently negotiating a similar arrangement with an affiliate of NationsBank. In addition, the Company is a major mortgage originator for insurance companies having originated, on a combined basis, mortgage loans in the names of the insurance companies valued at $1.6 billion in 1995, of which it serviced $891.4 million. As of December 31, 1995, 1994 and 1993, the Company, on a combined basis, serviced mortgage loan portfolios of $7.3 billion, $7.1 billion and $6.3 billion, respectively. Based upon available statistics, the Company believes that, on a combined basis, it is the largest independent commercial mortgage originator in the United States. As of December 31, 1995, the Company, on a combined basis, was the eighth largest commercial mortgage loan servicer in the United States. The Company believes it will have a significant competitive advantage in the commercial mortgage loan origination business due to its anticipated integration with the deal flow generated through the Company's brokerage and investment properties sales activities. This integration will not only provide advantages to mortgage banking, but will also facilitate sales transactions enhancing the Company's capability to execute clients' sales assignments. Investment Management and Advisory. The Company provides its investment management and advisory services primarily to large institutions and pension funds through Westmark which employs over 100 professionals and operates nationally from its headquarters in Los Angeles, California. Westmark operates as a 6 separate and independent subsidiary, providing advisory services and managing approximately $3.7 billion in tax-exempt capital invested in more than 220 office, industrial and retail properties located in more than 40 major U.S. markets with an aggregate of more than 40 million square feet. The Company's investment management and advisory activities include creating investment products, raising investor capital, identifying and acquiring specific properties and managing the operations and dispositions of the assets. As of September 30, 1996, the Company represented more than 180 investors in 13 commingled funds and a variety of nondiscretionarily managed separate accounts. Valuation and Appraisal Services. Valuation and appraisal services delivers sophisticated commercial real estate valuations through a variety of products including market value appraisals, portfolio valuations, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. The Company's appraisal staff has more than 80 professionals with more than 50% of its professionals holding the Member Appraisal Institute ("MAI") professional designation. Valuation and appraisal services operates nationally through 21 regional offices, and its clients are generally portfolio owners, both corporate and institutional. The Company believes it is among the leading commercial real estate appraisal firms in the United States. THE OFFERING Common Stock offered by the Compa- ny................................ 4,347,000 shares(1) Common Stock to be outstanding af- ter the Offering.................. 13,266,171 shares(1)(2) Use of proceeds.................... The net proceeds from the Offering will be used to repay a portion of the Company's senior secured indebtedness and to pay accrued and unpaid interest on the Company's senior subordinated indebtedness. Any remaining net proceeds will be used for general corporate purposes, including to fund acquisitions. See "Use of Proceeds." Listing............................ The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CBCG."
- -------- (1) Does not include up to 652,050 shares subject to an over-allotment option granted to the Underwriters by the Company. See "Underwriting." (2) Excludes (i) 1,046,890 shares issuable upon exercise of stock options under the Company's stock option plans as of September 30, 1996, (ii) shares of Class C-R and Class J common stock to be repurchased by the Company for an aggregate of $8,000 in connection with the Offering and (iii) 4,000,000 shares of Preferred Stock convertible into a lesser number of shares of Common Stock at the option of the holder after the Offering. Includes 444,444 shares of Common Stock issuable upon conversion of the 800,000 shares of the Company's Class C-1 common stock (assuming an initial public offering price per share of $22.50). See "Capitalization" and "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." 7 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth summary financial and other data for the Company on a consolidated historical basis and a consolidated pro forma basis for the periods and dates indicated. The summary historical balance sheet data as of December 31, 1995 and 1994 and the statement of operations data for each of the three years in the period ended December 31, 1995 are derived from the financial statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants, included herein. The summary historical balance sheet data as of December 31, 1993, 1992 and 1991 and the statement of operations data for the years ended December 31, 1992 and 1991 are derived from audited financial statements not included herein. The summary historical financial data for each of the nine month periods ended September 30, 1996 and 1995 are derived from unaudited financial statements prepared on the same basis as the audited financial statements and containing, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for such periods. Period to period comparability in 1995 and 1996 is affected by the Westmark acquisition completed in June 1995 and the L.J. Melody acquisition completed in July 1996. A significant portion of the Company's revenue is transactional in nature and seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and EBITDA to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the entire year ending December 31, 1996 or for any future period. The summary unaudited pro forma statement of operations data, balance sheet data and other data give effect to the acquisitions of Westmark, L.J. Melody as well as the Offering and Recapitalization as if such transactions had occurred as of January 1, 1995 with respect to operating and other data, and as if the Offering and the Recapitalization had occurred as of September 30, 1996 with respect to the pro forma balance sheet data. The pro forma financial data set forth below is not necessarily indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated or that may be achieved in the future. The information set forth below should be read in conjunction with "Unaudited Pro Forma Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for each of the Company, L.J. Melody and Westmark and related notes thereto which are included elsewhere in this Prospectus. 8
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------ 1996 1996 1996 1995 ----------- ----------- ---------- ---------- PRO FORMA ------------------------ ACQUISITION ACQUISITION AND ONLY OFFERING ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue......... $ 394,280 $ 394,280 $ 390,863 $ 324,890 Costs and expenses: Commissions, fees and other incentives..... 198,240 198,240 195,465 167,569 Operating, administrative and other...... 160,741 160,741 159,196 134,839 Depreciation and amortization (1) 10,267 10,267 9,749 8,173 Non-recurring charges........ -- -- -- -- ---------- ---------- ---------- ---------- Operating income (loss)......... 25,032 25,032 26,453 14,309 Interest income. 1,180 1,180 1,035 1,228 Interest expense........ 18,099 13,672 17,883 16,944 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 8,113 12,540 9,605 (1,407) Provision for income tax..... 4,323 6,094 4,610 238 Reduction of valuation allowances..... (40,400) (40,400) (40,400) -- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). (36,077) (34,306) (35,790) 238 ---------- ---------- ---------- ---------- Net income (loss)......... $ 44,190 $ 46,846 $ 45,395 $ (1,645) ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 3.20 $ 3.37 $ 3.29 $ (0.14) Number of shares used in computing per share amounts (3).... 13,815,434 13,006,876 13,815,434 11,732,012 OTHER DATA: EBITDA (4)...... $ 35,299 $ 35,299 $ 36,202 $ 22,482 Ratio of earnings to fixed charges at period end (5) 1.27 1.49 1.42 0.93 Net cash provided by (used in) operating activities..... $ 24,170 $ 551 Net cash (used in) investing activities..... $ (9,517) $ (21,960) Net cash provided by (used in) financing activities..... $ (12,795) $ 3,481 Investments under management at period end (6). $3,730,226 $3,918,825 Loans originated (7)............ $2,180,485 $ 603,097 Loans serviced (7)............ $7,498,905 $3,671,532 Total consideration of properties sold ......... $6,393,389 $4,517,550 Number of sale transactions... 2,758 2,491 Number of lease transactions... 12,521 12,733 ---------- ---------- Total sale and lease transactions... 15,279 15,224 ========== ========== Square feet under management (8). 103,754 95,406 YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 1995 1995 1995 1994 1993 1992 1991 ------------ ------------ ---------- ---------- ---------- ---------- ---------- PRO FORMA ------------------------- ACQUISITIONS ACQUISITIONS AND ONLY OFFERING ------------ ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue......... $ 489,684 $ 489,684 $ 468,460 $ 428,988 $ 392,037 $ 360,223 $ 338,119 Costs and expenses: Commissions, fees and other incentives..... 245,564 245,564 239,018 225,085 206,070 187,582 175,142 Operating, administrative and other...... 200,341 200,341 187,968 170,234 160,073 152,402 159,791 Depreciation and amortization (1) 14,502 14,502 11,631 8,091 49,606 45,855 51,946 Non-recurring charges........ -- -- -- -- -- 4,500 12,030 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)......... 29,277 29,277 29,843 25,578 (23,712) (30,116) (60,790) Interest income. 1,926 1,926 1,674 1,109 915 1,083 1,349 Interest expense........ 26,080 20,177 23,267 17,362 14,240 15,516 24,805 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 5,123 11,026 8,250 9,325 (37,037) (44,549) (84,246) Provision for income tax..... 220 2,581 841 152 112 12 135 Reduction of valuation allowances..... -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). 220 2,581 841 152 112 12 135 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)......... $ 4,903 $ 8,445 $ 7,409 $ 9,173 $ (37,149) $ (44,561) $ (84,381) ========== ========== ========== ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 0.37 $ 0.35 $ 0.55 $ 0.70 $ (3.26) $ (3.94) $ (7.52) Number of shares used in computing per share amounts (3).... 13,414,437 12,605,879 13,414,437 13,179,014 11,378,540 11,319,273 11,221,984 OTHER DATA: EBITDA (4)...... $ 43,779 $ 43,779 $ 41,474 $ 33,669 $ 25,894 $ 15,739 $ (8,844) Ratio of earnings to fixed charges at period end (5) 1.13 1.36 1.28 1.40 -- -- -- Net cash provided by (used in) operating activities..... $ 30,632 $ 31,418 $ 19,609 $ 10,911 $ (25,307) Net cash (used in) investing activities..... $ (24,888) $ (3,865) $ (5,629) $ (4,821) $ (3,715) Net cash provided by (used in) financing activities..... $ (11,469) $ (4,923) $ (14,662) $ (2,157) $ 16,012 Investments under management at period end (6). $3,901,727 $ 879,809 $ 760,554 $ 883,761 $ 776,010 Loans originated (7)............ $ 989,872 $ 874,159 $ 613,071 $ 458,792 $ 135,022 Loans serviced (7)............ $3,779,069 $3,578,962 $3,140,635 $3,787,941 $3,830,502 Total consideration of properties sold ......... $6,549,861 $6,521,451 $4,995,234 $4,478,472 $3,986,576 Number of sale transactions... 3,503 3,693 3,249 3,042 2,590 Number of lease transactions... 17,476 17,930 18,338 17,909 17,431 ---------- ---------- ---------- ---------- ---------- Total sale and lease transactions... 20,979 21,623 21,587 20,951 20,021 ========== ========== ========== ========== ========== Square feet under management (8). 105,356 92,311 76,065 70,707 71,156
AS OF SEPTEMBER 30, AS OF DECEMBER 31, ------------------------------- ---------------------------------------------------- 1996 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- -------- PRO FORMA OFFERING --------- BALANCE SHEET DATA: Cash and cash equiva- lents.................. $ 26,502 $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 $ 6,822 $ 2,889 Total assets............ 248,835 232,575 180,038 190,954 150,100 128,914 173,274 212,249 Total long-term debt.... 143,113 231,986 252,468 250,142 233,571 239,853 239,473 240,401 Total liabilities....... 250,596 339,469 344,184 345,642 314,648 303,774 311,630 306,123 Total stockholders' eq- uity (deficit)......... (1,761) (106,894) (164,146) (154,688) (164,548) (174,860) (138,356) (93,874)
(footnotes on following page) 9 - ------- (1) 1993, 1992, and 1991 reflect the amortization of intangibles associated with the acquisition in 1989 of CB Commercial Real Estate Group, Inc. of $42.9 million, $40.7 million and $47.1 million, respectively. (2) Net provision (benefit) for income tax on a consolidated basis for the nine months ended September 30, 1996 was ($35.8) million, a decrease of $36.0 million from $0.2 million for the nine months ended September 30, 1995. During the quarter ended September 30, 1996, the Company projected, on a more likely than not basis, that a portion of its net operating loss carryforwards ("NOLs") would be realized in current and future periods and, accordingly, reduced existing deferred tax asset valuation allowances of $45.7 million, of which $5.3 million has been allocated to the purchase price of L.J. Melody, based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income taxes provision). With the recognition of the deferred tax asset, current and future provisions for income tax will be recorded at the full effective tax rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Net Operating Losses." (3) Includes the dilutive effect of 1,046,890 shares issuable upon exercise of stock options outstanding as of September 30, 1996 under the Company's stock option plans. Acquisitions and offering pro forma data excludes shares of Class C-R and Class J common stock to be repurchased by the Company in connection with the Offering and shares of Preferred Stock convertible at the option of the holder into Common Stock after the Offering. Pro forma data includes 444,444 shares of Common Stock issuable upon conversion of the 800,000 shares of the Company's Class C-1 common stock (assuming an initial public offering price per share of $22.50). See "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." (4) EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income, consisting of depreciation and the amortization of intangible assets relating to acquisitions. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated that can be used by the Company to service its debt and for other required or discretionary purposes. Management has used EBITDA as one of the primary measures of operating performance in evaluating its recent acquisitions. Net cash available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, which are deducted from EBITDA. EBITDA should not be considered as an alternative either (i) to operating income (determined in accordance with generally accepted accounting principles ("GAAP")) or (ii) operating cash flow (determined in accordance with GAAP). (5) The ratio of earnings to fixed charges represents earnings before income taxes and fixed charges divided by fixed charges. Fixed charges include interest expense, one-third of rent expense relating to operating leases, and, for purposes of the pro forma ratios, preferred stock dividends. For purposes of this calculation preferred stock dividends are computed to demonstrate earnings required on a pre-tax basis. The Company's earnings were not sufficient to cover its fixed charges requirements by $16.5 million, $22.2 million and $52.4 million, in 1993, 1992 and 1991, respectively. Earnings included non-cash depreciation and amortization charges of $9.7 million, $8.2 million, $11.6 million, $8.1 million, $49.6 million, $45.9 million and $51.9 million for the nine month periods ended September 30, 1996 and 1995, and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. (6) Investments under management represent the market value of the assets managed as of the end of the period shown. (7) Mortgage loans originated represent the initial principal amount of loans originated during the period and loans serviced represents the outstanding principal balance of loans being serviced as of the end of the period shown. The increase in mortgage loans originated and serviced primarily reflects the acquisition of L.J. Melody on July 1, 1996. (8) Square feet under management represents the total square footage of properties for which the Company provided property management services as of the end of the period shown. 10 THE RECAPITALIZATION In connection with the Offering, (i) the Company's Certificate of Incorporation will be amended to, among other things, change the name of the Company from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group, Inc., effect the conversion of the Class B-1 and Class B-2 common stock of the Company into the Common Stock on a 1-for-1 basis, effect the conversion of the Class C-1 common stock of the Company into a lesser number of shares of Common Stock based upon the initial public offering price per share and provide for the convertibility of the Company's Preferred Stock into Common Stock at the holder's option, and (ii) the Company will repurchase all of the outstanding shares of its Class C-R common stock and Class J common stock for $.01 per share, in each case upon the consummation of the Offering, as part of the proposed recapitalization of the Company's capital structure (the "Recapitalization"). After the Recapitalization, the holders of the 1,000,000 shares of Series A-1 Preferred Stock will continue to have two votes per share for such shares on all matters submitted to a vote of stockholders of the Company, and the 1,000,000 shares of Series A-3 Preferred Stock will continue to have no right to vote on matters unless otherwise entitled by statute. See "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." FORWARD LOOKING INFORMATION When used in this Prospectus, the words "expects," "anticipates," "estimates," "believes" and words of similar import may constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. Such statements, which include statements contained in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" concerning projections of revenue growth and statements of management's objectives and expectations as to levels of expenditures, are subject to risks and uncertainties, including those set forth under "Risk Factors" and elsewhere in this Prospectus, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date of this Prospectus. The Company expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 11 RISK FACTORS Prospective investors should carefully consider the following risk factors in addition to the other information presented in this Prospectus before purchasing the shares of Common Stock offered hereby. GENERAL ECONOMIC CONDITIONS Periods of economic slowdown or recession, rising interest rates or declining demand for real estate will adversely affect certain segments of the Company's business. Such economic conditions could result in a general decline in rents which in turn would adversely affect revenues from property management fees and brokerage commissions derived from property sales and leases. Such conditions could also lead to a decline in sale prices as well as a decline in demand for funds invested in commercial real estate and related assets. An economic downturn or increase in interest rates also may reduce the amount of loan originations and related servicing by the Company's commercial mortgage banking business. If the Company's brokerage and mortgage banking businesses are adversely affected, it is also quite likely that other segments of the Company's business will also be adversely affected, due to the relationship among the Company's various business segments. GEOGRAPHIC CONCENTRATION For the year ended December 31, 1995, approximately $141.4 million or 37.0% of total sale and lease revenue of $382.4 million was generated from transactions originated in the state of California. Total revenue from sale and lease transactions for 1995 was 81.6% of the Company's total revenue for 1995. As a result of this geographic concentration, any negative performance of the commercial real estate markets and the local economies in various areas within California could materially adversely affect the Company's results of operations. COMPETITION The Company competes in a variety of service disciplines within the commercial real estate industry, including (i) brokerage (facilitating sales and leases on behalf of investors), investment properties (acquisitions and sales), corporate services, property management, and real estate market research and (ii) mortgage banking (loan origination and servicing), investment management and advisory services, and valuation and appraisal services. Each of these business areas is highly competitive on a national as well as local level. The Company faces competition not only from other real estate service providers, but also from institutional lenders, insurance companies and investment advisory, mortgage banking, accounting and appraisal firms. Some of the Company's principal competitors in certain of these business areas are better established and have substantially more experience than the Company. Moreover, although many of the Company's competitors are local or regional firms that are substantially smaller than the Company on an overall basis, they may be substantially larger on a local or regional basis. Because of these factors, these companies may be better able than the Company to obtain new customers, pursue new business opportunities or to survive periods of industry consolidation. In addition, the Company has faced increased competition in recent years in the property management and investment advisory segment of its business which has resulted in decreased property management fee rates and margins and decreased investment advisory fees and margins. In general, in each of the Company's businesses there can be no assurance that the Company will be able to continue to compete effectively or that it will be able to maintain current commission or fee levels or margins or that it will not encounter increased competition which could limit the Company's ability to maintain or increase its market share. Coldwell Banker, a former sister company of CB Commercial Real Estate Group, Inc., recently acquired by HFS, Inc., has announced that it intends to expand its franchise program from the residential real estate brokerage franchising business into commercial brokerage franchising. The activities of Coldwell Banker franchisees as direct competitors of the Company could cause name confusion in the industry between the Company and Coldwell Banker franchisees, which could result in a dilution of the value of the trade name "CB Commercial." See "Business--Competition." 12 RISKS INHERENT IN ACQUISITION GROWTH STRATEGY Lack of Availability of Acquisition Candidates A significant component of the Company's growth in 1995 and 1996 has been, and part of its principal strategy for continued growth is, through acquisitions. Recent acquisitions have included L.J. Melody (mortgage banking services), Westmark (investment management and advisory services) and Langdon Rieder Corporation (tenant advisory services). The Company expects to continue its acquisition program. The Company's future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon favorable terms and conditions; however, there can be no assurance that future acquisitions can be consummated at favorable prices or upon favorable terms and conditions. In addition, acquisitions entail risks that businesses acquired will not perform in accordance with expectations and that business judgments with respect to the value, strengths and weaknesses of businesses acquired or the consequences of any such acquisition will prove incorrect. See "Business--Acquisitions." Difficulty of Integration In addition, there can be no assurance that significant difficulties in integrating operations acquired from other companies will not be encountered, including difficulties arising from the diversion of management's attention from other business concerns and the potential loss of key employees of either the Company or the acquired operations. The Company encountered a number of these difficulties when it acquired Westmark and, to a lesser extent, when it acquired L.J. Melody. The Company believes that most acquisitions will have an adverse impact on EBITDA, operating income and net income during the first six months following the acquisition. There can be no assurance that the Company's management will be able to effectively manage the acquired businesses or that such acquisitions will benefit the Company overall. Lack of Available Financing The Company will require additional financing to sustain its acquisition program. The Company expects to finance future acquisitions and internal growth through a combination of funds available under its senior secured credit facilities (as in effect following the consummation of the Offering), cash flow from operations, additional indebtedness incurred by the Company (including, in the case of acquisitions, seller financing) and public or private sales of the Company's capital stock. The covenants in the Company's credit agreements as in effect following the consummation of the Offering will restrict the Company's ability to raise additional capital in certain respects. There can be no assurance that financing will be available to the Company or, if available, that it will be sufficient to finance acquisitions and internal growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "The Company's Credit Agreements." SEASONALITY A substantial component of the Company's revenues is transactional in nature and as a result is subject to seasonality. Historically, the Company's revenues, operating income and net income in the first two calendar quarters are generally lower than in the third and fourth calendar quarters due to seasonal fluctuations, which are consistent with the industry generally. In the first quarter of the calendar year, the Company has historically sustained a loss. The Company's non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. As a consequence of the seasonality of revenues and the relatively constant level of quarterly expenses, a substantial majority of the Company's operating income and net income has historically been realized in the third and fourth calendar quarters. The Company believes that future operating results will continue to follow these historical patterns, although revenues are also likely to be affected by both broad economic fluctuations and supply and demand cyclicality relating to commercial real estate. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 THE COMPANY'S LEVERAGE AND INTANGIBLE NATURE OF ITS ASSETS Following the Offering, the Company will have indebtedness of approximately $154 million as to which it will have annual principal and interest obligations of more than $30 million which must be paid regardless of the Company's operating cash flow. Any material downturn in the Company's revenue or increase in its costs and expenses could result in the Company's being unable to meet its debt obligations. After giving effect to the Offering, the Company will have total assets of $248.8 million on a pro forma basis, approximately $73.5 million of which will be goodwill and other intangible assets which would not be realizable at their carrying amounts in liquidation. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the Offering could have an adverse effect on the market price of the Common Stock. 6,667,264 shares will be eligible for sale in the public market immediately following the Offering. Additionally, 180 days after the closing of the Offering, 2,299,017 shares will become eligible for sale without any volume restriction, and 2,256,152 shares will become eligible for sale, subject to the volume limitations of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). Furthermore, holders of the Company's 4,000,000 shares of outstanding Preferred Stock have the right to convert such shares into Common Stock after the date of the Offering at a conversion ratio ranging from .60 to .78 shares of Common Stock for each share of Preferred Stock, depending on the market price of the Common Stock.The holders of the Preferred Stock have agreed not to sell any shares of Common Stock they acquire upon such conversion for 180 days from the date of this Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Thereafter, for an additional six months, such holders are contractually bound to sell such shares within the volume limitations of Rule 144 if the sale is made at a price per share below the initial public offering price unless such sales are pursuant to block trades which do not involve a broker's transaction executed on any exchange or in the over-the-counter market. See "Shares Eligible for Future Sale" and "Underwriting." LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for listing on the Nasdaq National Market, there can be no assurance that an active trading market will develop or be sustained. The price of shares of Common Stock to be sold in the Offering will be determined by negotiations among the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of the Offering. See "Underwriting" for factors to be considered in determining such offering price. The market price of the Common Stock could be subject to significant fluctuations in response to quarter-to-quarter variations in operating results of the Company or its competitors, conditions in the commercial real estate industry, the commencement of, developments in or outcome of litigation, changes in estimates of the Company's performance by securities analysts, and other events or factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Common Stock. See "Underwriting." RETAINED RISKS OF MORTGAGE LOANS SOLD In connection with the Company's origination and sale of certain mortgage loans in its mortgage banking business, the Company must make certain representations and warranties concerning mortgages originated by the Company and sold to "conduit" purchasers or to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). These representations and warranties cover such matters as title to the mortgaged property, lien priority, environmental reviews and certain other matters. The Company's representations and warranties rely in part on similar representations and warranties made by the borrower or others. The Company would have a claim against the borrower or another party in the event of a breach of any of these representations or warranties; however, the 14 Company's ability to recover on any such claim would be dependent upon the financial condition of the party against which such claim is asserted. There can be no assurance that the Company will not experience a material loss as a result of representations and warranties it makes. POTENTIAL LACK OF SPACE TO LEASE A significant portion of the Company's brokerage business involves facilitating the lease of commercial property including retail, industrial, and office space. Since the real estate depression of the early 1990s, the development of new retail, industrial, and office space has been limited. As a consequence, in certain areas of the country there is beginning to be inadequate office, industrial and retail space to meet demand and there is a potential for a decline in the Company's overall number of lease transactions, the effect of which may, over time, be partially offset by increasing sales, including sales of undeveloped land (which would benefit the Company's brokerage business). There can be no assurance that any such increase in the sale of undeveloped land will coincide with any decline in the number of lease transactions. DILUTION The initial public offering price is expected to be substantially higher than the book value per share of Common Stock. As a result, purchasers of shares of Common Stock in the Offering will incur immediate and substantial dilution. ENVIRONMENTAL CONCERNS Numerous laws and regulations have been enacted which regulate exposure to potentially hazardous materials often found in and around buildings. Some of these laws and regulations directly and indirectly impact the commercial real estate market by imposing additional costs and liability on owners, operators and sellers as well as lenders. Such laws and regulations tend to discourage sales and leasing activities and mortgage lending with respect to some properties, and may therefore adversely affect the Company. In addition, the failure of the Company to disclose environmental issues may subject the Company to liability to a buyer or lessee of property or to a purchaser of a mortgage loan. FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as within this Prospectus generally. In addition, when used in this Prospectus, the words "anticipates," "expects" and words of similar import may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of the risk factors set forth above and the matters set forth in the Prospectus generally. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. 15 THE COMPANY The Company's business was founded under the name Tucker, Lynch & Coldwell by Colbert Coldwell in San Francisco in 1906 as a commercial real estate brokerage firm. The firm was renamed Coldwell, Cornwall & Banker with the arrival of Benjamin Arthur Banker in 1913, became Coldwell, Banker & Company in 1940 and was acquired by Sears, Roebuck & Co. ("Sears") in 1981. In March 1989 the Company was incorporated in Delaware for the purpose of acquiring Coldwell Banker Commercial Group, Inc. from Sears by a group of six officers of Coldwell Banker Commercial Group, Inc. led by Mr. James J. Didion, the Company's Chairman and Chief Executive Officer, and an investor group formed by Mr. Frederic V. Malek and The Carlyle Group, L.P., a Washington, D.C.-based private merchant bank. The acquisition was completed in April 1989 and the name of Coldwell Banker Commercial Group, Inc. was changed to CB Commercial Real Estate Group, Inc. in 1991. The Company is a holding company that conducts its operations solely through CB Commercial Real Estate Group, Inc. and its subsidiaries. In connection with the Offering the Company will change its name to CB Commercial Real Estate Services Group, Inc. The Company's executive offices are located at 533 South Fremont Avenue, Los Angeles, California 90071-1798 and its telephone number is (213) 613-3123. USE OF PROCEEDS The net proceeds to the Company from the sale of 4,347,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $90.5 million ($104.0 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $22.50 per share and after deducting the estimated underwriting discount and offering expenses payable by the Company. The Company intends to use $79.9 million of the net proceeds ($86.7 million if the Underwriter's over-allotment option is exercised in full) to repay a portion of the Company's senior secured indebtedness and $9.0 million (whether or not the Underwriter's over-allotment option is exercised in full) to pay accrued and unpaid interest on the Company's senior subordinated indebtedness. The remaining $1.6 million of net proceeds ($8.3 million if the Underwriters' over-allotment option is exercised in full) will be used for general corporate purposes, including to fund acquisitions. Pending such uses, the net proceeds will be invested in short-term, investment grade, interest-bearing securities. As of September 30, 1996, the balance of the Company's outstanding senior secured indebtedness was $139.8 million and bore interest at a rate of approximately 7.0% per annum. The terms of the senior secured indebtedness, as amended in connection with the Recapitalization and the Offering, will provide for a final maturity date of December 31, 2001. As of September 30, 1996, the balance of the Company's senior subordinated indebtedness was $71.0 million and bore interest at a rate of 5.875% per annum. The terms of the senior subordinated indebtedness, as amended in connection with the Recapitalization and the Offering, will provide for a final maturity date of July 23, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--The Company's Credit Agreements." 16 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends on its Common Stock in the foreseeable future. The Company's Series A-1, Series A-2 and Series A-3 Preferred Stock (collectively, the "Preferred Stock") is entitled to a quarterly dividend of $0.25 per share. Until the Company has completed its acquisition program, it does not intend to pay the dividend on the Preferred Stock. As a consequence, such dividend will accumulate and bear interest which will be paid on a current basis, and the Company will be prohibited from prepaying long-term debt until such accumulated dividend and interest have been paid in full. In addition to the restrictions imposed by the terms of the Preferred Stock, the Company's credit agreements, as amended, will restrict its ability to pay dividends with respect to the Common Stock. See "Business-- The Company's Credit Agreements" and "Description of Capital Stock--Preferred Stock." Prior to the Offering, there has been no established public market for the Company's Common Stock. As of September 30, 1996, there were 1,467 holders of record of the Company's Class B-2 Common Stock, nine holders of record of the Company's Class B-1 Common Stock, two holders of record of the Company's Class C-R Common Stock, three holders of record of the Company's Class C-1 Common Stock and two holders of record of the Company's Class J Common Stock. As of September 30, 1996, there was one holder of record of the Company's Series A-1 Preferred Stock, two holders of record of the Company's Series A-2 Preferred Stock and one holder of record of the Company's Series A-3 Preferred Stock. 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996 and as adjusted to give effect to the Offering at an assumed initial public offering price of $22.50 per share and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." This table should be read in conjunction with "Unaudited Pro Forma Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements, including the related notes thereto, all appearing elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996 ------------------------------ ACTUAL AS ADJUSTED(1) ------------ ---------------- (IN THOUSANDS) Long-term obligations, less current portion...... $ 231,986 $ 143,113 Stockholders' equity: Preferred Stock, $.01 par value;--8,000,000 shares authorized; 4,000,000 shares issued and outstanding;--4,000,000 shares issued and outstanding, as adjusted(2)................... 40 40 Common Stock, $.01 par value;--100,000,000 shares authorized; 10,074,729 shares issued and outstanding; 13,266,171 shares issued and outstanding, as adjusted...................... 101 133 Additional paid-in capital..................... 117,826 208,266 Notes receivable from sale of stock............ (5,109) (5,109) Accumulated deficit............................ (219,752) (205,091) ------------ ------------ Total stockholders' equity (deficit)......... $ (106,894) $ (1,761) ------------ ------------ Total capitalization............................. $ 125,092 $ 141,352 ============ ============
- -------- (1) Assumes an increase in the Company's authorized Common Stock to 100,000,000 shares of Common Stock, the conversion of the Class B-1 and Class B-2 common stock of the Company into Common Stock on a 1-for-1 basis, the conversion of the 800,000 shares of the Class C-1 common stock of the Company into 444,444 shares of Common Stock assuming an initial public offering price per share in the Offering of $22.50, and the repurchase by the Company for $0.01 per share of the 800,000 outstanding shares of the Company's Class C-R common stock and two outstanding shares of the Company's Class J common stock, which in each case will occur upon the consummation of the Offering as part of the Recapitalization. See "Description of Capital Stock--The Recapitalization." (2) The Preferred Stock is convertible into Common Stock at the holder's option after the consummation of the Offering at a ratio based upon the per share market price of the Common Stock, ranging from .60 shares of Common Stock per share of Preferred Stock at a market price of $30.00 or more per share of Common Stock to .78 shares of Common Stock per share of Preferred Stock at a market price of $10.00 to $21.99 per share of Common Stock. No conversion of the Preferred Stock is permitted when the market price of the Common Stock is below $10.00 per share. See "Description of Capital Stock--Preferred Stock." 18 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth selected financial and other data for the Company on a consolidated historical basis and a consolidated pro forma basis for the periods and dates indicated. The selected historical balance sheet data as of December 31, 1995 and 1994 and the statement of operations data for each of the three years in the period ended December 31, 1995 are derived from the financial statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants, included herein. The selected historical balance sheet data as of December 31, 1993, 1992 and 1991 and the statement of operations data for the years ended December 31, 1992 and 1991 are derived from audited financial statements not included herein. The selected historical financial data for each of the nine-month periods ended September 30, 1996 and 1995 are derived from unaudited financial statements prepared on the same basis as the audited financial statements and containing, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for such periods. Period to period comparability in 1995 and 1996 is affected by the Westmark acquisition completed in June 1995 and the L.J. Melody acquisition completed in July 1996. A significant portion of the Company's revenue is transactional in nature and seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and EBITDA to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the entire year ending December 31, 1996 or for any future period. The selected unaudited pro forma statement of operations data, balance sheet data and other data give effect to the acquisitions of Westmark, L.J. Melody as well as the Offering and Recapitalization as if such transactions had occurred as of January 1, 1995 with respect to operating and other data, and as if the Offering and the Recapitalization had occurred as of September 30, 1996 with respect to the pro forma balance sheet data. The pro forma financial data set forth below is not necessarily indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated or that may be achieved in the future. The information set forth below should be read in conjunction with "Unaudited Pro Forma Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for each of the Company, L.J. Melody and Westmark and related notes thereto which are included elsewhere in this Prospectus. 19
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------ 1996 1996 1996 1995 ----------- ----------- ---------- ---------- PRO FORMA ------------------------ ACQUISITION ACQUISITION AND ONLY OFFERING ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue......... $ 394,280 $ 394,280 $ 390,863 $ 324,890 Costs and expenses: Commissions, fees and other incentives..... 198,240 198,240 195,465 167,569 Operating, administrative and other...... 160,741 160,741 159,196 134,839 Depreciation and amortization (1). 10,267 10,267 9,749 8,173 Non-recurring charges........ -- -- -- -- ---------- ---------- ---------- ---------- Operating income (loss)......... 25,032 25,032 26,453 14,309 Interest income. 1,180 1,180 1,035 1,228 Interest expense........ 18,099 13,672 17,883 16,944 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 8,113 12,540 9,605 (1,407) Provision for income tax..... 4,323 6,094 4,610 238 Reduction of valuation allowances..... (40,400) (40,400) (40,400) -- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). (36,077) (34,306) (35,790) 238 ---------- ---------- ---------- ---------- Net income (loss)......... $ 44,190 $ 46,846 $ 45,395 $ (1,645) ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 3.20 $ 3.37 $ 3.29 $ (0.14) Number of shares used in computing per share amounts (3).... 13,815,434 13,006,876 13,815,434 11,732,012 OTHER DATA: EBITDA (4)...... $ 35,299 $ 35,299 $ 36,202 $ 22,482 Ratio of earnings to fixed charges at period end (5) 1.27 1.49 1.42 0.93 Net cash provided by (used in) operating activities..... $ 24,170 $ 551 Net cash (used in) investing activities..... $ (9,517) $ (21,960) Net cash provided by (used in) financing activities..... $ (12,795) $ 3,481 Investments under management at period end (6). $3,730,226 $3,918,825 Loans originated (7)............ $2,180,485 $ 603,097 Loans serviced (7)............ $7,498,905 $3,671,532 Total consideration of properties sold ......... $6,393,389 $4,517,550 Number of sale transactions... 2,758 2,491 Number of lease transactions... 12,521 12,733 ---------- ---------- Total sale and lease transactions... 15,279 15,224 ========== ========== Square feet under management (8). 103,754 95,406 YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 1995 1995 1995 1994 1993 1992 1991 ------------ ------------ ---------- ---------- ---------- ---------- ---------- PRO FORMA ------------------------- ACQUISITIONS ACQUISITIONS AND ONLY OFFERING ------------ ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue......... $ 489,684 $ 489,684 $ 468,460 $ 428,988 $ 392,037 $ 360,223 $ 338,119 Costs and expenses: Commissions, fees and other incentives..... 245,564 245,564 239,018 225,085 206,070 187,582 175,142 Operating, administrative and other...... 200,341 200,341 187,968 170,234 160,073 152,402 159,791 Depreciation and amortization (1) 14,502 14,502 11,631 8,091 49,606 45,855 51,946 Non-recurring charges........ -- -- -- -- -- 4,500 12,030 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)......... 29,277 29,277 29,843 25,578 (23,712) (30,116) (60,790) Interest income. 1,926 1,926 1,674 1,109 915 1,083 1,349 Interest expense........ 26,080 20,177 23,267 17,362 14,240 15,516 24,805 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 5,123 11,026 8,250 9,325 (37,037) (44,549) (84,246) Provision for income tax..... 220 2,581 841 152 112 12 135 Reduction of valuation allowances..... -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). 220 2,581 841 152 112 12 135 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)......... $ 4,903 $ 8,445 $ 7,409 $ 9,173 $ (37,149) $ (44,561) $ (84,381) ========== ========== ========== ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 0.37 $ 0.35 $ 0.55 $ 0.70 $ (3.26) $ (3.94) $ (7.52) Number of shares used in computing per share amounts (3).... 13,414,437 12,605,879 13,414,437 13,179,014 11,378,540 11,319,273 11,221,984 OTHER DATA: EBITDA (4)...... $ 43,779 $ 43,779 $ 41,474 $ 33,669 $ 25,894 $ 15,739 $ (8,844) Ratio of earnings to fixed charges at period end (5) 1.13 1.36 1.28 1.40 -- -- -- Net cash provided by (used in) operating activities..... $ 30,632 $ 31,418 $ 19,609 $ 10,911 $ (25,307) Net cash (used in) investing activities..... $ (24,888) $ (3,865) $ (5,629) $ (4,821) $ (3,715) Net cash provided by (used in) financing activities..... $ (11,469) $ (4,923) $ (14,662) $ (2,157) $ 16,012 Investments under management at period end (6). $3,901,727 $ 879,809 $ 760,554 $ 883,761 $ 776,010 Loans originated (7)............ $ 989,872 $ 874,159 $ 613,071 $ 458,792 $ 135,022 Loans serviced (7)............ $3,779,069 $3,578,962 $3,140,635 $3,787,941 $3,830,502 Total consideration of properties sold ......... $6,549,861 $6,521,451 $4,995,234 $4,478,472 $3,986,576 Number of sale transactions... 3,503 3,693 3,249 3,042 2,590 Number of lease transactions... 17,476 17,930 18,338 17,909 17,431 ---------- ---------- ---------- ---------- ---------- Total sale and lease transactions... 20,979 21,623 21,587 20,951 20,021 ========== ========== ========== ========== ========== Square feet under management (8). 105,356 92,311 76,065 70,707 71,156
AS OF SEPTEMBER 30, AS OF DECEMBER 31, ------------------------------- ---------------------------------------------------- 1996 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- -------- PRO FORMA OFFERING --------- BALANCE SHEET DATA: Cash and cash equiva- lents.................. $ 26,502 $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 $ 6,822 $ 2,889 Total assets............ 248,835 232,575 180,038 190,954 150,100 128,914 173,274 212,249 Total long-term debt.... 143,113 231,986 252,468 250,142 233,571 239,853 239,473 240,401 Total liabilities....... 250,596 339,469 344,184 345,642 314,648 303,774 311,630 306,123 Total stockholders' eq- uity (deficit)......... (1,761) (106,894) (164,146) (154,688) (164,548) (174,860) (138,356) (93,874)
(footnotes on following page) 20 - -------- (1) 1993, 1992, and 1991 reflect the amortization of intangibles associated with the acquisition in 1989 of CB Commercial Real Estate Group, Inc. of $42.9 million, $40.7 million and $47.1 million, respectively. (2) Net provision (benefit) for income tax on a consolidated basis for the nine months ended September 30, 1996 was ($35.8) million, a decrease of $36.0 million from $0.2 million for the nine months ended September 30, 1995. During the quarter ended September 30, 1996, the Company projected, on a more likely than not basis, that a portion of its NOLs would be realized in current and future periods and, accordingly, reduced existing deferred tax asset valuation allowances of $45.7 million, of which $5.3 million has been allocated to the purchase price of L.J. Melody, based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income taxes provision). With the recognition of the deferred tax asset, current and future provisions for income tax will be recorded at the full effective tax rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Net Operating Losses." (3) Includes the dilutive effect of 1,046,890 shares issuable upon exercise of stock options outstanding as of September 30, 1996 under the Company's stock option plans. Acquisitions and offering pro forma data excludes shares of Class C-R and Class J common stock to be repurchased by the Company in connection with the Offering and shares of Preferred Stock convertible at the option of the holder into Common Stock after the Offering. Pro forma data includes 444,444 shares of Common Stock issuable upon conversion of the 800,000 shares of the Company's Class C-1 common stock (assuming an initial public offering price per share of $22.50). See "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." (4) EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income, consisting of depreciation and the amortization of intangible assets relating to acquisitions. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated that can be used by the Company to service its debt and for other required or discretionary purposes. Management has used EBITDA as one of the primary measures of operating performance in evaluating its recent acquisitions. Net cash available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, which are deducted from EBITDA. EBITDA should not be considered as an alternative either (i) to operating income (determined in accordance with GAAP) or (ii) operating cash flow (determined in accordance with GAAP). (5) The ratio of earnings to fixed charges represents earnings before income taxes and fixed charges divided by fixed charges. Fixed charges include interest expense, one-third of rent expense relating to operating leases, and, for purposes of the pro forma ratios, preferred stock dividends. For purposes of this calculation preferred stock dividends is computed to demonstrate earnings required on a pre-tax basis. The Company's earnings were not sufficient to cover its fixed charges requirements by $16.5 million, $22.2 million and $52.4 million, in 1993, 1992 and 1991, respectively. Earnings included non-cash depreciation and amortization charges of $9.7 million, $8.2 million, $11.6 million, $8.1 million, $49.6 million, $45.9 million and $51.9 million for the nine month periods ended September 30, 1996 and 1995, and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. (6) Investments under management represent the market value of the assets managed as of the end of the period shown. (7) Mortgage loans originated represent the initial principal amount of loans originated during the period and loans serviced represents the outstanding principal balance of loans being serviced as of the end of the period shown. The increase in mortgage loans originated and serviced primarily reflects the acquisition of L.J. Melody on July 1, 1996. (8) Square feet under management represents the total square footage of properties for which the Company provided property management services as of the end of the period shown. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The integrated real estate services provided by the Company include (i) Property and User Services, consisting of brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research, and (ii) Investor Services, consisting of mortgage banking (mortgage origination and servicing) through L.J. Melody, investment management and advisory services through Westmark, and valuation and appraisal services. During the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its net operating loss carryforwards ("NOL") would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income tax provision). With the recognition of deferred tax assets, the current period and the future periods provisions for income tax will be recorded at the full effective tax rate. For the nine months ended September 30, 1996, a $4.6 million provision for income taxes has been recorded. Net income for the nine months ended September 30, 1996 was $45.4 million ($3.29 per share of common stock), which includes the net benefit for income tax of $35.8 million. Net income for the nine months ended September 30, 1996 would have been $8.8 million ($.64 per share of common stock) if the Company had not recorded tax benefits related to projected future taxable income. An additional $16.3 million reduction of valuation allowances and related tax benefit is expected to be recorded in the fourth quarter of 1996 as a result of the Offering and related reduction in future interest expense. The $40.4 million recognized tax benefit has a material effect on the reported net income for the nine months ended September 30, 1996. This $40.4 million tax benefit is a non-recurring item and is unrelated to the Company's performance and should not be used in evaluating the Company's prospects or future performance. See "Net Operating Losses" below and "Unaudited Pro Forma Balance Sheet." A significant portion of the Company's revenue is transactional in nature and seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the entire year ending December 31, 1996 or for any future period. See "Risk Factors--Seasonality." Revenue from Property and User Services, which constitutes a substantial majority of the Company's revenue, is largely transactional in nature and subject to economic cycles. However, the Company's significant size, geographic coverage, number of transactions, and large client base has made the Company's annual revenue more stable. Due in large part to acquisitions, revenue from Investor Services, a significant portion of which is non- transactional in nature, has grown more rapidly than revenue from Property and User Services. Approximately 54.0% of the costs and expenses associated with Property and User Services are directly correlated to revenue while approximately 25.0% of the costs and expenses of Investor Services are directly correlated to revenue. The Company has recently completed three strategic acquisitions and is continually assessing acquisition opportunities as part of its growth strategy (see "Business--Acquisitions"). Because of the substantial non-cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting, management anticipates that future acquisitions may result in a decrease in net income. Management's strategy is to pursue acquisitions that are expected to be accretive to income before provision for income taxes and to operating cash flows after all integration costs. 22 Since 1992, the Company's results have benefitted from its ability to take advantage of a significant and ongoing recovery in U.S. commercial real estate markets and the generally rising level of occupancy and rental levels, and, as a result, property values. Since brokerage fees are typically based upon a percentage of transaction value, and property management fees are typically based upon a percentage of total rent collections, recent occupancy and rental rate increases at the property level have generated an increase in brokerage and property management fees to the Company. Upon consummation of the Offering, the Company's total outstanding indebtedness will be reduced from $256.5 million to $167.7 million. The reduction of the Company's total outstanding indebtedness, net of the effect of the increase in the interest rate on the Senior Subordinated Credit Agreement, will result in a savings in interest expense to the Company of approximately $5.9 million per year. See "The Company's Credit Agreements-- Senior Subordinated Debt Amendments." The 2.5% quarterly dividend on the Company's Preferred Stock, which will accrue from October 1, 1996, will result, if and when paid, in a cost of $1.0 million per quarter. Until the Company has completed its acquisition program, it does not intend to pay dividends on the Preferred Stock. As a consequence, such dividends will accumulate and bear interest which will be paid on a current basis and the Company will be prohibited from prepaying long-term debt until such accumulated dividend has been paid in full. Effective upon the consummation of the Offering, the terms of the Company's Preferred Stock will be amended to provide that it is convertible at the option of the holders into shares of Common Stock. See "Description of Capital Stock--Preferred Stock." RESULTS OF OPERATIONS The following unaudited table sets forth items derived from the Company's consolidated statements of operations for each of the periods presented in dollars and as a percentage of revenue.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, -------------------------------------- ----------------------------------------------- 1996 1995 1995 1994 1993 ------------------ ------------------ -------------- -------------- --------------- (DOLLARS IN THOUSANDS) Revenue................. $390,863 100.0 % $324,890 100.0 % $468,460 100.0% $428,988 100.0% $392,037 100.0 % Costs and Expenses: Commissions, fees and other incentives...... 195,465 50.1 167,569 51.6 239,018 51.0 225,085 52.5 206,070 52.6 Operating, administrative and other................. 159,196 40.7 134,839 41.5 187,968 40.1 170,234 39.7 160,073 40.8 Depreciation and amortization.......... 9,749 2.4 8,173 2.5 11,631 2.5 8,091 1.9 49,606 12.7 --------- ------ --------- ------ -------- ----- -------- ----- -------- ----- Operating income (loss). 26,453 6.8 14,309 4.4 29,843 6.4 25,578 5.9 (23,712) (6.1) Interest income......... 1,035 0.2 1,228 0.3 1,674 0.4 1,109 0.3 915 0.2 Interest expense........ 17,883 4.5 16,944 5.2 23,267 5.0 17,362 4.0 14,240 3.6 --------- ------ --------- ------ -------- ----- -------- ----- -------- ----- Income (loss) before provision (benefit) for income tax............. 9,605 2.5 (1,407) (0.5) 8,250 1.8 9,325 2.2 (37,037) (9.5) Provision for income tax.................... 4,610 1.2 238 0.0 841 0.2 152 0.0 112 0.0 Reduction of valuation allowances............. (40,400) 10.3 -- -- -- -- -- -- -- -- --------- ------ --------- ------ -------- ----- -------- ----- -------- ----- Net provision (benefit) for income tax......... (35,790) (9.1) 238 0.0 841 0.2 152 0.0 112 0.0 --------- ------ --------- ------ -------- ----- -------- ----- -------- ----- Net income (loss)....... $ 45,395 11.6 $ (1,645) (0.5)% $ 7,409 1.6% $ 9,173 2.2% $(37,149) (9.5)% ========= ====== ========= ====== ======== ===== ======== ===== ======== =====
23 The following unaudited tables summarize the revenue, cost and expenses, and operating income by operating segment for the nine months ended September 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------------- --------------------------------------------------- 1996 1995 1995 1994 1993 -------------- --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS) PROPERTY AND USER SERV- ICES Revenue: Brokerage.............. $227,756 66.7% $208,913 70.8% $294,290 69.6% $284,775 71.1% $270,063 74.2% Investment Properties.. 80,406 23.5 58,520 19.9 87,576 20.7 81,394 20.4 67,388 18.5 Corporate Services..... 17,436 5.1 13,524 4.6 21,723 5.1 15,631 3.9 9,640 2.6 Property Management(1) ...................... 14,705 4.3 13,139 4.5 18,332 4.4 17,692 4.4 16,432 4.5 Real Estate Market Research.............. 1,198 0.4 627 0.2 912 0.2 758 0.2 649 0.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 341,501 100.0 294,723 100.0 422,833 100.0 400,250 100.0 364,172 100.0 Costs and expenses: Commissions, fees and other incentives...... 183,951 53.9 159,475 54.1 227,387 53.8 215,506 53.8 196,425 53.9 Operating, administrative and other................. 130,764 38.3 116,085 39.4 160,415 37.9 152,141 38.0 143,394 39.4 Depreciation and amortization.......... 6,830 2.0 6,617 2.2 8,889 2.1 7,485 1.9 44,268 12.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss)................ $ 19,956 5.8% $ 12,546 4.3% $ 26,142 6.2% $ 25,118 6.3% $(19,915) (5.5)% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== INVESTOR SERVICES Mortgage Banking Revenue................ $ 14,035 100.0% $ 6,533 100.0% $ 10,417 100.0% $ 9,488 100.0% $ 7,218 100.0% Costs and expenses: Commissions, fees and other incentives............ 5,611 40.0 2,663 40.8 4,209 40.4 3,914 41.3 2,805 38.9 Operating, administrative and other................. 6,409 45.6 4,823 73.8 6,338 60.8 5,538 58.4 4,521 62.6 Depreciation and amortization.......... 386 2.8 184 2.8 268 2.6 195 2.1 1,372 19.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income....... $ 1,629 11.6% $ (1,137) (17.4)% $ (398) (3.8)% $ (159) (1.8)% $ (1,480) (20.5)% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Investment Management and Advisory Revenue................ $ 22,239 100.0% $ 11,575 100.0% $ 18,610 100.0% $ 5,902 100.0% $ 5,091 100.0% Costs and expenses: Operating, administrative and other................. 16,351 73.5 8,451 73.0 13,745 73.9 5,580 94.5 5,103 100.2 Depreciation and amortization.......... 2,207 9.9 1,126 9.7 2,148 11.5 149 2.5 1,245 24.5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss). $ 3,681 16.6% $ 1,998 17.3% $ 2,717 14.6% $ 173 3.0% $ (1,257) (24.7)% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Valuation and Appraisal Services Revenue................ $ 13,088 100.0% $ 12,059 100.0% $ 16,600 100.0% $ 13,348 100.0% $ 15,556 100.0% Costs and expenses: Commissions, fees and other incentives...... 5,903 45.1 5,431 45.1 7,422 44.7 5,665 42.4 6,840 44.0 Operating, administrative and other................. 5,672 43.3 5,480 45.4 7,470 45.0 6,975 52.3 7,055 45.4 Depreciation and amortization.......... 326 2.5 246 2.0 326 2.0 262 2.0 2,721 17.5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss)................ $ 1,187 9.1% $ 902 7.5% $ 1,382 8.3% $ 446 3.3% $ (1,060) (6.9)% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== TOTAL INVESTOR SERVICES Revenue................ $ 49,362 100.0% $ 30,167 100.0% $ 45,627 100.0% $ 28,738 100.0% $ 27,865 100.0% Costs and expenses: Commissions, fees and other incentives...... 11,514 23.3 8,094 26.8 11,631 25.5 9,579 33.3 9,645 34.6 Operating, administrative and other................. 28,432 57.6 18,754 62.2 27,553 60.4 18,093 63.0 16,679 59.9 Depreciation and amortization.......... 2,919 5.9 1,556 5.2 2,742 6.0 606 2.1 5,338 19.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income (loss)................ $ 6,497 13.2% $ 1,763 5.8% $ 3,701 8.1% $ 460 1.6% $ (3,797) (13.7)% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ------- (1) Does not include reimbursable costs associated with the wages of on-site employees and the cost of field office rent, furniture, computers, supplies and utilities. Revenues from leasing services provided to the Company's property management clients are reflected in brokerage rather than property management revenue. 24 NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 REVENUE on a consolidated basis for the nine months ended September 30, 1996 was $390.9 million, an increase of $66.0 million or 20.3% from $324.9 million for the nine months ended September 30, 1995. The overall increase in revenue, compared to the same period in 1995, reflected a continued improvement in the commercial real estate markets in most areas of the United States. This improvement reflected increasing investor confidence, increasing prices and a more liquid market than in prior periods resulting from declining vacancy levels and the return of some bargaining power to landlords. Property and User Services revenue was $341.5 million for the nine months ended September 30, 1996, an increase of $46.8 million or 15.9% from $294.7 million for the nine months ended September 30, 1995. Brokerage revenue accounted for $227.8 million, an increase of $18.8 million or 9.0% from $208.9 million, and investment properties revenue accounted for $80.4 million, an increase of $21.9 million or 37.4% from $58.5 million. These increases resulted in part from an increase in the total number and size of brokerage and investment properties sale transactions closed during the nine months ended September 30, 1996 compared to transactions closed during the nine months ended September 30, 1995. Although the number of lease transactions declined from the nine months ended September 30, 1995 to the nine months ended September 30, 1996, the average commission amount for lease transactions increased from the nine months ended September 30, 1995 to the nine months ended September 30, 1996, resulting in an overall increase in revenue from leasing. Property management revenue was $14.7 million, an increase of $1.6 million or 11.9% from $13.1 million and corporate services revenue was $17.4 million, an increase of $3.9 million or 28.9% from $13.5 million. Investor Services revenue was $49.4 million for the nine months ended September 30, 1996, an increase of $19.2 million or 63.6% from $30.2 million for the nine months ended September 30, 1995. This increase was primarily due to an increase in investment management and advisory revenue to $22.2 million from $11.6 million, resulting from the Westmark acquisition. Valuation and appraisal services revenue accounted for $13.1 million, an increase of $1.0 million or 8.5% from $12.1 million, and mortgage banking revenue was $14.0 million, an increase of $7.5 million or 114.8% from $6.5 million, primarily as a result of the Melody acquisition together with increased sales and refinancing activity. COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis for the nine months ended September 30, 1996 were $195.5 million, an increase of $27.9 million or 16.6% from $167.6 million for the nine months ended September 30, 1995. The increase in these costs is directly correlated to the increase in revenue since most of the Company's sales professionals are compensated based on revenue. As a percentage of revenue, commissions, fees and other incentives decreased from 51.6% to 50.0%. The decrease in commissions, fees and other incentives as a percentage of revenue is primarily due to the acquisition of Westmark, which significantly increased the revenue of investment management and advisory which does not incur this type of revenue-based expense. Excluding investment management and advisory, commissions, fees and other incentives, on a consolidated basis, were relatively flat as a percentage of revenue decreasing to 53.0% for the nine months ended September 30, 1996 from 53.5% for the nine months ended September 30, 1995. Property and User Services commissions, fees and other incentives were $184.0 million for the nine months ended September 30, 1996, an increase of $24.5 million or 15.3% from $159.5 million for the nine months ended September 30, 1995 and a decrease as a percentage of revenue from 54.1% to 53.9%. Investor Services commissions, fees and other incentives were $11.5 million for the nine months ended September 30, 1996, an increase of $3.4 million or 42.3% from $8.1 million for the nine months ended September 30, 1995 and a decrease as a percentage of revenue from 26.8% to 23.3%. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis for the nine months ended September 30, 1996 was $159.2 million, an increase of $24.4 million or 18.1% from $134.8 million for the nine months ended September 30, 1995, and decreased as a percentage of revenue for such periods from 41.5% to 40.7%. Property and User Services operating, administrative and other was $130.8 million for the nine months ended September 30, 1996, an increase of $14.7 million or 12.6% from $116.1 million for the nine months ended September 30, 1995. This increase was primarily associated with increased operating activities. Investor Services operating, administrative and other was $28.4 million for the nine months ended September 30, 1996, an increase of $9.7 million or 51.6% from $18.8 million for the nine months ended September 30, 1995, primarily resulting from the Westmark acquisition. 25 DEPRECIATION AND AMORTIZATION on a consolidated basis for the nine months ended September 30, 1996 was $9.7 million, an increase of $1.5 million or 19.3% from $8.2 million for the nine months ended September 30, 1995, resulting primarily from the Westmark and Melody acquisitions. Property and User Services depreciation and amortization was $6.8 million for the nine months ended September 30, 1996, an increase of $0.2 million or 3.2% from $6.6 million for the nine months ended September 30, 1995. Investor Services depreciation and amortization was $2.9 million for the nine months ended September 30, 1996, an increase of $1.4 million or 87.6% from $1.6 million for the nine months ended September 30, 1995. OPERATING INCOME on a consolidated basis for the nine months ended September 30, 1996 was $26.5 million, an increase of $12.2 million or 84.9% from $14.3 million for the nine months ended September 30, 1995. The increase in operating income resulted from an increase in revenue of $66.0 million or 20.3% partially offset by a related increase in commission expense of $27.9 million or 16.6%, a $24.4 million or 18.1% increase in operating expenses and a $1.5 million or 19.3% increase in depreciation and amortization as described above. Property and User Services operating income was $20.0 million for the nine months ended September 30, 1996, an increase of $7.4 million or 59.1% from $12.5 million for the nine months ended September 30, 1995. The increase in Property and User Services operating income resulted from an increase in Property and User Services revenue of $46.8 million or 15.9% partially offset by a related increase in commission expense of $24.5 million or 15.3%, a $14.7 million or 12.6% increase in operating expenses and a $0.2 million or 3.2% increase in depreciation and amortization as described above. Investor Services operating income was $6.5 million for the nine months ended September 30, 1996, an increase of $4.7 million or 268.5% from $1.8 million for the nine months ended September 30, 1995. The increase in Investor Services operating income resulted from an increase in Investor Services revenue of $19.2 million or 63.6% partially offset by a related increase in commission expense of $3.4 million or 41.5%, a $9.7 million or 51.6% increase in operating expenses and a $1.4 million or 87.6% increase in depreciation and amortization as described above. INTEREST INCOME on a consolidated basis for the nine months ended September 30, 1996 was $1.0 million, a decrease of $0.2 million or 15.7% from $1.2 million for the nine months ended September 30, 1995. INTEREST EXPENSE on a consolidated basis for the nine months ended September 30, 1996 was $17.9 million, an increase of $1.0 million or 5.5% from $16.9 million for the nine months ended September 30, 1995, primarily resulting from additional debt incurred with respect to the Westmark and Melody acquisitions, offset by reduced average bank borrowing levels on other Company indebtedness and a decline in interest rates on bank debt. NET PROVISION (BENEFIT) FOR INCOME TAX on a consolidated basis for the nine months ended September 30, 1996 was ($35.8) million, compared to a charge of $0.2 million for the nine months ended September 30, 1995. During the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income tax provision). With the recognition of deferred tax assets, the current period and the future periods provisions for income tax will be recorded at the full effective tax rate. For the nine months ended September 30, 1996, a $4.6 million provision for income taxes has been recorded. Net income for the nine months ended September 30, 1996 was $45.4 million ($3.29 per share of common stock), which includes the net benefit for income tax of $35.8 million. Net income for the nine months ended September 30, 1996 would have been $8.8 million ($.64 per share of common stock) if the Company had not recorded tax benefits related to projected future taxable income. An additional $16.3 million reduction of valuation allowances and related tax benefit is expected to be recorded in the fourth quarter of 1996 as a result of the Offering and related reduction in future interest expense. The $40.4 million recognized tax benefit has a material effect on the reported net income for the nine months ended September 30, 1996. This $40.4 million tax benefit is a non-recurring item and is unrelated to the Company's performance and should not be used in evaluating the Company's prospects or future performance. 26 NET INCOME on a consolidated basis for the nine months ended September 30, 1996 was $45.4 million ($3.29 per share of common stock), after giving effect to the tax benefit resulting from the reduction of valuation allowances of $40.4 million ($2.92 per share of common stock) an improvement of $47.0 million from a net loss of $1.6 million ($0.14 per share of common stock) for the nine months ended September 30, 1995. The improvement also resulted from a revenue increase of $66.0 million or 20.3% which was partially offset by a related increase in commission expense of $27.9 million or 16.6%, a $24.4 million or 18.1% increase in operating expenses and a $1.5 million or 19.3% increase in depreciation and amortization as described above. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 REVENUE on a consolidated basis in 1995 was $468.5 million, an increase of $39.5 million or 9.2% from $429.0 million in 1994. The overall increase in revenue, compared to 1994, reflected a continued improvement in the commercial real estate markets in most areas of the United States. This improvement reflected increasing investor confidence, increasing prices and a more liquid market than in prior years resulting from declining vacancy levels and the return of some bargaining power to landlords. Property and User Services revenue was $422.8 million in 1995, an increase of $22.5 million or 5.6% from $400.3 million in 1994. Brokerage revenue accounted for $294.3 million, an increase of $9.5 million or 3.3% from $284.8 million and investment properties revenue accounted for $87.6 million, an increase of $6.2 million or 7.6% from $81.4 million. Corporate services revenue accounted for $21.7 million, an increase of $6.1 million or 39% from $15.6 million. Although the number of sale and lease transactions closed decreased in 1995 from 1994, the average dollar amount of both sale and lease transactions increased approximately 9.0%, resulting in a net increase in brokerage and investment properties revenue. Investor Services revenue was $45.6 million in 1995, an increase of $16.9 million or 58.8% from $28.7 million in 1994, largely due to an increase in investment management and advisory revenue to $18.6 million from $5.9 million, primarily resulting from the Westmark acquisition. Valuation and appraisal services revenue accounted for $16.6 million, an increase of $3.3 million or 24.4% from $13.3 million and mortgage banking revenue accounted for $10.4 million, an increase of $0.9 million or 9.8% from $9.5 million. COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1995 were $239.0 million, an increase of $13.9 million or 6.2% from $225.1 million in 1994. The increase in these costs is directly correlated to the increase in revenue since most of the Company's sales professionals are compensated based on revenue. As a percentage of revenue, commissions, fees and other incentives decreased from 52.5% in 1994 to 51.0% in 1995. The decrease in commissions, fees and other incentives as a percentage of revenue is primarily due to the significant revenue growth of investment management and advisory, which does not incur this type of revenue-based expense. Excluding investment management and advisory, commissions, fees and other incentives on a consolidated basis remained constant as a percent of revenues at 53.2% for 1995 and 1994. Property and User Services commissions, fees and other incentives was $227.4 million in 1995, an increase of $11.9 million or 5.5% from $215.5 million in 1994 and a decrease as a percentage of revenue from 53.9% to 53.8%. Investor Services commissions, fees and other incentives was $11.6 million in 1995, an increase of $2.0 million or 21.4% from $9.6 million in 1994 and a decrease as a percentage of revenue from 33.4% to 25.6%. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1995 was $188.0 million, an increase of $17.8 million or 10.4% from $170.2 million in 1994, remaining relatively stable as a percentage of revenue for such periods at 40.0% and 39.7%, respectively. Property and User Services operating, administrative and other was $160.4 million in 1995, an increase of $8.3 million or 5.4% from $152.1 million in 1994. This increase was caused, in part, by additions to staff in anticipation of further increases in operating activities and resulted in higher levels of administrative, technical 27 and other support expenditures and related personnel costs, as well as higher business promotion and other expenses. Investor Services operating, administrative and other was $27.6 million in 1995, an increase of $9.5 million or 52.3% from $18.1 million in 1994, primarily resulting from the Westmark acquisition. DEPRECIATION AND AMORTIZATION on a consolidated basis in 1995 was $11.6 million, an increase of $3.5 million or 43.8% from $8.1 million in 1994 as a result of the Westmark acquisition and new capital leases for computer equipment entered into in 1995. Property and User Services depreciation and amortization was $8.9 million in 1995, an increase of $1.4 million or 18.8% from $7.5 million in 1994. Investor Services depreciation and amortization was $2.7 million in 1995, an increase of $2.1 million or 352.5% from $0.6 million in 1994. OPERATING INCOME on a consolidated basis in 1995 was $29.9 million, an increase of $4.3 million or 16.7% from $25.6 million in 1994. The increase in operating income resulted from an increase in revenue of $39.5 million or 9.2% partially offset by a related increase in commission expense of $13.9 million or 6.2%, a $17.8 million or 10.4% increase in operating expenses and a $3.5 million or 43.8% increase in depreciation and amortization as described above. Property and User Services operating income was $26.1 million in 1995, an increase of $0.9 million or 4.1% from $25.2 million in 1994. The increase in Property and User Services operating income resulted from an increase in Property and User Services revenue of $22.5 million or 5.6% partially offset by a related increase in commission expense of $11.9 million or 5.5%, an $8.3 million or 5.4% increase in operating expenses and a $1.4 million or 18.8% increase in depreciation and amortization as described above. Investor Services operating income was $3.7 million in 1995, an increase of $3.3 million or 704.6% from $0.4 million in 1994. The increase in Investor Services operating income resulted from an increase in Investor Services revenue of $16.9 million or 58.8% partially offset by a related increase in commission expense of $2.0 million or 21.4%, a $9.5 million or 52.3% increase in operating expenses and a $2.1 million or 352.5% increase in depreciation and amortization primarily as a result of the Westmark acquisition as described above. INTEREST INCOME on a consolidated basis in 1995 was $1.7 million, an increase of $0.6 million or 50.1% from $1.1 million in 1994. This increase primarily resulted from increased interest rates and improved cash management. INTEREST EXPENSE on a consolidated basis in 1995 was $23.3 million, an increase of $5.9 million or 34.0% from $17.4 million in 1994. This increase resulted from a general increase in interest rates, the full year impact of the higher interest rates on the senior secured and senior subordinated debt of LIBOR plus 250 basis points and LIBOR plus 125 basis points, respectively, which were effective June 30, 1994, and the addition of the debt incurred with respect to the Westmark acquisition, offset in part by reduced average borrowing levels on other Company indebtedness. NET INCOME on a consolidated basis in 1995 was $7.4 million ($0.55 per share of common stock), a decrease of $1.8 million or 19.2% from $9.2 million ($0.70 per share of common stock) in 1994. The increase in net income resulted from an increase in revenue of $39.5 million or 9.2% partially offset by a related increase in commission expense of $13.9 million or 6.2%, a $17.8 million or 10.4% increase in operating expenses, a $3.5 million or 43.8% increase in depreciation and amortization and an increase in interest expense of $5.9 million or 34.0% as described above. 28 YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 REVENUE on a consolidated basis in 1994 was $429.0 million, an increase of $37.0 million or 9.4% from $392.0 million in 1993. Property and User Services revenue was $400.3 million in 1994, an increase of $36.1 million or 9.9% from $364.2 million in 1993. Brokerage revenue accounted for $284.8 million, an increase of $14.7 million or 5.5% from $270.1 million and investment properties revenue accounted for $81.4 million, an increase of $14.0 million or 20.8% from $67.4 million. Corporate services revenue accounted for $15.6 million, an increase of $6.0 million or 62.1% from $9.6 million and property management revenue accounted for $17.7 million, an increase of $1.3 million or 7.7% from $16.4 million. These increases resulted in part from an increase in the total number and size of brokerage, investment properties and corporate services sale transactions closed during 1994 and in part from an increase in total size of brokerage lease transactions closed during 1994. Although the number of lease transactions declined in 1994 from 1993, the average lease commission amount increased by approximately 9.7%, resulting in an overall increase in revenue from leasing. Investor Services revenue was $28.7 million in 1994, an increase of $0.9 million or 3.1% from $27.8 million in 1993. Investment Management and Advisory revenue accounted for $5.9 million, an increase of $0.8 million or 15.9% from $5.1 million. Valuation and Appraisal Services revenue accounted for $13.3 million, a decrease of $2.3 million or 14.2% from $15.6 million as a result of a change in federal regulations, which modified appraisal standards and requirements. Mortgage Banking revenue accounted for $9.5 million, an increase of $2.3 million or 31.5% from $7.2 million, primarily resulting from improved availability of credit to finance commercial real estate transactions. COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1994 were $225.1 million, an increase of $19.0 million or 9.2% from $206.1 million in 1993. An increase in these costs is directly correlated to an increase in revenue since most of the Company's sales professionals are compensated based on revenue. As a percentage of revenue, commissions, fees and other expenses remained relatively flat decreasing from 52.6% in 1993 to 52.5% in 1994. Property and User Services commissions, fees and other incentives was $215.5 million in 1994, an increase of $19.1 million or 9.7% from $196.4 million in 1993 and a decrease as a percentage of revenue from 53.9% to 53.8%. Investor Services commissions, fees and other incentives was $9.6 million for both years, a decrease as a percentage of revenues from 34.6% to 33.3%. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1994 was $170.2 million, an increase of $10.2 million or 6.3% from $160.1 million in 1993, and remained relatively flat as a percentage of revenue for such periods at 39.7% and 40.8%, respectively, due to the cost control measures implemented in 1994. These increases were primarily the result of the Company's expansion of loan closing and underwriting activities and continuing investments in information technology and the additions of sales support personnel and LAN (local area network) administrators and technicians to enhance the productivity of sales personnel. Property and User Services operating, administrative and other was $152.1 million in 1994, an increase of $8.7 million or 6.1% from $143.4 million in 1993. Investor Services operating, administrative and other was $18.1 million in 1994, an increase of $1.4 million or 8.5% from $16.7 million in 1993. DEPRECIATION AND AMORTIZATION on a consolidated basis in 1994 was $8.1 million, a decrease of $41.5 million or 83.7% from $49.6 million in 1993 as a result of the write-off of intangibles in 1993 associated with the Acquisition. 29 Property and User Services depreciation and amortization was $7.5 million in 1994, a decrease of $36.8 million or 83.1% from $44.3 million in 1993. Investor Services depreciation and amortization was $0.6 million in 1994, a decrease of $4.7 million or 88.7% from $5.3 million in 1993. OPERATING INCOME on a consolidated basis in 1994 was $25.6 million, an improvement of $49.3 million from an operating loss of $23.7 million in 1993. The improvement in operating income resulted from an increase in revenue of $37.0 million or 9.4% partially offset by a related increase in commission expense of $19.0 million or 9.2%, a $10.2 million or 6.3% increase in operating expenses and a $41.5 million or 83.7% decrease in depreciation and amortization as a result of the write-off of intangibles in 1993 as described above. Property and User Services operating income was $25.2 million in 1994, an improvement of $45.1 million from $(19.9) million in 1993. The improvement in Property and User Services operating income resulted from an increase in Property and User Services revenue of $36.1 million or 9.9% partially offset by a related increase in commission expense of $19.1 million or 9.7%, an $8.7 million or 6.1% increase in operating expenses and a $36.8 million or 83.1% decrease in depreciation and amortization as a result of the write-off of intangibles in 1993 as described above. Investor Services operating income was $0.4 million in 1994, an improvement of $4.2 million from an operating loss of $3.8 million in 1993. The improvement in Investor Services operating income resulted primarily from a $4.7 million or 88.7% decrease in depreciation and amortization as a result of the write-off of intangibles in 1993 as described above. INTEREST INCOME on a consolidated basis in 1994 was $1.1 million, an increase of $0.2 million or 21.2% from $0.9 million in 1993. INTEREST EXPENSE on a consolidated basis in 1994 was $17.4 million, an increase of $3.2 million or 21.9% from $14.2 million in 1993. This increase resulted from a general increase in interest rates and the impact of the higher interest rates on the senior secured indebtedness and senior subordinated indebtedness, which were effective June 30, 1994. NET INCOME on a consolidated basis in 1994 was $9.2 million ($0.70 per share of common stock), an improvement of $46.4 million from a net loss of $37.2 million ($3.26 per share of common stock) in 1993. The improvement in net income resulted from an increase in revenue of $37.0 million or 9.4% partially offset by a related increase in commission expense of $19.0 million or 9.2%, a $10.2 million or 6.3% increase in operating expenses, a $41.5 million or 83.7% decrease in depreciation and amortization as a result of the write-off of intangibles in 1993 and an increase in interest expense of $3.3 million or 21.9% as described above. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and non-acquisition related capital expenditures primarily with internally generated funds, operating leases and, to a much lesser extent, capital leases, and borrowings under a revolving credit facility. In order to finance the acquisition of CB Commercial Real Estate Group, Inc. and related expenses, in April 1989 the Company incurred borrowings of $251.0 million, which included $170.0 million under a senior secured credit agreement (the "Senior Secured Credit Agreement") and $81.0 million under a senior subordinated credit agreement (the "Senior Subordinated Credit Agreement"). As of September 30, 1996, the Company had outstanding $139.8 million, including $4.8 million of deferred interest, under the Senior Secured Credit Agreement and $8.0 million under a revolving credit facility ("Revolving Credit Facility A"), no amounts outstanding under its second revolving credit facility ("Revolving Credit Facility B" and together with Revolving Credit Facility A, the "Revolving Credit Facilities") and $71.0 million (including $9.0 million of deferred interest) under the Senior Subordinated Credit Agreement. The outstanding amount under the Senior Secured Credit Agreement reflects principal repayments of $41.3 million since June 30, 1994. 30 In addition, as of September 30, 1996 the Company had outstanding other long- term indebtedness, consisting primarily of acquisition debt, totaling approximately $45.7 million. Consistent with the seasonality of the Company's revenue, as of October 31, 1996 all outstanding borrowings under the Revolving Credit Facility A have been repaid. $79.9 million of the net proceeds of the Offering will be used to repay a portion of the Senior Secured Credit Agreement and $9.0 million will be used to pay accrued and unpaid interest on the Senior Subordinated Credit Agreement. The remaining $1.6 million of net proceeds will be used for general corporate purposes, including to fund acquisitions. As proposed, effective upon completion of the Offering, the Revolving Credit Facility B will be converted into a facility for acquisitions and will bear interest at LIBOR plus 300 basis points. The Company has begun discussions to increase Revolving Credit Facility B from $10.0 million to $20.0 million sometime in 1997, although there can be no assurance that such discussions will be successful or if successful that $20.0 million will be adequate to finance the Company's acquisition program. In connection with the Offering and the repayment of a portion thereof, the senior secured lenders have agreed to amend the terms of the Senior Secured Credit Agreement. As amended, the Company will be required to make quarterly principal payments of $2.625 million commencing March 31, 1997 with a final payment of $2.2 million on September 30, 2001. Revolving Credit Facility A permits maximum borrowings of $20.0 million which must be paid off in full for at least 30 consecutive days in each year commencing with 1997. See "The Company's Credit Agreements--Senior Secured Debt Repayment and Amendments." Also in connection with the Offering, the senior subordinated lenders have agreed to amend the terms of the Senior Subordinated Credit Agreement. As amended, interest will be payable on a current basis commencing January 1, 1997 and the entire amount outstanding under the Senior Subordinated Credit Agreement will be due on July 23, 2002. Interest payments on the amounts outstanding under Senior Subordinated Credit Agreement had been deferred since June 1994 until the payment in full of amounts outstanding under the Senior Secured Credit Agreement. See "The Company's Credit Agreements--Senior Subordinated Debt Amendments." Upon consummation of the Offering and the Recapitalization, principal payments on the Senior Secured Credit Agreement, Senior Subordinated Credit Agreement and the Company's other indebtedness, including debt incurred to finance the acquisitions of Westmark and L.J. Melody, are as follows (in thousands):
PRO FORMA --------- 1996........................................................... $ 13,841 1997........................................................... 22,470 1998........................................................... 18,516 1999........................................................... 12,827 2000........................................................... 26,283 2001........................................................... 8,536 2002........................................................... 62,000 Thereafter..................................................... 3,181 -------- $167,654 ========
The Company expects to have capital expenditures of approximately $4.0 million in 1997. In connection with the Westmark acquisition, the sellers may be entitled to a supplemental purchase price based on the operating results of Westmark payable over a period of six years and subject to a maximum aggregate payment of $18.0 million. See "Note 1 of Notes to Consolidated Financial Statements." The Company expects to use net cash provided by operating activities for the next several years primarily to fund acquisitions, including earnout payments, and to make required principal payments under the Company's outstanding indebtedness. The Company believes that it can satisfy these obligations as well as working capital requirements from internally generated cash flow, borrowings under the Revolving Credit Facilities and, with respect to acquisitions, seller financing and third-party borrowing. 31 The 2.5% quarterly dividend on the Company's Preferred Stock, which will accrue from October 1, 1996, will result, if and when paid, in a cost of $1.0 million per quarter. The Company currently expects to pay dividends on the Preferred Stock out of working capital generated from operating cash flow after it has completed its acquisition program. The Company anticipates that its existing sources of liquidity, including cash flow from operations, will be sufficient to fund its operations for at least the next twelve months. The Company's EBITDA was $36.2 million, $22.5 million, $41.5 million, $33.7 million and $25.9 million for the nine months ended September 30, 1996, and September 30, 1995, and the years ended December 31, 1995, December 31, 1994 and December 31, 1993, respectively. The improvement in EBITDA in the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994 reflects the overall period to period revenue growth discussed above. EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income consisting of depreciation and the amortization of intangible assets relating to acquisitions. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated that can be used by the Company to service its debt and other required or discretionary purposes. Net cash that will be available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA. In addition, EBITDA should not be considered as an alternative to (i) operating income determined in accordance with GAAP or (ii) operating cash flow determined in accordance with GAAP. Ratio of earnings to fixed charges was 1.42, 0.93, 1.28 and 1.4 at September 30, 1996, September 30, 1995, December 31, 1995, December 31, 1994. For the year ended December 31, 1993 fixed charges exceeded earnings by $16.5 million due primarily to a write-off of certain intangible assets in the amount of $16.5 million. The improvement at September 30, 1996 compared to December 31, 1995 reflected an increase in earnings. CASH FLOWS Net cash provided by (used in) operating activities for the nine months ended September 30, 1996 was $24.2 million, an increase of $24.8 million from ($0.6) million for the nine months ended September 30, 1995. The increase resulted primarily from an improvement in net income, excluding the tax benefit from the reduction of valuation allowances, of $11.2 million. See "Net Operating Losses." Additionally, non-cash charges, consisting of depreciation, amortization and deferred compensation and interest, included in net income for the nine months ended September 30, 1996, were $3.6 million higher than for the nine months ended September 30, 1995. Net cash provided by operating activities was also impacted by changes in components of other operating assets and liabilities which provided a net increase to net cash provided by operating activities of $9.5 million. Net cash used in investing activities was $9.5 million for the nine months ended September 30, 1996, compared to $22.0 million for the nine months ended September 30, 1995 as a result of the Westmark acquisition in June 1995 and the L. J. Melody acquisition in July 1996. Net cash provided by (used in) financing activities was $(12.8) million for the nine months ended September 30, 1996, compared to $3.5 million for the nine months ended September 30, 1995. The $16.3 million decrease in cash provided by financing activities resulted from $18.2 million repayment of amounts outstanding under the Senior Secured Credit Agreement as compared to $14.8 million repayment for the nine months ended September 30, 1995, $21.0 million proceeds offset by $13.0 million repayment from the Revolving Credit Facility A during the nine months ended September 30, 1996 as compared to $14.0 million proceeds offset by $4.0 million repayment for the nine months ended September 30, 1995, a $0.7 million reduction in capital lease repayments and $10.0 million proceeds from senior subordinated loans in connection with the Westmark acquisition during the nine months ended September 30, 1995. 32 Net cash provided by operating activities was $30.6 million in 1995 compared to $31.4 million in 1994. The decrease primarily resulted from a reduction in net income of $1.8 million in 1995 compared to 1994, offset in part by changes in components of operating assets and liabilities. Net cash provided by operating activities in 1994 was $31.4 million compared to $19.6 million in 1993. The increase primarily resulted from an increase in net income of $46.3 million, offset by changes in components of operating assets and liabilities. Net cash used in investing activities was $24.9 million in 1995 compared to $3.9 million in 1994. The increase was caused by the acquisitions of Westmark and Langdon Rieder in 1995 for $22.4 million (see "Business--Acquisitions"), partially offset by a $2.1 million decrease in purchases of property and equipment. Net cash used in investing activities was $3.9 million in 1994 compared to $5.6 million in 1993. The decrease was primarily caused by a decrease in purchases of property and equipment and a reduction in other investing activities. Net cash used in financing activities was $11.5 million in 1995 compared to $4.9 million in 1994. The increase in 1995 resulted from the $19.0 million repayment of senior term loans and $2.2 million repayment of capital leases, partially offset by proceeds from the senior subordinated loan of $10.0 million. Net cash used in financing activities was $4.9 million in 1994 compared to $14.7 million in 1993. The decrease in 1994 resulted from the $14.0 million net repayment of senior revolving credit line in 1993, partially offset by the $4.1 million repayment of senior term loans in 1994. NET OPERATING LOSSES The Company had NOLs of approximately $221.0 million as of December 31, 1995, corresponding to $77.6 million of the Company's $87.5 million in net deferred tax assets, all of which were reserved through valuation allowances. The valuation allowances were based on management's conclusion regarding the realizability of this deferred tax asset on a more likely than not basis, as defined in SFAS No. 109. In reaching this conclusion, management considered the Company's past operating results, the current year events and trends, including the impact, if any, of the acquisitions that were concluded during the year and other factors. Management evaluates the appropriateness of all or part of these valuation allowances on a periodic basis and if the Company concludes there is a change with respect to realizability, any necessary adjustments are made at that time. As of September 30, 1996, the Company has experienced continuing profitability due to a variety of reasons, including the strength of the commercial real estate markets. In addition, the Company has operated Westmark for one full year since acquiring Westmark in June 1995, and as a result has concluded that Westmark should make a positive contribution to the Company's consolidated taxable income. Finally, the acquisition of L.J. Melody in July 1996 is also expected to make a positive contribution to the Company's consolidated taxable income. As a result of these factors, during the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income tax provision). With the recognition of deferred tax assets, the current period and the future periods provisions for income tax will be recorded at the full effective tax rate. For the nine months ended September 30, 1996, a $4.6 million provision for income taxes has been recorded. Net income for the nine months ended September 30, 1996 was $45.4 million ($3.29 per share of common stock), which includes the net benefit for income tax of $35.8 million. Net income for the nine months ended September 30, 1996 would have been $8.8 million ($.64 per share of common stock) if the Company had not recorded tax benefits related to projected future taxable income. An additional $16.3 million reduction of valuation allowances and related tax benefit is expected to be recorded in the fourth quarter of 1996 as a result of the Offering and related reduction in future interest expense. The $40.4 million recognized tax benefit has a material effect on the reported net income for the nine months ended September 30, 1996. This $40.4 million tax benefit is a non-recurring item and is unrelated to the Company's performance and should not be used in evaluating the Company's prospects or future performance. The Company would have to generate future taxable income of approximately $110 million to realize the deferred tax assets 33 recorded on the consolidated balance sheet as of September 30, 1996. The Company's taxable income has historically been higher than pretax income for financial reporting primarily due to certain charges in the financial statements that were not deductible for tax purposes. The Company expects its full year 1996 taxable income to be higher than its full year pretax earnings for financial reporting purposes. The Company believes that its future taxable income will be adequate to realize the deferred tax assets on the September 30, 1996 balance sheet. In addition, the Company believes that when the Offering is completed, it will be able to generate additional taxable income in the future through interest savings resulting from the paydown of part of its Senior Secured Credit Agreement using the proceeds from the Offering. Accordingly, the Company expects to record an estimated additional reduction in the deferred tax asset valuation allowances of $16.3 million upon completion of the Offering. The ability of the Company to utilize NOLs may also be limited in the future if an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, were deemed to occur. Such an ownership change may be deemed to occur if the Company engages in certain transactions involving the issuance of shares of Common Stock, including the issuance of shares of Common Stock in connection with an acquisition or otherwise or by reason of a sale of capital stock by an existing shareholder. If an ownership change were to occur, Section 382 would impose an annual limit on the amount of NOLs the Company could utilize. The Company believes that the Offering and Recapitalization will not result in an ownership change. An ownership change may not be within the control of the Company, however, and therefore there is no assurance that an ownership change will not occur in the future. The availability of NOLs is, in any event, subject to uncertainty since their validity is not reviewed by the Internal Revenue Service until such time as they are utilized to offset income. INFLATION The Company's operations are directly affected by various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand versus general inflation. NEW ACCOUNTING PRONOUNCEMENTS In 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions and SFAS No. 112, Employers' Accounting for Postemployment Benefits. These standards did not have a material impact on the Company's financial statements. Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, SFAS No. 122, Accounting for Mortgage Servicing Rights and SFAS No. 123, Accounting for Stock-Based Compensation. These standards did not have a material impact on the Company's financial statements. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement is required to be adopted by the Company in 1997. Management of the Company has not yet determined the impact, if any, that the adoption of this statement will have on the Company's financial position or results of operations. QUARTERLY RESULTS OF OPERATIONS AND OTHER FINANCIAL DATA The following table sets forth certain unaudited consolidated statement of operations data for each of the Company's last eleven quarters and the percentage of the Company's revenues represented by each line item 34 reflected in each consolidated income statement. In the opinion of management, this information has been presented on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and includes all adjustments, consisting only of normal recurring adjustments and accruals, that the Company considers necessary for a fair presentation. The unaudited quarterly information should be read in conjunction with the audited 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.
1996 1995 1994 ---------------------------- -------------------------------------- -------------------------------------- SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Results of Opera- tions: Revenue.......... $147,168 $130,954 $112,741 $143,570 $116,603 $108,361 $ 99,926 $128,905 $112,843 $103,730 $ 83,510 Costs and expenses: Commissions, fees and other incentives..... 74,196 66,262 55,007 71,449 57,804 57,370 52,395 67,919 59,645 54,367 43,154 Operating, administrative and other....... 56,042 53,594 49,560 53,129 47,803 44,206 42,830 46,316 42,675 42,487 38,756 Depreciation and amortization... 3,431 3,038 3,280 3,458 3,546 2,297 2,330 2,562 1,797 1,783 1,949 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss).......... 13,499 8,060 4,894 15,534 7,450 4,488 2,371 12,108 8,726 5,093 (349) Interest income.. 286 354 395 446 345 393 490 370 270 255 214 Interest expense. 6,196 5,759 5,928 6,323 6,428 5,313 5,203 4,747 5,383 3,790 3,442 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax...... 7,589 2,655 (639) 9,657 1,367 (432) (2,342) 7,731 3,613 1,558 (3,577) Provision (benefit) for income tax...... 4,220 438 (48) 603 138 26 74 (73) 75 75 75 Reduction of valuation allowances...... (40,400) -- -- -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net provision (benefit) for income tax...... (36,180) 438 (48) 603 138 26 74 (73) 75 75 75 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ 43,769 $ 2,217 $ (591) $ 9,054 $ 1,229 $ (458) $ (2,416) $ 7,804 $ 3,538 $ 1,483 $ (3,652) ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Other Financial Data: EBITDA........... $ 16,930 $ 11,098 $ 8,174 $ 18,992 $ 10,996 $ 6,785 $ 4,701 $ 14,670 $ 10,523 $ 6,876 $ 1,600 Net cash provided by (used in) operating activities...... $ 22,150 $ 13,865 $(11,845) $ 31,133 $ 7,564 $ 6,418 $(14,483) $ 21,911 $ 13,817 $ 5,894 $(10,204) Net cash (used in) investing activities...... $ (9,401) $ 1,768 $ (1,884) $ (2,928) $ (595) $(18,887) $ (2,478) $ (1,321) $ (1,006) $ (748) $ (790) Net cash provided by (used in) financing activities...... $(15,297) $ (4,306) $ 6,808 $(16,002) $ (8,098) $ 15,391 $ (2,760) $ (4,369) $ (5,114) $ (5,407) $ 9,967
AS A PERCENTAGE OF REVENUES -------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------- ------------------------------------------- ------------------------- SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Revenue.......... 100.0 % 100.0% 100.0 % 100.0% 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0% 100.0 % Costs and ex- penses: Commissions, fees and other incentives..... 50.4 50.6 48.8 49.8 49.6 52.9 52.4 52.7 52.9 52.4 51.7 Operating, administrative and other...... 38.1 40.9 44.0 37.0 41.0 40.8 42.9 35.9 37.8 41.0 46.4 Depreciation and amortization... 2.3 2.3 2.9 2.4 3.0 2.1 2.3 2.0 1.6 1.7 2.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Operating income (loss).......... 9.2 6.2 4.3 10.8 6.4 4.2 2.4 9.4 7.7 4.9 (0.4) Interest income.. 0.2 0.3 0.3 0.3 0.3 0.3 0.5 0.3 0.3 0.3 0.2 Interest expense. 4.2 4.4 5.2 4.4 5.5 4.9 5.2 3.7 4.8 3.7 4.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision (benefit) for income tax...... 5.2 2.1 (0.6) 6.7 1.2 (0.4) (2.3) 6.0 3.2 1.5 (4.3) Provision for income tax...... 2.9 0.3 (0.0) 0.4 0.1 0.0 0.1 (0.1) 0.1 0.1 0.1 Reduction of valuation allowances...... (27.5) -- -- -- -- -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net provision (benefit) for income tax...... (24.6) 0.3 (0.0) 0.4 0.1 0.0 0.1 (0.1) 0.1 0.1 0.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss).......... 29.7 % 1.8% (0.6)% 6.3% 1.1% (0.4)% (2.4)% 6.1 % 3.1% 1.4% (4.4)% ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
35 BUSINESS COMPANY OVERVIEW Founded in 1906, the Company believes that it is the largest vertically- integrated commercial real estate services company in the United States with aggregate 1995 revenue of $468.5 million, and 231 business unit offices in 107 locations. In addition, the Company has established exclusive alliances with international commercial real estate services firms which have offices in an additional 109 locations in 30 countries. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research (collectively, "Property and User Services"), and (ii) mortgage banking (mortgage loan origination and servicing), investment management and advisory services, and valuation and appraisal services (collectively, "Investor Services"). Management believes that, on the basis of revenue, its brokerage and independent commercial mortgage loan origination are the largest such businesses in the United States, and that the Company is among the top ten providers of commercial property management and mortgage loan servicing in the United States. The Company believes that one of its most important competitive advantages as a diversified commercial real estate services provider is its ability to capitalize on the significant deal flow and strong market presence of its core brokerage, investment properties and property management businesses. These businesses provide the Company with real-time, in-depth local, national and, through its alliances, international market information and entree to clients. This real-time information is employed for the benefit of all of the Company's business disciplines and enables the Company to capitalize upon client demand for a variety of integrated commercial real estate services. The Company's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. The Company believes that it enjoys a variety of competitive advantages in the commercial real estate services industry, including the Company's-- . 90-year tradition and history of providing high-quality services and client coverage; . Internationally recognized "brand" identity which the Company believes is widely respected in the real estate services industry; . Experienced and trained professionals in all business disciplines, including approximately 2,000 sales professionals in Property and User Services who have an average tenure of more than eight years with the Company; . Multi-discipline capabilities and extensive multi-market network; . State-of-the-art technology and professional education programs which enable the Company to deliver superior services; . Experienced management team, the executive and key employees of which have an average tenure of more than 16 years with the Company and will own collectively approximately 15.9% of the Company's Common Stock (including exercisable stock options and shares held through the Company's Deferred Compensation Plan) after the Offering; and . Employees who will own more than 40% of the Common Stock of the Company after the Offering. INDUSTRY TRENDS Over the last ten years, the commercial real estate industry has experienced various structural changes and more recently has been experiencing a broad recovery from the real estate "depression" of the early 1990s. Management believes these factors and the resulting trends, the most important of which are discussed below, create an opportunity for the Company to leverage its experience, multi-discipline integrated services, multi-market presence and brand equity to its competitive advantage. 36 . CHANGING COMPOSITION AND NEEDS OF INVESTORS IN AND OWNERS OF COMMERCIAL REAL ESTATE ASSETS. Investors in and owners of commercial real estate assets have become increasingly institutional. Simultaneously, their investment and management needs have become increasingly multi-market due to the fact that the commercial real estate properties in their portfolios are typically located in numerous geographic locations. This change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for and growth of sophisticated multi-service, nationally-oriented real estate service providers. . CONTINUING CORPORATE OUTSOURCING TREND. Shareholder pressure for higher performance and return on equity within most American corporations in the 1980's heightened corporate managements' awareness that corporate real estate assets are a major component of corporate net worth. Simultaneously, with competitive pressures encouraging greater focus on core businesses, companies have emphasized leaner staffing in non- core activities and, as a result, outsourced their non-core activities to third-parties. As a consequence, the demand for multi-discipline, multi-market professional real estate service firms that provide integrated services capable of supplementing a corporate real estate department has increased significantly. . ONGOING INDUSTRY CONSOLIDATION. The Company believes that the combination of more intense institutional and corporate real estate service needs and demands, together with the real estate "depression" of the early 1990s, has made it imperative that real estate service firms (i) provide comprehensive, high-quality services, (ii) make significant investments in corporate infrastructure, including information technology and professional education, and (iii) have access to sufficient capital to support these service and investment needs. These factors have fueled the current consolidating industry environment, which the Company believes will motivate local and regional real estate service providers to sell to, or form alliances with, major national and international companies. . EXPANDING CMBS MARKET. Historically, the majority of third-party financing for commercial real estate assets was provided by banks and insurance companies who generally held the mortgage loans they originated to the maturity date of the mortgage loans. More recently, Wall Street firms and financial institutions have been providing a significant amount of third-party mortgage financing, and have been accessing the public debt markets by issuing CMBs in order to securitize their portfolios and avoid holding mortgage loans for the long-term. The Company believes that its overall market presence, extensive available market data and access to real estate transaction deal flow positions its mortgage banking business to benefit substantially from the expansion of the CMBS market. The Company's national geographic coverage and mortgage origination capabilities create the opportunity to be a major supplier of mortgages to the CMBS market. In addition, the Company expects to service a majority of the mortgage loans that it originates, and the profit margin potential for servicing an increasing volume of mortgage loans may be significant to the Company's mortgage banking business. The acquisition and subsequent combination with L.J. Melody in July 1996 was a strategic step in substantially expanding the Company's capabilities in this area. The Company does not currently securitize loans and has no present intention of doing so. . RECOVERING COMMERCIAL REAL ESTATE MARKETS. Coincident with the longer term structural shifts in the commercial real estate industry, commercial real estate markets in the United States have been recovering over the last several years, experiencing increased activity in many product types and geographic market areas. This has been particularly true in California, where the Company has a significant market presence. National office and industrial building occupancy levels have generally been rising, rental rates are beginning to increase, and correspondingly, property values are increasing. 37 Geographically, recoveries are underway in a number of major U.S. real estate markets where the Company has operations, including California, Arizona, Texas, and the Washington, D.C./Baltimore areas. Additionally, the Company believes market activity levels in Chicago, Philadelphia, Seattle, and Atlanta have increased. BUSINESS OBJECTIVE AND GROWTH STRATEGIES The Company's primary business objective is to continue to expand through acquisitions and internal growth, while simultaneously delivering strong consistent growth in its annual results of operations. The key business strategies by which the Company plans to accomplish this objective include-- . LEVERAGING EXISTING BUSINESS DISCIPLINES, MARKET PRESENCE AND "BRAND" EQUITY TO CAPITALIZE ON INDUSTRY STRUCTURAL CHANGES. The Company believes that structural changes in the market for commercial real estate have led to an increasing demand for real estate services providers who can satisfy a wide range of customer needs on a vertically- integrated basis. Furthermore, as the ownership of commercial real estate becomes increasingly institutional, large firms who can efficiently service a nationwide real estate portfolio are gaining market share over smaller local and regional operators. The Company's ability to provide multi-discipline, integrated real estate services on a nationwide basis with strong brand identity is an important competitive advantage. The Company's strategy is to leverage these advantages to grow its revenues and market share in the large and fragmented real estate services industry. . PURSUING STRATEGIC ACQUISITIONS AND PARTNERSHIPS TO STRENGTHEN EXISTING BUSINESS AND EXPAND GEOGRAPHIC COVERAGE. Although the Company is currently a leading national provider of multi- discipline, integrated commercial real estate services, 37% of its total sale and lease revenue in 1995 was generated from transactions originated in the state of California. Through strategic acquisitions and partnerships, the Company intends to continue to strengthen, not only the range and quality, but also the geographic coverage of its services. The Company has recently completed three strategic acquisitions -- L.J. Melody (mortgage banking), Westmark (investment management and advisory services), and Langdon Rieder (corporate services). In addition, through its "CB Commercial/Partners" program, the Company has begun establishing relationships with leading local brokerage firms in order to expand the Company's geographic coverage in markets that are not currently being served by the Company. Due to the fragmented nature of the commercial real estate services industry, the Company believes that there will be substantial opportunities to strengthen its capabilities through acquisitions and strategic partnerships, and a tactical plan for growth through acquisitions has been developed for implementation over the next several years. As the Company continues to strengthen its integrated services capability, it intends to develop and/or acquire additional service disciplines to expand its client relationships. Development and construction management, dedicated facilities management, and real estate merchant banking are a few of the services under consideration and study. The Company believes it can increase its market share by increasing its services "menu" and the capabilities offered to its clients. . BENEFITTING FROM RECOVERING COMMERCIAL REAL ESTATE MARKETS. In addition to growth through expansion opportunities, brokerage fees and property management fees from contracts with existing clients have begun to increase as a result of the recovery in U.S. commercial real estate markets and the generally rising level of occupancy and rental levels and, as a result, property values. Since brokerage fees are typically based upon a percentage of transaction value, and property management fees are typically based upon a percentage of total rent collections, recent occupancy and rental rate increases at the property level have generated an increase in brokerage and property management fees to the Company. 38 . CAPITALIZING ON THE CORPORATE OUTSOURCING TREND. Large corporations seeking to focus on core businesses and reduce operating costs are looking to the multi-discipline, integrated national and international real estate service provider to outsource their real estate needs. By relying on a single integrated provider for all their real estate- related needs, corporations are able to reduce their ongoing overhead expense while taking advantage of the Company's real estate expertise. This outsourcing trend has accelerated in recent years and the Company believes that it will continue in the future. The Company is one of the major participants in this segment of the real estate services industry and believes that only a small percentage of the market has been penetrated. As a result, this trend provides the Company with attractive revenue opportunities. . GENERATING INTERNAL GROWTH BY INCREASING MARKET SHARE AND EMPLOYEE PRODUCTIVITY. Market Share. In order to increase its market share in the markets that the Company currently serves, the Company is focusing on increasing the number of brokerage professionals in its existing national network of offices. The Company's current sales professionals only occupy approximately 73%, on average, of its available office space for sales professionals, and the Company believes that revenue growth can be generated without a corresponding growth in management and infrastructure costs through the hiring of additional professionals. Employee Productivity. The Company also focuses on the enhancement of revenues and profit margins through the delivery of services to its clients in a more efficient manner. In order to improve each employee's productivity, the Company invests a substantial amount on an annual basis in information technology and for the professional education of both its management and revenue-producing professionals through its training programs, provided by its CB Commercial University. The success of this strategy is evidenced by the annual improvement in revenues per employee in the Company's brokerage group. Since 1993, the average revenue per sales professional has increased approximately 23% from $176,000 to $216,000 in 1995, while spending on information technology and professional development per employee increased approximately 16% from $2,800 to $3,300 in 1995. Through previously made and continuing investments in information technology and professional education, the Company believes it is well-positioned for further employee productivity gains. . ENCOURAGING LOCAL MARKET INNOVATION WITHIN CB COMMERCIAL'S QUALITY FRAMEWORK. In order to deliver consistently superior, vertically-integrated services, the Company requires each office to adhere to strict standards of quality consistency. Although the Company encourages each business discipline to innovate locally to meet its respective clients' needs, the Company believes that this framework, or "envelope" of consistency, is responsive to client demand, strengthening client relationships and increasing the potential for multiple assignments with each client. . CAPITALIZING ON CROSS BORDER ACTIVITY BY INCREASING INTERNATIONAL PRESENCE. Internationally, the Company has established exclusive alliances in various markets throughout Europe with DTZ and in Asia with C.Y. Leung, both leading firms in their respective markets. Historically, the Company's ability to offer real estate acquisition and disposition services, including related advisory services, internationally has enabled it to expand market share with its domestic clients, especially corporations. In addition, Westmark is currently exploring the development of new cross-border investment products in conjunction with DTZ and C.Y. Leung. ACQUISITIONS The Company is continually assessing acquisition opportunities as part of its growth strategy. Management believes that there are significant opportunities in the fragmented and consolidating real estate services industry to acquire additional companies to complement and expand the Company's existing operations. Since the beginning of 1995, the Company has completed three strategic acquisitions-- 39 L.J. MELODY. In July 1996, the Company acquired L.J. Melody for $15.0 million, including $6.0 million in seller financing, of which $2.3 million is contingent upon the continued employment by the Company of the former owner of L.J. Melody. The combined pre-acquisition mortgage originations of the Company and L.J. Melody for 1995 were $2.5 billion, and the combined pre-acquisition mortgage loans serviced as of December 31, 1995 were $7.3 billion. The L.J. Melody acquisition provides the Company with leadership for its own mortgage banking business, access to mortgage loan sources not previously available to the Company and the enhanced ability to access its investment properties and brokerage businesses as a source of mortgage originations. The Company expects to complete the integration of its mortgage banking business with that of L.J. Melody in the fourth quarter of 1996. The combined businesses will be headquartered in Houston, Texas. WESTMARK. In June 1995, the Company acquired Westmark, a Los Angeles, California-based investment management and advisory business with approximately $3.0 billion of assets under management. The purchase price for Westmark was $37.5 million plus $2.9 million in net liabilities assumed and an additional $1.0 million in costs related to the acquisition, with $20.0 million financed by the sellers, $10.0 million financed by a venture capital affiliate of a national bank and $7.5 million paid in cash by the Company. The sellers are also entitled to receive up to an additional $18.0 million of purchase price and $4.0 million of bonuses over a six-year period based upon Westmark's adjusted operating income. By early 1996, the Company had combined its $880.0 million investment management and advisory business with that of Westmark to create a company with approximately $3.7 billion in tax-exempt assets under management. The Westmark acquisition has moved the Company into a business area which the Company believes has the potential for significant growth and high margins. LANGDON RIEDER. In April 1995, the Company acquired Langdon Rieder, a nationally-known tenant representation firm based in Los Angeles, California, for $1.5 million in cash, and a deferred payment of $1.9 million payable over three years ($633,333 payable on each of January 2, 1997, 1998 and 1999). This acquisition strengthened the Company's ability to provide sophisticated tenant representation services to its corporate clients. Langdon Rieder has been combined with the Company's CBC/Madison Advisory Group, enhancing the Company's corporate services capabilities. The Company expects to continue its acquisitions program over the next several years and will focus on acquisitions in its mortgage banking, property management, and investment management and advisory businesses. The Company will also consider opportunistic acquisitions for its brokerage and investment properties businesses. Based upon its historical experience, the Company believes that seller financing generally will provide 40% to 50% of the purchase price for an acquisition, with the balance financed from third-party borrowings and internally generated cash flow. Because of the substantial non-cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting and because of interest expense associated with acquisition financing, management anticipates that future acquisitions may adversely affect net income. In addition, during the first six months following an acquisition, the Company believes there are generally significant one-time costs relating to integrating information technology, accounting and management services and rationalizing personnel levels. Management's strategy is to pursue acquisitions that are expected to be accretive to EBITDA after all integration costs. THE COMPANY'S BUSINESSES PROPERTY AND USER SERVICES BROKERAGE The Company has provided commercial real estate brokerage services since 1906 through the representation of buyers, sellers, landlords and tenants in connection with the sale and lease of office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. The Company believes that it is the 40 largest provider of commercial real estate brokerage services in the United States, based upon both 1995 total revenues, and the number of completed transactions, which totaled approximately $294.3 million and approximately 19,800, respectively. In 1995, brokerage facilitated over 2,500 sale transactions with an aggregate estimated total consideration over $2.5 billion and approximately 17,500 lease transactions involving aggregate rents, under the terms of leases facilitated, of over $8.3 billion. Brokerage services comprise the largest source of revenue for the Company and provide a foundation for growing the Company's other disciplines which make up its multi-discipline integrated commercial real estate services. The Company believes that its position in the brokerage services industry provides a competitive advantage for all of its lines of business by enabling them to leverage off brokerage's (i) national network of relationships with owners and users of commercial real estate, (ii) real-time knowledge of completed transactions and real estate market trends, and (iii) brand recognition in the brokerage area. Operations. As of September 30, 1996 the Company employed approximately 1,640 brokerage professionals in 79 offices located in most of the largest MSAs in the United States. The Company maintains a decentralized approach to brokerage services, bringing significant local knowledge and expertise to each assignment. Each local office draws upon the broad range of support services provided by the Company's other business groups, including a national network of market research, mortgage originations, client relationships and transaction referrals which the Company believes provide it with significant economies of scale over many local competitors. Each brokerage services professional is carefully selected based upon education, experience and knowledge of commercial real estate and receives on- going training through centralized and local office education programs. The Company believes that its market position provides a competitive advantage for recruiting and retaining its employees. As of September 30, 1996, the average tenure of sales professionals in Property and User Services was over eight years. Collectively, the Company's sales professionals only occupy approximately 73%, on average, of the Company's available office space for sales professionals, and substantive revenue growth can be generated without corresponding growth in management and infrastructure costs through the hiring of additional professionals. In order to increase market share in its domestic brokerage business, the Company recently announced a plan to establish "partnerships" with leading local firms in order to institute geographic coverage in markets that currently are not being served by the Company. To date, through the "CB Commercial/Partners" program, the Company has identified approximately 80 markets on which it intends to focus during the next three years. To date, the Company has established such partnership-type arrangements in Pittsburgh, Pennsylvania and Memphis, Tennessee. Revenue anticipated from this program will be a combination of an initial fee, fixed annual fees and a percentage of revenue in excess of a pre-agreed threshold, comparable to a classic franchise program. This program requires minimal capital outlay, and management believes it has an attractive profit potential once the initial infrastructure is established. Compensation. Under a typical brokerage services agreement, the Company is entitled to receive sale or lease commissions. Sale commissions, which are calculated as a percentage of sales price, are generally earned by the Company at the close of escrow. Sale commissions typically range from approximately 1% to 6% with the rate of commission declining as the price of the property increases. Lease commissions, which are calculated as a percentage of the minimum rent payable during the term of the lease, are generally earned by the Company at the commencement of a lease and are not contingent upon the tenant fulfilling the terms of the lease. In cases where a third-party brokerage firm is not involved, lease commissions earned by the Company for a new lease typically range between 2% and 6% of minimum rent payable under the lease depending upon the value of the lease. For renewal of an existing lease, such fees are generally 50% of a new lease commission. In sales and leases where a third-party broker is involved, the Company must typically share 50% of the commission it would have otherwise received with the third-party broker. The Company's brokerage sales professionals typically receive 50% of the Company's share of commissions before costs and expenses. 41 INVESTMENT PROPERTIES Since 1992, investment properties has provided sophisticated strategic planning for, and execution of, acquisitions and sales of income-producing properties for its clients. In 1995, the Company completed approximately 1,000 investment property transactions with an aggregate value over $4.0 billion, generating total revenues of $87.6 million, exceeding the transaction volume of most of its major competitors, including investment banking firms in the United States. Based upon these results, the Company believes that it is one of the largest providers of commercial real estate investment properties services in the United States. On behalf of property owners seeking to dispose of investment properties, the Company strives to ensure that the owner achieves the maximum value in the minimum amount of time by providing services which include (i) accessing the Company's proprietary databases and other information sources to provide real-time knowledge of available properties, completed comparable transactions, real estate market trends, and active investors in the market, and to assist with valuation and buyer identification, and (ii) designing the appropriate marketing strategy that allows the owner to target probable buyers or buyer categories. On behalf of prospective investors, access to the same sources of information provides the Company's clients with a competitive advantage by enabling the Company's professionals (i) to identify the geographical areas and specific properties which are most suitable for the investor and (ii) to advise investors in negotiations and due diligence. Operations. As of September 30, 1996, the Company employed approximately 280 investment properties professionals who exclusively handle acquisitions and sales of investment properties and are located in 37 offices in most of the largest MSAs in the United States. As of September 30, 1996, the average tenure of brokerage and investment properties sales professionals with the Company was more than eight years. A team of professionals with expertise within a given market and property type is assembled for each investment properties assignment to best accomplish the client's objectives. As necessary, the team may also include professionals from the Company's other disciplines. On larger and more complex assignments, the Company's financial consulting professionals provide sophisticated financial and analytical resources to the client, the marketing team and the investor. This counseling is accomplished by identifying cash flow, accounting and tax issues in order to propose appropriate strategies for optimal financial results. These services provide the client with in-depth analyses of transaction specific data as well as real estate market data. Additionally, mortgage banking may be involved to provide advice regarding available debt financing as well as the origination of new debt. Compensation. Under a typical investment properties agreement, the Company is entitled to receive sale commissions, which are calculated as a percentage of sales price and are generally earned by the Company at the close of escrow. In cases where another real estate broker is not involved, sale commissions earned by the Company typically range from 1% to 6% of the sales price, with the rate of commissions generally declining as the sales price increases. In cases where another firm is involved in the transaction, the Company must typically share up to 50% of the commission it would have otherwise received with the other firm. The Company's investment properties professionals typically receive 50% of the Company's commission before costs and expenses. CORPORATE SERVICES Since 1992, the Company has provided corporate services through CBC/Madison Advisory Group, assisting corporations in developing and executing multiple- market real estate strategies. The Company's objective is to establish long- term relationships with corporations that require continuity in the delivery of high-quality, multi-market management services and strategic advisory services including acquisition, disposition and consulting services. Global competition, the focus on quality, "right-sizing" of corporate organizations and changes in management philosophy have all contributed to an increased interest in and reliance on outside third-party real estate service providers. Specifically, through contractual relationships, the Company assists major, multi-market companies in developing and executing real estate strategies as well as addressing specific occupancy and facilities management objectives. Corporate services coordinates the utilization of all the Company's various 42 disciplines to deliver an integrated service to its clients. Essentially, Corporate Services expands a client's real estate department and supports most of the functions involved in a corporate real estate department. The Company's clients include, as examples, the following Fortune 500 companies -- Allstate Insurance Co. Inc., American Express, Eastman Kodak Co. Inc., Ford Motor Company, Gillette Company Inc., Household International Inc., IBM, John Hancock Mutual Life Insurance Co. Inc., McDonald's, Northwest Mutual, and Prudential Insurance Co. Operations. CBC/Madison Advisory Group is organized into three geographic regions in the Eastern, Western and Central areas of the United States, with each geographic region comprised of consulting, corporate services and team management professionals who provide corporate service clients with a broad array of financial, real estate, technological and general business skills. In addition to CBC/Madison Advisory Group's objective of providing a full range of corporate services in a contractual relationship, the group will respond to client requests generated by other Company business groups for significant, single-assignment acquisition, disposition and consulting assignments that may lead to long-term relationships. Compensation. A typical corporate services agreement gives the Company the right to execute some or all of the client's future sales and leasing transactions. The commission rate with respect to such transactions frequently reflects a discount for the captive nature and large volume of the business. Term. A typical corporate services agreement includes a stated term of at least one year and normally contains provisions for extensions of the agreement. Agreements typically include a provision for cancellation by either party, upon notice, within a specified short time frame. PROPERTY MANAGEMENT The Company provides value-added property management services for income- producing properties owned primarily by institutional investors and, as of September 30, 1996, managed approximately 104 million square feet of commercial space. According to National Real Estate Investor's 1996 Annual Survey of property managers, the Company's property management business was ranked the eighth largest in the United States based on square footage under management during 1995. Property management services include maintenance, marketing and leasing services for investor-owned properties, including office, industrial, retail and multi-family residential properties. Additionally, the Company provides construction management services, which relate primarily to tenant improvements. The Company works closely with its clients to implement their specific goals and objectives, focusing on the enhancement of property values through maximization of cash flow. The Company markets its services primarily to long-term institutional owners of large commercial real estate assets. The Company's property management clients include Allstate Insurance Co. Inc., AMB Institutional Realty Advisors Inc., Citicorp, The Equitable Life Assurance Society of the United States, GE Capital Investment Advisors, Prudential Insurance Company of America, Inc., Metropolitan Life Insurance Co., Westmark Realty Advisors L.L.C. and The Yarmouth Group, Inc. Operations. The Company employs approximately 130 property management professionals in 31 offices. Most property management 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 extensively trained and are encouraged to continue their education through both Company-sponsored and outside training. The Company provides each local office with centralized corporate resources including investments in computer software and hardware as described below under the caption "Information Technology." Property management personnel utilize state- of-the-art computer systems for accounting, marketing, and maintenance management. The Company believes that these investments in technology represent a competitive advantage for (i) accumulating and synthesizing property 43 data from multiple locations into customized financial and operating reports required by clients, and (ii) providing its services on a cost effective basis relative to smaller competitors by spreading these fixed costs over its large revenue base. Compensation. Under a typical property management agreement, the Company will be entitled to receive management fees and lease commissions. The management fee in most cases is based upon a formula which gives the Company a specified percentage of the monthly gross rental income collected from tenants occupying the property under management and, as a result, will increase and decrease as building rents and occupancies increase and decrease. Many of these property management agreements also include a stated minimum management fee. The Company also may be entitled to reimbursement for costs incurred that are directly attributable to management of the property. Reimbursable costs, which are not included in the Company's revenue, include the wages of on-site employees and the cost of field office rent, furniture, computers, supplies and utilities. The Company pays its property management professionals a combination of salary and incentive-based bonuses. Lease commissions, which are paid in addition to the management fee, are similar to those described for brokerage services. Revenue from leasing services provided to the Company's property management clients are reflected in brokerage rather than property management revenue since brokerage professionals are normally engaged to accomplish the leasing. Term. A typical property management agreement contains an evergreen provision which provides that the agreement remains in effect for an indefinite period, but enables the property owner to terminate the agreement upon 30 days prior written notice, which the Company believes to be customary in the commercial real estate industry. As of September 30, 1996, the average duration of the Company's tenure as property manager for properties under contract was approximately 4.5 years. REAL ESTATE MARKET RESEARCH Real estate market research services are provided by eight professionals in Boston, Massachusetts employed by CB Commercial/Torto Wheaton Research. Real estate market research services are provided to the Company's other businesses as well as sold to third-party clients and include (i) data collection and interpretation, (ii) econometric forecasting, and (iii) evaluating marketing opportunities and portfolio risk for institutional clients within and across U.S. commercial real estate markets. The Company's publications and products provide real estate data for more than 50 of the largest MSA's in the United States and are sold on a subscription basis to many of the largest portfolio managers, insurance companies and pension funds in the United States. INVESTOR SERVICES MORTGAGE BANKING The Company provides its mortgage origination and mortgage loan servicing through L.J. Melody, which was acquired in July 1996 and is based in Houston, Texas. The Company, on a combined basis, originated $2.3 billion, $2.0 billion and $1.1 billion of mortgages in 1995, 1994 and 1993, respectively, on a combined basis including originations by the Company prior to its acquisition of L.J. Melody. As part of these origination activities, the Company has special conduit arrangements with affiliates of Merrill Lynch & Co., Citicorp, and Lehman Brothers which permit it to service the mortgage loans which it originates, and is currently negotiating a similar arrangement with an affiliate of NationsBank. Under these arrangements, the Company generally originates mortgages in its name, makes certain representations and warranties based upon representations made to it by the borrower or another party and immediately sells them into a conduit program. The Company also originates mortgages into other conduit programs where it does not have servicing rights. In addition, the Company is a major mortgage originator for insurance companies having originated on a combined basis, mortgages in the names of the insurance companies valued at $1.6 billion in 1995. The Company has correspondency arrangements with various life insurance companies which entitle it to service the mortgage loans it originates. As of December 31, 1995, 1994 and 1993, the Company, on a combined basis with L.J. Melody, serviced mortgage loan portfolios of $7.3 billion, $7.1 billion and $6.3 billion, respectively. Based upon 44 available statistics, the Company believes that it is the largest independent commercial mortgage originator, in general, as well as through conduits, in the United States. As of December 31, 1995, the Company was, on a combined basis, the eighth largest commercial mortgage loan servicer in the United States. The Company's life insurance and pension plans clients on whose behalf it both originates and services mortgage loans include AETNA, Allstate Life Insurance Co., CIGNA, Lincoln National Life, Massachusetts Mutual Life, Phoenix Home Life, New York State Teachers' Retirement System, State of Wisconsin Investment Board, and Teachers' Retirement System of Texas. For 1995, CIGNA accounted for approximately 29.6% of the Company's mortgage origination business on a combined basis. Operations. The Company employs approximately 90 mortgage banking professionals in 22 offices in the United States. The Company's mortgage loan originations take place throughout the United States, with support from L.J. Melody's headquarters in Houston, Texas. All of the Company's mortgage loan servicing is handled by L.J. Melody in Houston, Texas. The Company believes that the L.J. Melody acquisition will give it a significant competitive advantage in the mortgage origination business due to the anticipated integration with the deal flow generated through the Company's brokerage and investment properties sales activities. This integration will not only provide competitive advantages to mortgage banking, but will also facilitate sales transactions, enhancing the Company's capability to execute clients' sales assignments. In 1995, less than 5% of the Company's property sales were financed by its commercial mortgage origination capabilities. Compensation. The Company typically receives origination fees, ranging from 0.5% for large insurance company mortgage loans to 1.0% for most conduit mortgage loans. In situations where the Company services the mortgage loans which it originates, it also receives a servicing fee between .06% and .25%, calculated as a percentage of the outstanding mortgage loan balance. These agreements generally contain an evergreen provision with respect to servicing which provides that the agreement remains in effect for an indefinite period, but enables the lender to terminate the agreement upon 30 days prior written notice, which the Company believes to be a customary industry termination provision. Approximately 55.5% of the Company's 1995 mortgage loan origination revenue, on a combined basis, was from agreements which entitle it to both originate and service mortgage loans. The Company also originates mortgage loans on behalf of conduits and insurance companies for whom it does not perform servicing. In 1995, approximately 44.5% of its revenues, on a combined basis, was attributable to such originations. The Company's client relationships have historically been long-term. The Company pays its mortgage banking professionals a combination of salary, commissions and incentive-based bonuses which typically average between 46% and 49% of the Company's loan origination fees. INVESTMENT MANAGEMENT AND ADVISORY The Company provides its investment management and advisory services primarily to tax-exempt corporate and public pension funds through Westmark. Since 1971, the Company has provided its clients with investment management and advisory services, including the creation of investment products, raising of investor capital, identification and acquisition of specific properties and management and disposition of the assets. Currently, the Company represents more than 180 clients in 13 commingled funds and a variety of separate accounts. Westmark separate account clients include the AFL-CIO Building Investment Trust, Alaska Permanent Fund Corporation, AT&T Telephone Real Estate Equity Trust, California Public Employees' Retirement System (CalPERS), California State Teachers' Retirement System (CalSTRS), Delta Air Lines Benefit Trust, Eastman Kodak Retirement Income Plan, GTE Service Corporation Plan for Employees' Pensions, Utah State Retirement Fund, Pacific Telesis Group Master Pension Trust and McDonnell Douglas Corporation Master Retirement Trust. Operations. Westmark operates as a separate and independent subsidiary of the Company, providing advisory services and managing approximately $3.7 billion in tax-exempt capital invested in more than 220 office, industrial and retail properties located in 40 major U.S. markets with an aggregate of more than 40 million square feet. Westmark's headquarters are located in Los Angeles and it maintains regional offices in Boston, Dallas, New York City, and Washington D.C. Westmark develops and markets a variety of investment alternatives designed to meet its client's risk, reward, and liquidity requirements. Westmark employs 100 professionals who perform the following services for its investors -- market research and forecasting, acquisition 45 strategy and implementation, portfolio strategy and management, specific asset management, and development and dispositions. Westmark uses a state-of-the-art portfolio information system that integrates property and fund-level accounting with specific asset management data. Westmark's investors invest through separate accounts, commingled funds, and real estate operating companies, including limited partnerships. Certain funds and separate accounts are subject to ERISA regulations and, with respect to such funds and accounts, Westmark is limited in its ability to employ any affiliated company, including the Company. Because Westmark must conduct its operations in compliance with ERISA, where applicable, Westmark maintains both internal and external control mechanisms to assure compliance. While Westmark has experienced significant growth in its separate accounts business, it has been impacted by the industry's adverse investor response to non-property specific commingled funds. The Company believes that this lack of investor interest in non-property specific commingled funds has been replaced with interest in new, more narrowly focused investment vehicles. The Company believes that the consolidation of the industry combined with the development of these new investment vehicles should reduce pressures on fees and margins in the second half of 1997. Compensation. Westmark's fees are typically higher for managing commingled and other funds than they are for separate accounts, but all of the fees are within the ranges indicated below. Westmark receives an annual asset management fee which is typically 0.5% to 1.2% of the lower of the cost of the assets managed or their fair market value. When debt is managed, the asset management fee is at the lower end of the range. Westmark also receives an acquisition fee when it acquires property or places debt on behalf of a client that is typically 0.5% to 1.0% of funds invested or debt placed (the placement fee for debt is at the low end of this range). In some, but not all cases, Westmark receives an incentive fee when an asset or a fund is sold. Typically, the incentive fee will only be payable after the client has achieved a specified real (adjusted for inflation) rate of return of 8% to 12% and is a percentage of value in excess of that return. In recent years, Westmark has experienced reduced rates of asset management and acquisition fees. Term. The term of Westmark's advisory agreements vary by the form of investment vehicle utilized. In the commingled funds, the term is generally 10 years with extension provisions based upon a vote of the investors. In the Company's separate account relationships, the agreements are generally one to three years in term, with "at will" termination provisions. In general, both the capital managed by Westmark and its client relationships are long-term in nature. VALUATION AND APPRAISAL SERVICES The Company's valuation and appraisal services business delivers sophisticated commercial real estate valuations through a variety of products including market value appraisals, portfolio valuations, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. The Company's appraisal staff has more than 80 professionals with more than 50% of the staff holding the MAI professional designation. The business is operated nationally through 22 regional offices and its clients are generally corporate and institutional portfolio owners and lenders. The Company believes it is among the leading real estate appraisal firms on the basis of revenues generated in 1995. INTERNATIONAL ALLIANCES AND ACTIVITIES In response to growing cross-border capital flows for investment in commercial real estate, and the multinational strategies of the Company's U.S. corporate clients, the Company has developed exclusive alliances with leading firms in various countries in Europe, the Far East and Southeast Asia, Australia and New Zealand. The relationships with DTZ, a consortium of 23 real estate advisory firms operating in 15 countries in Europe, as well as Australia and New Zealand, and C. Y. Leung & Company, a locally-owned firm operating in China, Singapore, and Malaysia, have allowed the Company to provide global corporate service capabilities and significantly strengthen its client relationships in the United States. Representative international clients include 46 Blockbuster Videos Entertainment Corp., Coca-Cola Co. Inc., Tenneco, U. S. Robotics Corp. and Westinghouse Electric Corp. Revenues from the Company's international activities currently represent a small portion of total revenues. In addition to cross-border corporate space acquisition and disposition activity, Westmark is exploring the development of new cross- border investment products with DTZ and C.Y. Leung. INFORMATION TECHNOLOGY In order to enhance the quality of its real estate services and improve the productivity of its employees, the Company has invested in state-of-the-art computer and telecommunication systems to provide real-time real estate information and sophisticated presentation and analysis tools. The Company's information technology group ("IT Group"), headquartered in Torrance, California, employs 40 professionals that operate the Company's data center, develop custom programs, implement special systems software, and provide support for hardware and software utilized in the Company's national network of offices. The Company has adopted computer hardware and software standards to maintain the consistency and quality of its real estate services. Each office is connected directly to the Company's IBM mainframe computer for real-time access to the Company's centralized databases and customized software applications. The Company also utilizes PeopleSoft's client server financial applications on a Sun/Oracle platform to support its accounting functions. Each evening all data is backed up to tape and stored off-site. The Company's disaster recovery services, including a "hot site," are provided by Comdisco Disaster Recovery Services, Inc. The Company believes that it maintains one of the nation's largest databases of commercial properties in the United States. The CB Commercial proprietary property information database contains over 20 years of comprehensive data on over 17 billion square feet of office, industrial and retail space. Nearly 150 information services coordinators, researchers, and analysts located throughout the United States and over 2,000 of the Company's real estate professionals support the centralized, real-time information gathering activities. The Company also purchases commercial real estate data from third parties. LANs, connected to the Company's wide area network (WAN) through Frame Relay, provide the Company's professionals with direct and simultaneous access to current market information and industry-specific software applications that synthesize complex and comprehensive information into charts, spreadsheets and presentations. Products and systems available to the Company's professionals include: (i) "virtual" property tours which incorporate demographics, pictures, floor plans and sound providing current information on properties located throughout the United States, (ii) standardized financial analyses and presentation of multiple lease scenarios to compare total occupancy costs, (iii) tracking of owned and leased property information, including photographs, locator maps and site/floor plans, (iv) transaction management for a corporate multi-market real estate portfolio to coordinate, facilitate, and expedite acquisition, disposition and consulting requirements and, (v) centralized property management data bases with an array of management, valuation, accounting and reporting applications. Mobile computing with remote, on-line access to the Company's databases and software applications is available to the Company's professionals. By special arrangement, some of the Company's clients have remote modem access to selected client-customized software applications. The CB Commercial Web Site has also given clients direct access through the CB Internet home page. These systems allow clients to gain access to various levels of information, maintain day-to-day contact with the Company's professionals, and track and monitor property acquisition and disposition activities and property portfolios. EMPLOYEE EDUCATION In 1991, the Company founded its training program, known as CB Commercial University ("CBCU") to provide professional development and industry training for its key professional employees. CBCU is distinguished in the industry for its quality, intensity, scope and results. Through CBCU and its professional education department, the Company currently offers 39 training programs and courses. The courses offered at 47 CBCU are typically one week in length and are customized to meet both employees' and clients' needs and skill levels. Courses focus on (i) employees' productivity and quality consistency; (ii) management leadership and effectiveness in the context of the latest industry knowledge and technology; and (iii) clients' needs in the Company's various business lines and specialty practice areas. Although CBCU was originally established to develop the skills of the Company's employees, in 1995 in response to demand from its clients, the Company added courses to the CBCU curriculum which involve its clients. In 1995, more than 450 employees and clients took courses at CBCU. COMPETITION The market for commercial real estate brokerage and other real estate services provided by the Company is both highly fragmented and highly competitive. Thousands of local commercial real estate brokerage firms and hundreds of regional commercial real estate brokerage firms have offices in the United States. The Company believes that no more than two other major firms have the ability to compete nationally with the Company's brokerage business, and that the Company's national brokerage network enables it to compete effectively with these organizations. Most of the Company's competitors are local or regional firms that are substantially smaller than the Company on an overall basis, but in some cases, may be larger locally. L.J. Melody competes 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 services are provided by other national, local and regional appraisal firms and national and regional accounting firms. Consulting services are provided by numerous commercial real estate firms (national, regional and local), accounting firms, appraisal firms and others. The Company's property management business competes for the right to manage properties controlled by third parties. The competitor may be the owner of the property (who is trying to decide the efficiency of outsourcing) or another property management company. Increasing competition in recent years has resulted in having to provide additional services at lower rates through eroding margins. In 1996, however, rates have stabilized and in some cases increased. Westmark competes with a significant number of investment advisors, banks and insurance companies in attracting investor money. Over the last several years, Westmark experienced growth in its separate accounts and its commingled debt funds, but not in its commingled equity funds. In all of its business disciplines, the Company competes on the basis of the skill and quality of its personnel, the variety of services offered, the breadth of geographic coverage and the quality of its infrastructure, including technology. See "Risk Factors--Competition." EMPLOYEES As of September 30, 1996, the Company had approximately 4,000 employees, approximately 73% of whom work in the areas of brokerage and investment properties. All of the Company's sales professionals are parties to contracts with the Company which subject them to the Company's rules and policies during their employment, and limit their post-employment activities in terms of soliciting clients or employees of the Company. The Company believes that relations with its employees are good. FACILITIES The Company owns its headquarters building in downtown Los Angeles, California. In addition to the Company's headquarters, the Company owns and occupies three smaller office buildings in Phoenix, Arizona, San Diego and Carlsbad, California. These properties are mortgaged to secure loans to the Company. 48 The Company also leases office space on terms that vary depending on the size and location of the office. The leases expire at various dates through 2006. For those leases that are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs. LEGAL PROCEEDINGS As a result of the thousands of transactions in which the Company participates and its employment of almost 4,000 people, it is a party to a number of pending or threatened lawsuits, arising out of or incident to the ordinary course of its business. At any given time, the Company typically is a defendant in 150 to 175 legal proceedings and a plaintiff in 50 to 100 legal proceedings. The Company believes that any liability that may result from these proceedings will not have a material adverse effect on its consolidated financial position or results of operation. As part of its process of minimizing, to the extent possible, potential litigation, the Company requires its sales professionals to agree to contribute each month toward a "Reserve Account" to be used whenever a claim of professional liability is asserted. In addition, each sales professional contractually agrees to be responsible for a portion of any amount paid to defend or settle a claim against that professional or for any resulting judgment. 49 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- James J. Didion......... 56 Chairman of the Board and Chief Executive Officer Gary J. Beban........... 50 President/Director David A. Davidson....... 61 Senior Executive Vice President, Chief Financial Officer and Treasurer Thaddeus W. Jones....... 54 Senior Executive Vice President/Senior Executive Director-- CBC/Madison Advisory Group George J. Kallis........ 53 Senior Executive Vice President--Brokerage Western U.S./ Director Charles O. McBride, Jr.. 54 Senior Executive Vice President/Chief Operating Officer-- Property Management Services Jeffrey S. Morgan....... 42 Senior Vice President/Director Ronald J. Platisha...... 49 Executive Vice President and Principal Accounting Officer Richard A. Pogue........ 54 Senior Executive Vice President--Brokerage/Director Kenneth D. Sandstad..... 50 Senior Executive Vice President--Brokerage Eastern U.S. Walter V. Stafford...... 56 Senior Executive Vice President and General Counsel John L. Stanfill........ 55 President--CB Commercial Investment Properties Richard C. Clotfelter... 59 President--Westmark Realty Advisors L.L.C./Director Lawrence J. Melody...... 58 President--L.J. Melody & Company/Director Stanton D. Anderson(2).. 56 Director Richard C. Blum(1)(2)(3).......... 61 Director Frank C. Carlucci....... 65 Director Daniel A. D'Aniello(2).. 50 Director Hiroaki Hoshino......... 54 Director Takayuki Kohri.......... 44 Director Paul C. Leach(2)........ 51 Director Frederic V. Malek(1)(3). 59 Director Peter V. Ueber- roth(1)(3)............. 58 Director Gary L. Wilson(1)(3).... 56 Director
- -------- (1) Member of Compensation Committee of the Board of Directors. (2) Member of Audit Committee of the Board of Directors. (3) Member of Acquisition/Investment Committee of the Board of Directors James J. Didion. Mr. Didion has been Chairman and Chief Executive Officer of CB Commercial since January 1987 and a Director since the Company's incorporation. Previously, he served as President of CB Commercial Real Estate Group, Inc., following a career of almost 24 years in sales and management positions in the commercial brokerage operations of CB Commercial Real Estate Group, Inc. Mr. Didion is a member and current trustee of the Urban Land Institute. He is also a member of the National Realty Committee and was Chairman of the National Realty Committee from 1993 through June 1996. Mr. Didion holds an A.B. degree from the University of California, Berkeley and serves on the University's Advisory Board for the Haas School of Business. Gary J. Beban. Mr. Beban has been the President of the Company since May 1995 and a Director since 1989. He joined the Company's Los Angeles office in 1970 as an industrial and investment properties specialist and thereafter served in several management positions in Chicago. Mr. Beban has also been the President of CB Commercial Brokerage Services since 1987. He is a member of the Industrial Development Research Council and the National Realty Committee. Mr. Beban serves on the Board of Directors of The First American Financial 50 Corporation and its wholly-owned subsidiary, First American Title Insurance, Inc. Mr. Beban holds a B.A. degree from the University of California, Los Angeles. David A. Davidson. Mr. Davidson has been Senior Executive Vice President, Chief Financial Officer and Treasurer of the Company since November 1992. From February 1991 to November 1992, he served as Executive Vice President and from July 1990 to February 1991 was Senior Vice President. Mr. Davidson joined the Company as Vice President, Treasurer and Assistant Secretary in June 1989. During 1987 and 1988 he was Executive Vice President and Chief Operating Officer of Nationwide Health Properties, a real estate investment trust. Subsequently, he served as Executive Vice President of Corporation Operations and Chief Financial Officer for Voluntary Hospitals of America, an alliance of not-for-profit hospitals located in Dallas, Texas. From 1981 to 1987, Mr. Davidson was Vice President, Treasurer of Beverly Enterprises, a provider of health care services. Mr. Davidson holds a B.S. degree and a Masters of Accountancy degree from Brigham Young University. Thaddeus W. Jones. Mr. Jones has been Senior Executive Vice President of the Company and Senior Executive Director of CBC/Madison Advisory Group since 1994, after having served as Executive Director--CBC/Madison Advisory Group from 1992 to 1994. From 1986 to 1992 Mr. Jones was President of CB Commercial Realty Advisors and from 1984 to 1986 he was a Senior Vice President, after having served in various management positions in the Company's brokerage business. Mr. Jones rejoined CB Commercial in 1982 after leaving in 1979. Mr. Jones holds a B.S. degree from the University of California, Los Angeles. George J. Kallis. Mr. Kallis has been the Company's Senior Executive Vice President--Brokerage Western U.S. since 1992 and a Director of the Company since 1995. Prior to that time, he served as Executive Vice President from 1991 to 1992 and as Senior Vice President and Regional Manager--Brokerage from 1988 to 1991. Mr. Kallis joined the Company in 1977. Mr. Kallis is a member of the International Council of Shopping Centers and the Urban Land Institute and is on the Board of Directors of the Los Angeles County Economic Development Council. Mr. Kallis holds a B.S. degree in Business Administration from the University of Maryland. Charles O. McBride. Mr. McBride has been Senior Executive Vice President of the Company and Chief Operating Officer--Property Management Services since April 1991. He joined the Company in 1989 as Executive Vice President/Chief Operating Officer--Property Management Services. Mr. McBride was a senior officer with PM Realty Group, a national real estate management and services company, from 1971 to 1989, serving as Executive Vice President from 1981 to 1989. Mr. McBride holds a B.A. degree from the University of Texas. Jeffrey S. Morgan. Mr. Morgan has been a Senior Vice President of the Company since 1991 and a Director of the Company since 1995. He joined the Company in 1978 and is a specialist in industrial properties. He has been named to the Company's Colbert Coldwell Circle (representing the top three percent of the Company's sales force) for five of the last nine years. In 1994 he was awarded the William H. McCarthy Award, the highest honor awarded producing professionals within the Company. Mr. Morgan holds a B.S. degree in Marketing from California State University (Northridge). Ronald J. Platisha. Mr. Platisha has been the Company's Executive Vice President and Principal Accounting Officer since 1992. Mr. Platisha was promoted to Senior Vice President in 1991, after serving as First Vice President and Controller from 1982 to 1991. Mr. Platisha joined the Company in 1976. Mr. Platisha holds a B.S. degree from California State University (Long Beach). Richard A. Pogue. Mr. Pogue has been the Company's Senior Executive Vice President--Brokerage since January 1996 and a Director of the Company since 1996. From 1994 to 1995 he was Senior Executive Vice President (Brokerage Division) of the Company and from 1992 to 1994, he served as the Company's Senior Vice President--Investment Properties. From 1984 to 1992, he was Division President of The Koll Company, a real estate investment and development company. Mr. Pogue originally joined the Company in 1971. Mr. Pogue is a member of the National Realty Committee and the Urban Land Institute. Mr. Pogue holds a B.A. degree from the University of Oklahoma. 51 Kenneth D. Sandstad. Mr. Sandstad has been the Company's Senior Executive Vice President--Brokerage Eastern U.S. since 1991. He has also held the following positions with the Company: Institutional Services Manager from 1994 to 1996, Division Manager (Central Division) from 1990 to 1994 and Regional Manager (South Central) from 1985 to 1990. Mr. Sandstad was also a Director of the Company from 1992 to 1994. Mr. Sandstad joined the Company in 1974, beginning at the Minneapolis office in the brokerage division. He holds a B.A. degree from St. Olaf College and a J.D. degree from the University of Minnesota. Walter V. Stafford. Mr. Stafford has served as Senior Executive Vice President and General Counsel of the Company since 1995. Mr. Stafford was a partner at the law firm Pillsbury Madison & Sutro LLP from 1988 to 1995 and from 1973 to 1982. From 1982 to 1988 he was Senior Vice President and General Counsel at Diasonics, Inc., a medical device manufacturer, and from 1982 to 1994 he was a director of that company. Mr. Stafford holds a B.A. from the University of California, Berkeley and an L.L.B. degree from Boalt Hall. John L. Stanfill. Mr. Stanfill is President of CB Commercial Investment Properties. Previously, he was Managing Director--Special Investments, a position he was appointed to when he rejoined the Company in 1990 after founding a real estate investment banking firm in 1979. From 1976 to 1979, Mr. Stanfill served as Vice President of Investment Marketing of the Company. He originally joined the Company in 1971. Mr. Stanfill holds a B.A. in English Literature from the University of California, Los Angeles. Richard C. Clotfelter. Mr. Clotfelter was elected Chairman and President, Westmark Realty Advisors, an indirect wholly-owned subsidiary of the Company in 1995, and has been a Director of the Company since 1993. Mr. Clotfelter joined the Company in 1993 as President--Capital Markets, Asset Valuation and Management Activities. From April 1977 through 1992, he was President of Prescott, Inc., a real estate development and management company. Mr. Clotfelter is on the Board of Directors of The Commerce Bancorporation. Mr. Clotfelter is also a member of the Urban Land Institute, serving on its Urban Development/Mixed Used Council. Mr. Clotfelter holds a B.A. degree from Stanford University. Lawrence J. Melody. Mr. Melody has served as a Director since August 1996. He is also Chairman of the Board and President of L.J. Melody & Company which he founded in February 1978. He is a member of the International Council of Shopping Centers, the Urban Land Institute (a member of the Multifamily Council), the Pension Real Estate Association, the National Association of Industrial and Office Parks, the National Multi Housing Council, as well as other professional organizations. He is a member of Board of Trustees of the Mortgage Bankers Association of America and past President and Director of the Texas Mortgage Bankers Association, who awarded him their Distinguished Service Award in 1995. Mr. Melody holds a B.A. degree from the University of Notre Dame. Stanton D. Anderson. Mr. Anderson has been a Director of the Company since 1989. In 1995, he became counsel to the law firm of McDermott, Will & Emery. Prior to 1995, Mr Anderson was a founding partner in the law firm of Anderson, Hibey & Blair. He is also a founder of Global USA, Inc. an international consulting company, where he serves as Chairman and President. He served as Deputy Director of the Republican Convention in 1980, 1984 and 1988, as counsel to the Reagan-Bush Campaign in 1980 and as a Director of the 1980 Presidential Transition. Mr. Anderson serves on the Board of Directors of International Management & Development Group, Ltd. Mr. Anderson holds a B.A. degree from Westmont College and a J.D. degree from Willamette University School of Law. Richard C. Blum. Mr. Blum has been a Director of the Company since 1993. He is the Chairman and President of Richard C. Blum & Associates, Inc., a merchant banking firm he founded in 1975. Mr. Blum is a member of the Board of Directors of National Education Corporation; Sumitomo Bank of California; Triad Systems Corporation; Northwest Airlines Corporation; and URS Corporation. Mr. Blum also serves as Vice Chairman of URS Corporation. Mr. Blum holds a B.A. from the University of California, Berkeley, a graduate degree from the University of Vienna and an M.B.A. degree from the University of California, Berkeley. 52 Frank C. Carlucci. Mr. Carlucci has been a Director of the Company since 1989. In 1993, Mr. Carlucci became Chairman of The Carlyle Group, a merchant banking firm where he had served as Vice Chairman since 1989. From 1987 to 1989, Mr. Carlucci served as the Secretary of Defense. From 1986 to 1987, Mr. Carlucci was Assistant to the President for National Security Affairs. From 1983 to 1986, Mr. Carlucci served as Chairman and Chief Executive Officer of Sears World Trade. Mr. Carlucci is on the Board of Directors of Ashland Oil, Inc.; BDM International, Inc.; Bell Atlantic Corporation; General Dynamics Corporation; Kaman Corporation; Neurogen Corporation; Northern Telecom, Ltd.; The Quaker Oats Company; Sun Resorts, Ltd., N.V.; Texas Biotechnology Corporation; Pharmacia & Upjohn, Inc.; and Westinghouse Electric Corporation. Mr. Carlucci holds an A.B. degree from Princeton University. Daniel A. D'Aniello. Mr. D'Aniello has been a Director of the Company since 1989. He has served as Managing Director of The Carlyle Group, a merchant banking firm since May 1987. From August 1986 through April 1987, Mr. D'Aniello was Vice President--Finance and Development of Marriott Inflite Services, Inc., a subsidiary of Marriott Corp. Mr. D'Aniello is Chairman of the Board of Directors of GTS Duratek, Inc. Mr. D'Aniello holds a B.S. degree from Syracuse University and an M.B.A. from the Harvard University Graduate School of Business. Hiroaki Hoshino. Mr. Hoshino has been a Director of the Company since 1992. Previously, he served as Senior Vice President, Treasurer and Chief Financial Officer of Kajima International, Inc. from April 1987 to March 1990 and as Senior Vice President and Chief Financial Officer of that company from April 1990 to March 1991. From April 1991 to March 1993, he served as Executive Vice President and Chief Financial Officer of Kajima International Inc. Since April 1991, he has served as the Chief Financial Officer and since April 1993 he has been Executive Vice President and Chief Financial Officer of Kajima U.S.A., Inc. From September 1992 to April 1996, he was Executive Vice President, Chief Financial Officer and Director of Kajima Capital of America, Inc. Since April 1996 he has been President, Chief Executive Officer, Chief Financial Officer and Director of Kajima Capital of America, Inc. Mr. Hoshino holds a B.A. degree from Gakushuin University. Takayuki Kohri. Mr. Kohri has been a Director of the Company since 1989. Previously, he was Assistant Manager of Sumitomo Real Estate Sales in Japan from 1984 to August 1988. From August 1988 to July 1993, he was an Executive Vice President of Sumitomo Real Estate Sales L.A., Inc. Since July 1993, he has been Deputy Manager of Sumitomo Real Estate Sales Japan, a real estate sales and development firm. Mr. Kohri holds a B.A. degree in Economics from Keio University. Paul C. Leach. Mr. Leach has been a Director of the Company since August 1996. Since its founding in 1991, Mr. Leach has served as president of Paul Leach & Company, a private investment banking firm in San Francisco which specializes in international and domestic acquisitions and investments. He is also Managing Director of The Lone Cypress Company, the owner of Pebble Beach Company, and Managing Director of Rancho Cielo Company, a developer in Rancho Santa Fe, California. From 1988 through 1991, Mr. Leach was a senior manager and partner in the international merger and acquisition group at Deloitte & Touche. Prior to 1988, he held several positions in San Francisco, including serving as a partner with both Osterweis Capital Management and Centennial Petroleum Company and manager of corporate development for Natomas Company. From 1975 through 1977, Mr. Leach served as associate director of the Domestic Council Staff at the White House during the Ford Administration. Mr. Leach holds an A.B. degree from Dartmouth College and M.B.A. and J.D. degrees from Stanford Graduate School of Business and Stanford Law School, respectively. Frederic V. Malek. Mr. Malek has been a Director of the Company since 1989. He has served as Chairman of Thayer Capital Partners, a merchant banking firm he founded since 1993. He was President of Marriott Hotels and Resorts from 1981 through 1988 and was Executive Vice President of Marriott Corp. from 1978 through 1988. He was Senior Advisor to The Carlyle Group, a merchant banking firm, from November 1988 through December 1991. From September 1989 through June 1990, he was President of Northwest Airlines and from June 1990 until December 1991 he served as Vice Chairman of Northwest Airlines. From December 1991 through November 1992, Mr. Malek served as Campaign Manager for the 1992 Bush/Quayle presidential 53 campaign. He also serves on the Board of Directors of American Management Systems, Inc.; Automatic Data Processing Corp.; Avis, Inc.; FPL Group Inc.; ICF Kaiser International, Inc.; Intrav, Inc.; Manor Care, Inc.; National Education Corp.; Northwest Airlines Corporation; and Paine Webber Funds. Mr. Malek holds a B.S. degree from the United States Military Academy at West Point and an M.B.A. degree from the Harvard University Graduate School of Business. Peter V. Ueberroth. Mr. Ueberroth has been a Director of the Company since 1989. Since 1989, he has been an investor and Managing Director of Contrarian Group, Inc., a business management company. From 1984 through 1989, he was the Commissioner of Major League Baseball in the United States. Mr. Ueberroth is a member of the Board of Directors of The Coca Cola Company; Ambassadors International, Inc.; Doubletree Hotels Corp; and Transamerica Corporation. Gary L. Wilson. Mr. Wilson has been a Director of the Company since 1989. Since 1991, he has been Co-Chairman of Northwest Airlines, Inc., Northwest Airlines Corporation and NWA, Inc. From 1985 until January 1990, Mr. Wilson was an Executive Vice President and Chief Financial Officer and Director for The Walt Disney Company and remains a Director of The Walt Disney Company. From 1974 until 1985, he was Executive Vice President and Chief Financial Officer of Marriott Corporation. Mr. Wilson holds a B.A. degree from Duke University and an M.B.A. from the Wharton Graduate School of Business and Commerce at the University of Pennsylvania. All directors are elected to hold office until the next annual meeting of stockholders of the Company and until their successors have been elected. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. See "Description of Capital Stock--The Recapitalization." BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Effective upon the closing of the Offering, there will be three committees of the Board of Directors: a Compensation Committee, an Audit Committee and an Acquisition/Investment Committee. See "Description of Capital Stock--The Recapitalization." The Compensation Committee members are Messrs. Blum, Malek, Ueberroth and Wilson, who are outside directors of the Company. Currently this committee determines the salary and incentive compensation, if any, of executive officers of the Company whose annual base salary exceeds $300,000, may authorize employment agreements with such officers, and in exceptional circumstances, may review and approve compensation arrangements with other employees. Effective upon the closing of the Offering, the Compensation Committee will determine the salaries of the Chairman and Chief Executive Officer and, upon the recommendation of the Chief Executive Officer, the salaries and incentive compensation of the President and the Chief Financial Officer. The salaries and incentive compensation of all other officers are determined by the Chief Executive Officer. The members of the Audit Committee are Messrs. Anderson, Blum, D'Aniello and Leach, who are outside directors of the Company. The purpose of the Audit Committee is to recommend a firm of independent public accountants to be appointed by the Board subject to stockholder ratification, review the Company's annual consolidated financial statements and consult with the representatives of the independent public accountant and the Chief Financial Officer and Principal Accounting Officer with regard to the adequacy of internal controls. The Acquisition/Investment Committee members are Messrs. Blum, Malek, Ueberroth and Wilson. The purpose of the Acquisition/Investment Committee is to authorize the undertaking by the Company of definitive negotiations with respect to any acquisition or investment that contemplates the issuance of any class of the Company's stock or the aggregate cost of which is likely to exceed $10 million. 54 DIRECTOR COMPENSATION Each of the directors of the Company who is not also an executive officer is entitled to receive a fee of $2,500 for attendance at each meeting of the Board of Directors, $2,500 for attendance at each meeting of a board committee which does not coincide with a Board of Directors meeting and an annual retainer of $15,000. No director received compensation from the Company for services as a director in excess of $27,500 in 1995. Non-employee directors are reimbursed for their expenses for each meeting attended. In 1993, below market options were granted to certain non-employee directors in partial payment of directors' fees. See "Employee Benefit Plans." In October 1996, the Compensation Committee (Messrs. Blum, Ueberroth and Wilson abstaining) granted each of Messrs. Blum, Ueberroth and Wilson a 10,000 share stock option under the Company's Service Providers Stock Option Plan exercisable at the initial public offering price and vesting over three years. The Company is considering the adoption of a longer term stock option program for its independent directors. 55 EXECUTIVE COMPENSATION The following table summarizes all compensation paid to the Company's Chief Executive Officer and to the Company's nine other most highly compensated executive officers other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities to the Company for each of the fiscal years in the three year period ended December 31, 1995. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------------------- --------------------- OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING ALL OTHER COMPEN- STOCK STOCK COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS SATION(2) AWARDS(3) OPTIONS SATION(4) - --------------------------- ---- -------- -------- -------- ---------- ---------- --------- James J. Didion............. 1995 $390,000 $279,160 $63,212 -- -- $1,520 Chairman of the Board and 1994 390,000 300,000 94,005 -- -- 1,105 Chief Executive Officer 1993 375,000 250,000 (5) $90,000 -- 978 Gary J. Beban............... 1995 300,000 190,527 (5) -- -- 1,520 President 1994 300,000 236,118 (5) -- 10,000 273 1993 270,000 233,899 (5) 60,000 -- -- Richard C. Clotfelter....... 1995 250,000 174,475 (5) -- -- -- President--Westmark Realty 1994 225,000 123,192 (5) 32,500 20,000 -- Advisors L.L.C. 1993(6) 183,334 106,671 (5) 150,000 40,000 -- David A. Davidson........... Senior Executive Vice 1995 225,000 109,919 (5) -- -- 1,291 President, Chief Financial 1994 215,000 112,660 (5) -- 20,000 1,105 Officer and Treasurer 1993 185,000 72,730 (5) 60,000 -- 978 Thaddeus W. Jones........... 1995 210,000 173,079 (5) -- -- -- Senior Executive Vice 1994 210,000 177,259 (5) -- 20,000 -- President Senior Executive 1993 210,000 140,514 (5) -- -- -- Director--CBC/Madison Advisory Group George J. Kallis............ Senior Executive Vice 1995 200,000 153,538 (5) -- -- -- President--Brokerage 1994 200,000 177,944 (5) 32,500 -- 747 Western U.S. 1993 170,000 140,805 (5) -- -- 876 Charles O. McBride.......... 1995 194,479 134,345 (5) -- -- 1,520 Senior Executive Vice 1994 189,000 137,735 (5) -- -- 1,105 President/Chief Operating 1993 183,750 76,366 (5) -- -- 978 Officer--Property Management Services Richard A. Pogue............ 1995 192,000 143,767 (5) -- -- -- Senior Executive Vice 1994 177,708 158,780 (5) 97,500 40,000 -- President--Brokerage 1993 125,000 72,035 (5) -- -- -- Kenneth D. Sandstad......... Senior Executive Vice 1995 200,000 139,580 (5) -- -- 1,520 President--Brokerage 1994 200,000 162,887 (5) -- -- 1,105 Eastern U.S. 1993 185,000 116,367 (5) -- -- 978 John L. Stanfill............ 1995 197,600 142,581 (5) -- -- -- President--CB Commercial 1994 190,000 146,485 (5) 32,500 -- -- Investment Properties 1993 175,000 120,253 (5) -- -- --
56 - -------- (1) Bonus for each year is paid in the first quarter of the following year. Pursuant to the Company's Deferred Compensation Plan, Mr. Didion elected to defer his entire bonuses in 1993, 1994 and 1995, and Mr. Davidson and Mr. Kallis elected to defer all or a substantial portion of their bonuses in 1994 and 1995. All such amounts were invested in shares of the Company's Common Stock. (2) Under the Company's Deferred Compensation Plan beginning in 1994, an individual who defers an amount payable as bonus in the first 90 days of 1994, 1995 or 1996 for investment in shares of the Company's Common Stock was credited with such shares based on the appraised value of such shares at the time the election to defer was made. The amounts shown represent the difference between the aggregate appraised value of such shares at the time the bonus was paid and the aggregate appraised value of such shares at the time the election to defer was made. The amounts shown relate to bonuses payable in the first quarter of the following year. Amounts shown also include automobile allowances. (3) Represents the appraised value of restricted stock awards at the date of grant. The aggregate number of shares and appraised value of restricted stock (excluding stock no longer subject to any specified vesting period) held by the individuals named above as of December 31, 1995 was as follows: Mr. Didion--15,000 ($149,100); Mr. Beban--10,000 ($99,400); Mr. Clotfelter--30,000 ($298,200); Mr. Davidson--10,000 ($99,400); Mr. Jones-- 0; Mr. Kallis--5,000 ($49,700); Mr. McBride--0; Mr. Pogue--15,000 ($149,100); Mr. Sandstad--0; and Mr. Stanfill--5,000 ($49,700). The holders of shares of restricted stock are entitled to receive dividends on such shares to the extent dividends are paid on the Common Stock. Does not include income recognized for income tax purposes upon vesting of restricted stock awards. (4) Consists of each individual's allocable share of profit sharing contributions in the form of shares of Common Stock made by the Company to the Company's Capital Accumulation Plan, based on the appraised value of the stock at the time of contribution. (5) The only form of Other Annual Compensation awarded, earned or paid consisted of perquisites and personal benefits which did not exceed the lesser of $50,000 or 10% of the total annual salary and Bonus reported. (6) Mr. Clotfelter's employment by the Company commenced in February 1993. AGGREGATED 1995 YEAR-END OPTION VALUES The following table sets forth certain information as of December 31, 1995 with respect to the number and value of unexercised stock options held by individuals named in the Summary Compensation Table above. In fiscal 1995, none of the such individuals either were granted or exercised any options. At December 31, 1995 all options listed below had exercise prices which exceeded the value of the underlying stock and, therefore, had no value.
NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED OPTIONS(1) AT DECEMBER 31, 1995 ------------------------- NAME EXERCISABLE UNEXERCISABLE ---- ----------- ------------- James J. Didion.................................... 75,000 0 Gary J. Beban...................................... 62,500 7,500 Richard C. Clotfelter.............................. 31,667 28,333 David A. Davidson.................................. 45,000 15,000 Thaddeus W. Jones.................................. 25,000 15,000 George J. Kallis................................... 40,000 0 Charles O. McBride................................. 40,000 0 Richard A. Pogue................................... 10,000 30,000 Kenneth D. Sandstad................................ 40,000 0 John L. Stanfill................................... 20,000 0
- -------- (1) All options have an exercise price of $10.00 per share. 57 EMPLOYEE BENEFIT PLANS Omnibus Stock and Incentive Plan. The Company's Omnibus Stock and Incentive Plan (the "Omnibus Plan") is a restricted stock plan which provides for the issuance of shares of the Company's Common Stock, subject to vesting provisions. No shares remain available for issuance under the Omnibus Plan, but additional shares will become available if forfeited by any of the current holders. 1990 Stock Option Plan. One million shares have been reserved for issuance under the Company's 1990 Stock Plan (the "Stock Option Plan"). These options vest over one to four years. Options exercisable at $10.00 per share for 920,000 shares are outstanding as of August 31, 1996. If options are forfeited, the underlying shares again become available for grant under the Stock Option Plan. Service Providers Stock Option Plan. A total of 600,000 shares of Common Stock have been reserved for issuance under the Company's 1991 Service Providers Stock Option Plan. In 1993, 5,922 below-market options were granted to certain directors in partial payment of director fees. During 1996 and 1995 options to purchase 467 and 4,106 shares, respectively, of Common Stock were exercised. As of September 30, 1996, options to purchase 36,140 shares of Common Stock are outstanding. In October 1996, the Compensation Committee (Messrs. Blum, Ueberroth and Wilson abstaining) granted each of Messrs. Blum, Ueberroth and Wilson a 10,000 share option under the Service Providers Plan. Each option is exercisable at the initial public offering price and vests over a three year period. 1996 Equity Incentive Plan. In November 1995 the Board of Directors authorized, and in January 1996 the Compensation Committee of the Board adopted, a restricted stock purchase plan (the "Equity Incentive Plan") for the purpose of retaining selected executives by offering them an opportunity to acquire a proprietary interest, or to increase such interest, in the success of the Company by purchasing shares of the Common Stock. A total of 550,000 shares of Common Stock have been reserved for issuance under the Equity Incentive Plan. In January 1996, the Compensation Committee awarded ten senior executives a total of approximately 540,000 shares under the Equity Incentive Plan, subject to the authority of Chief Executive Officer to reduce any grants. After reductions a total of 510,906 shares were purchased. The following amounts of shares were purchased by the individuals named in the Summary Compensation Table above: James J. Didion--175,027; Gary J. Beban-- 53,910; Richard C. Clotfelter--33,750; George J. Kallis--42,750; Richard A. Pogue--35,750; Kenneth D. Sandstad--44,586; and John L. Stanfill--54,383. The shares may be issued to senior executives for a purchase price equal to the greater of $10.00 per share or fair market value, and the shares previously acquired were purchased at $10.00 per share. The purchase price for shares under this plan must be paid either in cash or by delivery of a full recourse promissory note. Any shares purchased vest at the rate of 5% per quarter. Bonuses. The Company has bonus programs covering certain 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. Although bonuses are generally paid in cash, the Company retains the discretion to pay any bonus in shares of the Company's Common Stock. Capital Accumulation Plan. The Company's Capital Accumulation 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. Under the Cap Plan, each participating employee may elect to defer a portion of his or her earnings and the Company may make additional contributions from the Company's current or accumulated net profits to the Cap Plan in such amounts as determined by the Board of Directors. During each year that the Cap Plan has been in existence except 1991, the Company has made an additional contribution of stock having a fair market value equal to 2 1/2% of the Company's operating income for the year for which such contribution was made. Each such contribution has been allocated among the participating employees in proportion to their respective contributions to the Cap Plan during the year for which such contribution was made. At September 30, 1996, Cap Plan held 2,842,775 shares of the Company's Common Stock. 58 Deferred Compensation Plan. In 1993, the Company's Board of Directors approved the adoption and implementation of a Deferred Compensation Plan (the "DCP") effective January 1, 1994. Under the DCP, a select group of management and highly-compensated employees are permitted to defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive amounts deferred at a future date either in cash, which accrues at a rate of interest determined in accordance with the DCP, or in newly-issued shares of Common Stock of the Company. For the year ended December 31, 1995, approximately $698,000 (including interest) and $1.1 million were deferred in cash and stock, respectively. The accumulated deferrals as of September 30, 1996 are approximately $1.5 million in cash (including interest) and $2.8 million in stock for a total of $4.3 million. L.J. Melody Stock Option Acquisition Plan. A total of 90,750 shares of Class B-2 Common Stock have been reserved for issuance under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the Board of Directors in September 1996. Options for all of such shares have been issued at an exercise price of $10.00 per share and vest over a period of five years at the rate of 5% per quarter. Options for 90,750 were outstanding as of September 30, 1996. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS In connection with the Offering and Recapitalization, the Company's Third Restated Certificate of Incorporation will be amended and restated as the Fourth Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"). See "Description of Capital Stock--The Recapitalization." The Certificate of Incorporation will include provisions that limit the liability of its directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be limited under the Delaware General Corporation Law ("Delaware Law"). Delaware Law provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders, for monetary damages for breach of their fiduciary duty as directors, except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Certificate of Incorporation also provides that the Company shall indemnify its directors and officers to the fullest extent permitted by the Delaware Law. The Company has entered into separate indemnification agreements with its directors that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that the limitation of liability provision in its Certificate of Incorporation and the indemnification agreements will facilitate the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers of the Company. CERTAIN TRANSACTIONS Mr. Clotfelter, a director of the Company and president of Westmark, owns 85% of the stock of Prescott, Inc. ("Prescott"), a property management company based in Seattle, Washington. In 1994, the Company completed the acquisition of certain assets of Prescott, which consisted of property management agreements, for an aggregate purchase price of $175,000. In connection with the acquisition of assets from Prescott, in 1994 Mr. Clotfelter incurred indebtedness to the Company in an aggregate principal amount of $106,000. The indebtedness bore interest at nine percent, which was determined under the Company's policies for employee loans, and the largest amount outstanding at any time (including principal and interest) was $109,000. The loan was repaid in full as of March 20, 1996. 59 In February 1995, the Company retained the law firm of McDermott, Will & Emery, to which Mr. Anderson, a director of the Company, is counsel, to provide services to the Company consisting of legal counsel in connection with the Company's activities with certain federal agencies. On June 30, 1995, the Company, through a general partnership (the "Acquisition Partnership") in which it directly or indirectly owns all of the partnership interests, acquired Westmark. The purchase price was funded in part by a $10 million senior subordinated loan (the "Senior Subordinated Loan") from 399 Venture Partners, Inc., which owns 427,750 shares of the Company's common stock, to the Acquisition Partnership. See "Principal Stockholders." In November 1996, the terms of the Senior Subordinated Loan were amended to provide for interest to be payable quarterly on a current basis at a rate of 11%, effective June 30, 1995, and to provide for quarterly amortization payments by the Company of $500,000. As amended, interest will accrue on the Senior Subordinated Loan at the original interest rate of 20%, but interest in excess of 11% will be forgiven upon the payment of the Senior Subordinated Loan in full. If the Company defaults on its payment obligations under the loan at any time, such excess interest will not be forgiven and the Senior Subordinated Loan will bear interest at the rate of 20% from June 30, 1995. The terms of the Senior Subordinated Loan originally provided for the interest to be deferred until the debt payable to the Westmark sellers was paid or cash collateralized in full. Pursuant to the terms of his employment arrangements, in each of 1991, 1992 and 1993 the Company paid Mr. Stanfill $50,000 as an interest free advance against future bonuses. Mr. Stanfill's maximum obligation pursuant to such advances was $133,463.50 and his current obligation is $33,363.50 which is scheduled to be repaid in February of 1997. In connection with the Company's acquisition of L.J. Melody the Company entered into an Employment Agreement, dated as of July 1, 1996 ("Melody Employment Agreement"), pursuant to which the Company agreed to employ Mr. Melody as President and Chief Executive Officer of L.J. Melody through June 30, 2001. Pursuant to the Melody Employment Agreement, Mr. Melody is entitled to receive (a) a base salary of $26,000 per month and (b) certain "incentive compensation," based on L.J. Melody's profits. Under certain conditions, Mr. Melody is entitled to severance benefits from L.J. Melody if the Melody Employment Agreement is terminated. If the termination occurs prior to July 1, 1997, the severance benefit is $43,750 per month multiplied by 36 less the number of months elapsed since June 30, 1996. If the termination occurs on or after July 1, 1997, the severance benefit is equal to approximately two years of salary and two years of incentive compensation. In addition, in connection with the acquisition, the Company granted Mr. Melody an option to purchase 30,250 shares of the Company's Class B-2 common stock. See "Management--Principal Stockholders." For information concerning indemnification of directors and officers, see "Management--Limitation of Liability and Indemnification Matters." 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's voting capital stock as of September 30, 1996, assuming the completion of the Recapitalization and the conversion of the Class C-1 common stock assuming an initial public offering price per share of $22.50 and as adjusted to reflect the sale by the Company of the shares offered hereby (assuming no exercise of the Underwriters' over-allotment option), by: (i) each person who is known by the Company to own beneficially more than 5% of each class of the Company's voting stock, (ii) each of the Company's directors, (iii) each of the Company's executive officers named under "Management--Summary Compensation Table," and (iv) all directors and executive officers of the Company as a group.
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED PRIOR TO OWNED AFTER TITLE OF CLASS THE OFFERING THE OFFERING -------------------------- ----------------------- ------------ NUMBER PERCENT PERCENT ------------ ---------- ------------ Kajima U.S.A., Inc. Park Avenue Plaza 55 East 52nd Street 32nd Floor New York, NY 10055.... Series A-1 Preferred Stock 1,000,000 100% 100% Common 2,609(1) * * Fukoku Mutual Life Insurance Company 2-2, Uchisaiwaicho 2- chome Chiyoda-ku, Tokyo 100 Japan.................. Series A-2 Preferred Stock 1,000,000 50% 50% S.R.E.S.--Fifth Avenue, Inc. 666 Fifth Avenue New York, NY 10103..... Series A-2 Preferred Stock 1,000,000 50% 50% Common 4,106(2) * * Entities Associated with BK Capital Partners (3) 909 Montgomery Street Suite 400 San Francisco, CA 94133.................. Common 437,500 4.91% 3.30% Entities associated with Mellon Family Invest- ment Company V (4) Mill Street Extension Laughlintown, PA 15655. Common 466,300 5.23% 3.51% 399 Venture Partners, Inc. 399 Park Avenue New York, NY 10043..... Common 427,750 4.80% 3.22% Gary J. Beban (7)....... Common 193,959 2.16% 1.45% Richard C. Clotfelter (5)(7)................. Common 113,835 1.27% * David A. Davidson (5)(7)................. Common 93,055 1.04% * James J. Didion (5)(6)(7).............. Common 403,067 4.48% 3.02%
61
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE OFFERING THE OFFERING ------------------- ------------ TITLE OF CLASS NUMBER PERCENT PERCENT -------------- ----------- ------- ------------ Thaddeus Jones (7)........... Common 77,233 * * George J. Kallis (5)......... Common 114,864 1.28% * Charles O. McBride (5)(7).... Common 56,631 * * Lawrence J. Melody (7)....... Common 1,513 * * Richard A. Pogue (5)(7)...... Common 71,468 * * Kenneth D. Sandstad (5)(7)... Common 117,756 1.31% * John L. Stanfill (7)......... Common 94,822 1.06% * Stanton D. Anderson (7)...... Common 27,779 * * Richard C. Blum (7)(8)....... Common 437,500 4.91% 3.30% Frank C. Carlucci (7)........ Common 2,287 * * Daniel A. D'Aniello (7)(9)... Common 309,795 3.47% 2.34% Hiroaki Hoshino (10)......... Common -- -- -- Takayuki Kohri (11).......... Common -- -- -- Paul C. Leach................ -- -- -- -- Frederic V. Malek (7)(12).... Common 322,634 3.61% 2.43% Jeffrey S. Morgan............ Common 9,837 * * Peter V. Ueberroth........... Common 10,000 * * Gary L. Wilson............... -- -- -- -- All directors and executive officers as a group (25 persons) (13)........... Common 2,548,110 27.21% 18.58%
- -------- * Less than 1%. (1) Represents options to purchase 2,609 shares of Common Stock exercisable on or before November 30, 1996 issued to Kajima U.S.A., Inc. in respect of services rendered as a director by Mr. Hoshino. (2) Represents 4,106 shares of Common Stock issued upon exercise of options issued to S.R.E.S.-Fifth Avenue, Inc. in respect of services rendered as a director by Mr. Kohri. (3) Includes 287,500 shares of Common Stock issued in the name of BK Capital Partners II. (4) Includes 225,000 shares of Common Stock issued in the name of Richard King Mellon Foundation. (5) Does not include shares of Common Stock issued in the name of the Company in respect of Common Stock units credited to the following persons in the following amounts under the Company's Deferred Compensation Plan but which are not beneficially owned by such persons: Clotfelter--1,895; Davidson-- 23,598; Didion--121,970; Kallis--10,991; McBride--6,087; Pogue--3,592; and Sandstad 1,506. (6) Includes 6,000 shares held by a trust for the benefit of three members of Mr. Didion's immediate family. (7) Represents number of shares of Common Stock which the named individual beneficially owns as well as those which the individual has options to acquire that are exercisable on or before November 30, 1996, which options have not been exercised. The respective numbers shown in the table include the following number of option shares for the following individuals: Anderson--4,235; Beban--65,000; Carlucci--2,287; Clotfelter--50,000; D'Aniello--4,235 (options issued to Carlyle); Davidson--50,000; Didion--75,000; 62 Jones--30,000; Kallis--40,000; Malek--5,934; McBride--40,000; Melody-- 1,513; Pogue--20,000; Sandstad--40,000; and Stanfill--20,000. Such shares do not include options for 2,609 shares of Common Stock issued to Kajima U.S.A., Inc. in respect of services rendered as a director by Mr. Hoshino. (8) Represents 437,500 shares owned by BK Capital Partners and BK Capital Partners II, limited partnerships of which Richard C. Blum & Associates, L.P. is the general partner. Mr. Blum holds the majority of the interests in Richard C. Blum & Associates, L.P. (9) Includes 4,235 shares of Common Stock subject to outstanding options exercisable on or before November 30, 1996 issued in the name of the Carlyle Group, L.P., which, by virtue of Mr. D'Aniello's interest in the general partner of the Carlyle Group, L.P., and investment control over such shares, may be deemed to be beneficially owned by Mr. D'Aniello. Includes shares of Class C-1 common stock which will convert into 168,360 shares of Common Stock upon the consummation of the Offering (assuming an initial public offering price of $22.50 per share). (10) Mr. Hoshino is a Director of Kajima U.S.A., Inc., which together with an affiliate owns 2,000,000 shares of the Company's Preferred Stock, 1,000,000 of which are voting securities, and 2,609 shares of Common Stock. Mr. Hoshino disclaims beneficial ownership of such shares. (11) Mr. Kohri is Deputy Manager of Sumitomo Real Estate Sales Japan, an affiliate of S.R.E.S.--Fifth Avenue, Inc., which owns 1,000,000 shares of the Company's Preferred Stock and 4,106 shares of the Company's Common Stock. Mr. Kohri disclaims beneficial ownership of such shares. (12) Includes shares of C-1 common stock which will convert into 210,450 shares of Common Stock upon the consummation of the Offering (assuming an initial public offering price of $22.50 per share). (13) Includes 448,204 shares of Common Stock subject to outstanding options exercisable on or before November 30, 1996. 63 DESCRIPTION OF CAPITAL STOCK The following summary is a description of certain provisions of the Company's Certificate of Incorporation and Bylaws that will be in effect upon the completion of the Recapitalization, which will occur concurrently with the closing of the Offering. Such summary does not purport to be complete, and is qualified in its entirety by all of the provisions of the Certificate of Incorporation and Bylaws. Copies of the Certificate of Incorporation and Bylaws are filed as exhibits to the Registration Statement of which this Prospectus forms a part. Upon the closing of the Offering, the authorized capital stock of the Company, after giving effect to the Recapitalization, will consist of 100,000,000 shares of Common Stock, $.01 par value ("Common Stock"), and 8,000,000 shares of preferred stock, $.01 par value ("Preferred Stock"). COMMON STOCK Assuming the completion of the Recapitalization and the conversion of the Class C-1 common stock (assuming an initial public offering price per share of $22.50), as of September 30, 1996, there were 8,919,171 shares of Common Stock outstanding. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and do not have cumulative voting rights. Accordingly, the holders of shares of Common Stock and Preferred Stock with a majority of the votes entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Upon a liquidation, dissolution or winding up of the Company, subject to the payment of any amounts which holders of Preferred Stock are entitled to receive in preference to holders of Common Stock, to the extent any assets of the Company remain available for distribution to stockholders, the holders of Common Stock and Preferred Stock are entitled to receive $10.00 per share, reduced by any prior payments to such holder in connection with any liquidation, dissolution or winding up of the Company (not including accrued and unpaid dividends and accrued interest thereon). The holders of Common Stock will be entitled to share in the remaining assets of the Company legally available for distribution. Holders of Common Stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Preferred Stock consists of a single class of 8,000,000 shares, of which three series will be outstanding: (a) 1,000,000 shares of Series A-1 Preferred Stock ("Series A-1 Preferred Stock"), (b) 2,000,000 shares of Series A-2 Preferred Stock ("Series A-2 Preferred Stock") and (c) 1,000,000 shares of Series A-3 Preferred Stock ("Series A-3 Preferred Stock"). The authorized shares of Preferred Stock not included in such series may be issued from time to time in one or more series upon authorization by the Board of Directors. In addition, upon conversion of any of the Series A-1 Preferred Stock, Series A-2 Preferred Stock or Series A-3 Preferred Stock (collectively, "Preferred Stock"), the shares converted will be available for issuance in one or more series from time to time. Subject to certain limitations set forth in the Certificate of Incorporation, the Board of Directors may determine the designation and number of shares of any such series of Preferred Stock and the designation, preferences and relative participating, optional or other special rights and the qualifications, limitations and restrictions thereon. Effective upon the completion of the Recapitalization, holders of Preferred Stock are entitled to dividends ("Preference Dividend") at the rate of $.25 per quarter on each share of Preferred Stock, payable out of funds legally available therefor. The accrual of such dividend will be retroactive to October 1, 1996. Until the Company has completed its acquisition program, it does not intend to pay the dividend on the Preferred Stock. As a consequence, such dividend will accumulate and bear interest which will be paid on a current basis, and the 64 Company will be prohibited from pre-paying long-term debt until such accumulated dividend and interest have been paid in full. In the event the Preference Dividend is not declared and paid within one year after the last day of the quarter to which it relates, it will bear compound annual interest at (i) a fixed rate of 8% annually with respect to the Series A-1 and A-3 Preferred Stock or (ii) an annual rate equal to the six-month rate offered to The Sumitomo Bank, Limited in the London interbank market with respect to the Series A-2 Preferred Stock in amounts comparable to the amount of any unpaid dividend plus 2 1/2%, as determined by each preferred stockholder. Pursuant to an agreement between the Company and the existing preferred stockholders, the holders of 3,000,000 shares of Preferred Stock have elected the 8% fixed rate annually and the holder of the remaining 1,000,000 shares has elected the variable rate option. Until all accrued and unpaid Preference Dividends are paid, no shares of Common Stock will be redeemed by the Company (other than in connection with the Recapitalization and other than shares issued pursuant to stock option, stock purchase or similar plans), and no dividends will be paid on any shares of Preferred Stock (other than the Series A-1, Series A-2 and Series A-3 Preferred Stock) or Common Stock. The Preference Dividend will not be paid and no interest will accrue or be paid thereon if applicable law restricts or prohibits the declaration or payment of the Preference Dividend. The Preference Dividend will also not be required to be declared or paid to the extent it would violate any contractual restrictions in a credit agreement of the Company. The Company has agreed that it will not enter into any contractual prohibition with respect to the accumulation of dividends or the accrual and payment of interest on any unpaid dividends with respect to the Preferred Stock. In addition to the Preference Dividend and any interest payable thereon, each share of Preferred Stock is entitled to receive dividends in the amount of sixty percent (60%) of the amount received by each share of Common Stock. Upon any liquidation, dissolution or winding up of the Company, holders of Preferred Stock and Common Stock will be entitled to share in the remaining assets of the Company after payment of liabilities and any accrued and unpaid Preference Dividend, including any interest thereon, subject to prior distribution rights of other preferred stock, if any, then outstanding, as follows: (i) each holder of Preferred Stock and Common Stock will be entitled to receive an amount, reduced by any prior payments to such holder pursuant to such liquidation, dissolution or winding up of the Company, other than the Preference Dividend and any interest therein, equal to $10.00 per share and (ii) each holder of Preferred Stock will be entitled to share ratably in all remaining assets of the Company to the extent of sixty percent (60%) of the distribution, with respect to each share of Common Stock in excess of $10.00. The holders of shares of Series A-1 Preferred Stock will have two (2) votes per share of Series A-1 Preferred Stock on all matters submitted to a vote of the stockholders of the Company and, except as provided by law, will vote together with the holders of shares of Series A-2 Preferred Stock and the holders of Common Stock as one class on all matters submitted to a vote of stockholders of the Company. The holders of Series A-3 Preferred Stock will not be entitled to vote on any matters, except as may be required by law. 65 The Preferred Stock is convertible into shares of Common Stock at the option of the holder at a ratio ranging from .60 to .78 shares of Common Stock for each share of Preferred Stock, depending on the Market Price (as defined below) of the Common Stock at the time of conversion as follows:
NUMBER OF SHARES OF COMMON STOCK FOR EACH "MARKET PRICE" OF SHARE OF PREFERRED COMMON STOCK STOCK ----------------- ----------------------- Under $10.00 No conversion permitted $10.00 - $21.99 0.78 22.00 - 22.99 0.76 23.00 - 23.99 0.74 24.00 - 24.99 0.72 25.00 - 25.99 0.70 26.00 - 26.99 0.68 27.00 - 27.99 0.66 28.00 - 28.99 0.64 29.00 - 29.99 0.62 $30.00 or more 0.60
The term "Market Price" means (i) during the first 20 consecutive days in which the Common Stock is traded after the closing of the Offering, the initial public offering price and (ii) thereafter, the average closing price for a share of Common Stock as reported by The Wall Street Journal (West Coast Edition) for 20 consecutive trading days immediately preceding the date as of which conversion occurs. Upon consummation of the Offering, 4,000,000 shares of undesignated preferred stock will be authorized. The Board of Directors has the authority, subject to certain rights of the Series A-1, Series A-2 and Series A-3 Preferred Stock and without further action by the stockholders, to issue shares of preferred stock from time to time in one or more series and to fix the number of shares, designations, preferences, powers, and relative, participating, optional or other special rights and qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of additional preferred stock could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the rights and powers, including voting rights, of the holders of Common Stock, and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of preferred stock other than in connection with the Recapitalization. REGISTRATION RIGHTS Pursuant to a registration rights agreement between the Company and the holders of the Preferred Stock (the "Registration Rights Agreement"), until expiration of the Rule 144 Period (as defined below), if the Company proposes to register any of its securities, it will use its best efforts to include in such registration Common Stock acquired by the holders of Preferred Stock upon conversion of the Preferred Stock. The registration rights granted to the holders of Preferred Stock do not apply to certain transactions, including the Offering, registrations relating solely to employee benefit plans, a corporate reorganization, reclassification, merger, consolidation or acquisition or a registration that does not permit secondary sales. The "Rule 144 Period" means the period beginning at the date of this Prospectus and continuing until the Common Stock acquired on conversion of the Preferred Stock is no longer subject to the volume limitation provisions of Rule 144 of the Securities Act, either pursuant to the provisions of the Registration Rights Agreement or by operation of law. 66 THE RECAPITALIZATION The Company has obtained stockholder approval for the Recapitalization pursuant to which, among other things, the Company's Certificate of Incorporation and Bylaws will be amended. The Company's Certificate of Incorporation which was in effect prior to the Offering will be amended to effect the following changes, among others: (i) change the name of the Company from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group, Inc., (ii) provide for (A) the automatic conversion, concurrently with the consummation of the Offering, of the Class B-1 common stock and Class B-2 common stock (which will be replaced on a one-for-one basis with Common Stock), the Class C-1 common stock (which will be replaced with Common Stock determined according to the formula set forth below) and each existing series of preferred stock (which will be replaced on a one-for-one basis with corresponding new series of preferred stock, respectively), and (B) the Common Stock as the only class of common stock of the Company following the closing of the Offering, (iii) provide for the elimination of Class C-R common stock and Class J common stock (the outstanding shares of which will be repurchased for $0.01 per share or an aggregate of $8,000), (iv) provide for an increase in the total number of shares of capital stock which the Company is authorized to issue from 27,200,002 to 108,000,000 and an increase in the number of shares of common stock (which will be comprised of the Common Stock) which the Company is authorized to issue from 19,200,002 to 100,000,000, (v) provide that the Common Stock and the Series A-1 and Series A-2 Preferred Stock will vote together as a class for directors and on other matters, except where a separate class vote is required by law and except with respect to any changes in any of the rights, preferences or privileges of the Preferred Stock (for which the holders of a majority of all series of Preferred Stock voting as a single class is required), and (vi) eliminate super majority and cumulative voting by stockholders. Each share of C-1 common stock will be converted into a number of shares of Common Stock equal to (i) the greater of the initial public offering price per share and $22.00, minus $10.00 divided by (ii) the greater of the initial public offering price per share and $22.00. Also as part of the Recapitalization, the Company's By-Laws will be amended to, among other things, (i) eliminate the requirement of supermajority stockholder approval to amend or repeal existing ByLaws, so that the ByLaws may be amended by a majority vote of the directors or a majority vote of the stockholders entitled to vote and (ii) eliminate the Operating Committee (the powers and authority of which were not clearly delineated) and grant to the Executive Committee and other committees of the Board of Directors the power to take such actions as may be authorized by resolution of the Board of Directors, consistent with the limitations of the Delaware Law, and (iii) modify certain requirements for the calling of meetings of the Board of Directors. DELAWARE ANTI-TAKEOVER LAW Following the consummation of the Offering, the Company will be subject to the "business combination" statute of the Delaware General Corporation Law (Section 203). In general, such statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with any "interested stockholder" for a period of three years after the date of the transaction in which the person became an "interested stockholder," unless (i) such transaction is approved by the board of directors prior to the date the interested stockholder obtains such status, (ii) upon consummation of such transaction, the "interested stockholder" beneficially owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) the "business combination" is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes mergers, asset sales and other transactions resulting in financial benefit to the "interested stockholder." An "interested stockholder" is a person who together with affiliates and associates owns (or within three years, did own) beneficially 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. 67 THE COMPANY'S CREDIT AGREEMENTS Senior Secured Debt Repayment and Amendments After the consummation of the Offering, approximately $70.5 million of indebtedness ("Term Debt"), including $18 million of indebtedness secured by certain mortgages (the "Mortgage Debt"), will be outstanding under the Company's Senior Secured Credit Agreement. The Senior Secured Credit Agreement also provides for a $20 million revolving credit facility ("Revolving Credit Facility A") and an additional $10 million revolving credit facility ("Revolving Credit Facility B"). No indebtedness is expected to be outstanding under Revolving Credit Facility A or Revolving Credit Facility B immediately after completion of the Offering. The Company has reached an agreement in principle to amend and restate the Senior Secured Credit Agreement. It is anticipated that, pursuant to such amendment the terms and conditions of the Senior Secured Credit Agreement will be substantially as described below. All indebtedness outstanding under the Senior Secured Credit Agreement other than that outstanding under Revolving Credit Facility B will bear interest at a rate equal to, at the Company's option, LIBOR plus 250 basis points or the prime rate plus 150 basis points. Amounts outstanding on Revolving Credit Facility B will bear interest at a rate equal to, at the Company's option, LIBOR plus 300 basis points or the prime rate plus 200 basis points. Principal payments of $2.625 million each will be due quarterly, commencing March 31, 1997, with final payment of $2.8 million on March 31, 2001. The availability period of Revolving Credit Facility A ends December 31, 2001.As proposed, effective upon completion of the Offering, Revolving Credit Facility B will be converted into a facility for acquisitions. As proposed, principal payments on amounts outstanding under such facility will be paid quarterly at the rate of 5% of the outstanding balance. All amounts of principal which are prepaid may be reborrowed until the December 31, 1999 expiration date of the facility. The Company has begun discussions to increase Revolving Credit Facility B from $10 million to $20 million sometime in 1997 and to extend the due date until December 31, 2001. Subject to certain exceptions and limitations, the Company will be obligated to make prepayments in respect of indebtedness outstanding under the Senior Secured Credit Agreement equal to (a) 100% of the net cash proceeds from any sale or other disposition of assets resulting in aggregate consideration in excess of $1 million in any twelve-month period, or (b) 25% of the net cash proceeds from a sale of the Company's capital stock. In general, prepayments are applied first to Term Debt (other than the Mortgage Debt) and then to indebtedness outstanding under Revolving Credit Facility A and Revolving Credit Facility B, pro rata according to the respective principal amounts then outstanding thereunder, and then to the Mortgage Debt. A prepayment required to be made as a result of the sale of real property which secures the Mortgage Debt is applied, first, to Mortgage Debt, next to other Term Debt, and, finally, to indebtedness outstanding under Revolving Credit Facility A and Revolving Credit Facility B, pro rata according to the respective principal amounts then outstanding thereunder. All of the foregoing prepayments in respect of Revolving Credit Facility A and Revolving Credit Facility B permanently reduce the amount available under the respective revolving credit facility by the amount of the prepayment. The obligations of the Company under the Senior Secured Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries, including cash, accounts receivable, equipment, intellectual property, and real property. The Senior Secured Credit Agreement, as amended, will contain certain financial tests which the Company is obligated to satisfy. These tests include a leverage ratio, an interest coverage ratio, a fixed charges coverage ratio, and a senior loan debt service coverage ratio. The Senior Secured Credit Agreement will also contain a number of affirmative and negative covenants covering such matters as maintenance of corporate existence, payment of taxes, maintenance of properties, maintenance of insurance, the granting or existence of certain liens, incurrence of additional indebtedness, payment of dividends, investments, capital expenditures, sales or other dispositions of property, payments in respect of subordinated debt, and compliance with ERISA. The financial and other covenants in the Senior Secured Credit Agreement may prevent the Company from carrying out a transaction or taking other action otherwise determined by the Board of Directors to be in the 68 Company's best interests. For example, the covenant regarding limitations on incurrence of indebtedness or regarding limitations on liens may preclude the Company and its subsidiaries from making an acquisition (whether by merger or in some other form). Although the Company would intend to seek a waiver or modification of these covenants under appropriate circumstances, there can be no assurance that the Company will be able to obtain such a waiver or modification upon terms and conditions acceptable to the Company on a timely basis, or at all. As a result, the covenants in the Senior Secured Credit Agreement may effectively preclude the Company from pursuing its strategy of growth through acquisitions or delay the Company's ability to carry out that strategy. The Senior Secured Credit Agreement will contain a number of events of default (each an "Event of Default"), including, without limitation, failure to make required payments or prepayments of principal or interest, breach of covenant, breach of a representation or warranty in a material respect, default in respect of other indebtedness in excess of $500,000, insolvency of the Company or any of its subsidiaries, failure to discharge or pay or obtain a stay in respect of a judgment in excess of $100,000, certain events relating to ERISA involving a liability or payment in excess of $100,000, a change of control, as defined below, and a material adverse change in the business, assets, prospects, results of operation or the financial condition of the Company or of the Company and its subsidiaries taken as a whole. Change of control is defined under the Senior Secured Credit Agreement as (i) the acquisition, by any person (other than the Company's Capital Accumulation Plan), of more than 25% of the total voting power of all classes of the Company's equity securities (excluding the acquisition by the Underwriters of Common Stock in the Offering) or (ii) a change in the board of directors of the Company such that board members at the beginning of any one year period no longer constitute a majority of the board at the end of such period, or (iii) the Company ceases to own 100% of the outstanding common stock of the Company's primary operating subsidiary. Upon the occurrence of an Event of Default (other than an Event of Default relating to insolvency), the lenders under the Senior Secured Credit Agreement have the right, in addition to other available remedies, to terminate the revolving credit facilities, to declare all indebtedness outstanding thereunder immediately due and payable, and to thereafter pursue applicable remedies against any and all collateral securing payment of such indebtedness. Senior Subordinated Debt Amendments After the consummation of the Offering, approximately $62.0 million of indebtedness will be outstanding under the Company's Senior Subordinated Credit Agreement. The Company has reached an agreement in principle to amend and restate the Senior Subordinated Credit Agreement and anticipates that as so amended such credit agreement will contain financial and other covenants no more restrictive than those under the Senior Secured Credit Agreement. Interest on the senior subordinated debt, will be LIBOR plus 125 basis points from the Offering through December 31, 1998, LIBOR plus 200 basis points during 1999, LIBOR plus 300 basis points during 2000 and LIBOR plus 400 basis points during 2001 and beyond. Interest in excess of LIBOR plus 125 basis points will be deferred and added to principal until the final maturity date. The principal outstanding under the Senior Subordinated Credit Agreement will be due and payable in full on July 23, 2002 and may not be prepaid while any amount is unpaid under the Senior Secured Credit Agreement. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The Bank of New York. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering there has been no active public market for the Common Stock of the Company. Although the Common Stock has been approved for listing on the Nasdaq National Market, no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be 69 available for sale shortly after the Offering due to certain contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price. Upon consummation of the Offering, the Company will have outstanding 13,266,171 shares of Common Stock, of which 6,667,264 shares of Common Stock will be freely tradable without restriction. The Company's directors, executive officers and certain stockholders, who collectively hold an aggregate of 7,057,948 shares of Common Stock (including shares represented by exercisable stock options), have agreed subject to certain exceptions that they will not directly or indirectly (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a period of 180 days from the date of this Prospectus (the "Lockup Period"). Following the expiration of the Lockup Period, approximately 2,256,152 shares of Common Stock, including shares issuable upon the exercise of certain options, will be available for sale in the public market subject to compliance with Rule 144, including approximately 2,299,017 shares eligible for the sale under Rule 144(k). See "Underwriting." Holders of the Company's 4,000,000 shares of outstanding Preferred Stock have the right to convert such shares into Common Stock after the date of the Offering at a conversion ratio ranging from .60 to .78 shares of Common Stock for each share of Preferred Stock, depending on the market price of the Common Stock. The holders of the Preferred Stock have agreed not to sell Preferred Stock or any shares of Common Stock they acquire upon such conversion for 180 days from the date of this Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Thereafter, for an additional six months, such holders are contractually bound to sell such shares only within the volume limitations of Rule 144 for sales made at a price per share below the initial public offering price unless such sales are pursuant to block trades which do not involve a broker's transaction executed on any exchange or in the over-the-counter market. See "Description of Capital Stock--Preferred Stock". In general, under Rule 144 as currently in effect, an affiliate of the Company, or a holder of Restricted Shares who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the previous two years, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 133,000 shares immediately after the Offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who owns beneficially Restricted Shares is entitled to sell such shares under Rule 144(k) without regard to the limitations described above, provided that at least three years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company. The Securities and Exchange Commission has recently proposed reducing the initial Rule 144 holding period from two years to one year and the Rule 144(k) holding period from three years to two years. There can be no assurance as to when or whether such rule changes will be enacted. The foregoing is a summary of Rule 144 and is not intended to be a complete description of it. Pursuant to the Registration Rights Agreement, until expiration of the Rule 144 Period (as defined below), if the Company proposes to register any of its securities, it will use its best efforts to include in such registration Common Stock acquired by the holders of the Preferred Stock upon conversion of the Preferred Stock. The registration rights granted to the holders of the Preferred Stock do not apply to the Offering, registrations at the 70 request of stockholders granted registration rights by the Company, registrations relating to solely employee benefit plans, a corporate reorganization, reclassification, merger, consolidation or acquisition or a registration that does not permit secondary sales. The "Rule 144 Period" means the period beginning at the date of this Prospectus and continuing until the Common Stock acquired on conversion of the Preferred Stock is no longer subject to the volume limitation provisions of Rule 144 of the Securities Act, either pursuant to the provisions of the Registration Rights Agreement or operation of law. 71 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company and each of the Underwriters named below (the "Underwriters"), the Company has agreed to sell to each of the Underwriters, and each of the Underwriters agreed to purchase from the Company, the number of shares of Common Stock set forth opposite its name below.
NUMBER UNDERWRITERS OF SHARES ------------ --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................. Montgomery Securities............................................. --------- Total........................................................ 4,347,000 =========
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery Securities are acting as representatives (the "Representatives") of the Underwriters. The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a discount not in excess of $ per share to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has granted the several Underwriters an option, exercisable within 30 days after the date hereof, to purchase up to an aggregate of 652,050 additional shares of Common Stock to cover over-allotments, if any, at the initial public offering price set forth on the cover of this Prospectus less the underwriting discount. If the Underwriters exercise this option, each of the Underwriters will be obligated, subject to certain conditions, to purchase the number of shares of Common Stock proportionate to such Underwriter's initial amount reflected in the foregoing table. The Company's executive officers, directors and certain other stockholders of the Company, who collectively hold in the aggregate approximately 7,057,948 shares of Common Stock (including shares represented by exercisable stock options and shares issuable upon conversion of the Preferred Stock), and the Company have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, for a period of 180 days from the date of this Prospectus. Prior to the Offering, there has been no established public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations by and among the Representatives and the Company. Among the factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, will be the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management, and the consideration of the above factors in relation to market valuations of companies in related businesses. 72 The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco, California and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. EXPERTS The consolidated financial statements and related schedules of (i) the Company as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 and (ii) L.J. Melody as of December 31, 1995 and for the year then ended and L.J. Melody & Company of California as of December 31, 1995 and for year then ended, in each case included in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The financial statements and related schedules of Westmark Realty Advisors L.L.C. (formerly Westmark Realty Advisors, a partnership) as of December 31, 1994 and 1993, included in this Prospectus have been audited by KPMG Peat Marwick LLP. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material may be obtained from such office upon payment of the fees prescribed by the Commission. Additionally, the Company is subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and thus files with the Commission periodic reports pursuant to Section 13(d) and proxy statements pursuant to Section 14 of the Exchange Act. These filings may also be inspected at or obtained from the Commission. In addition, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission through the Electronic Data Gathering, Analysis and Retrieval System. The Company furnishes its stockholders with annual reports containing financial statements audited by independent certified public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 73 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma balance sheet as of June 30, 1996 and statements of operations for the nine months ended September 30, 1996 and for the year ended December 31, 1995 ("the pro forma financial statements") give effect to (i) the acquisitions of Westmark Realty Advisors L.L.C., a Delaware limited liability company ("Westmark"), L.J. Melody & Company, a Texas corporation, and L.J. Melody & Company of California, a Texas corporation (together, "L.J. Melody"), by CB Commercial Holdings, Inc. and Subsidiaries ("CB Commercial") (together with Westmark and L.J. Melody, the "Company") and the Offering and the Recapitalization as if all transactions occurred as of January 1, 1995 in the pro forma combined statement of operations and (ii) the Offering and the Recapitalization as if they occurred as of September 30, 1996 in the pro forma combined balance sheet. See "Description of Capital Stock-- The Recapitalization." The pro forma financial statements also reflect the effects of the financing obtained to conclude the acquisitions, as well as certain other related assumptions. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable. The acquisitions have been accounted for by the Company as purchases. The adjustments included in the pro forma financial statements represent the effects of the Company's preliminary determination and allocation of the purchase price to the fair value of the assets and liabilities acquired, based upon currently available information. There can be no assurance that the actual effects will not differ significantly from the pro forma adjustments reflected in the pro forma financial statements. The pro forma financial statements are not necessarily indicative of either future results of operations or results that might have been achieved if the transactions had been consummated as of the dates indicated. The pro forma financial statements should be read in conjunction with the historical consolidated financial statements and footnotes of CB Commercial, Westmark, and L.J. Melody. P-1 UNAUDITED PRO FORMA BALANCE SHEET (DOLLARS IN THOUSANDS) AS OF SEPTEMBER 30, 1996
PRO FORMA PRO FORMA CB COMMERCIAL ADJUSTMENTS OFFERING ------------- ----------- --------- Current Assets: Cash and cash equivalents............. $ 24,903 $ 1,599 (c) $ 26,502 Receivables, net...................... 30,741 -- 30,741 Deferred taxes........................ 3,983 -- 3,983 Prepaid expense and other............. 7,498 -- 7,498 --------- -------- --------- Total current assets................ 67,125 1,599 68,724 Property and equipment, net............. 41,795 -- 41,795 Other intangibles, net.................. 12,138 (1,639)(a) 10,499 Goodwill, net........................... 62,999 -- 62,999 Inventoried property.................... 7,355 -- 7,355 Deferred tax asset...................... 34,562 16,300 (b) 50,862 Other assets, net....................... 6,601 -- 6,601 --------- -------- --------- Total assets........................ $ 232,575 $ 16,260 $ 248,835 ========= ======== ========= Current Liabilities: Compensation and employee benefits.... $ 28,489 $ -- $ 28,489 Accounts payable and accrued expenses. 17,931 -- 17,931 Senior revolving credit lines......... 8,000 -- 8,000 Reserve for bonus and profit sharing.. 11,292 -- 11,292 Current maturities of long-term debt.. 16,541 -- 16,541 Current portion of capital lease obli- gations.............................. 2,669 -- 2,669 --------- -------- --------- Total current liabilities........... 84,922 -- 84,922 --------- -------- --------- Long-term debt, less current maturities Senior term loans..................... 142,101 (79,911)(c) 62,190 Senior subordinated term loans........ 78,462 (8,962)(c) 69,500 Inventoried property loan............. 7,470 -- 7,470 Other long-term debt.................. 3,953 -- 3,953 --------- -------- --------- Total long-term debt................ 231,986 (88,873) 143,113 --------- -------- --------- Other long-term liabilities............. 22,561 -- 22,561 --------- -------- --------- Total liabilities................... 339,469 (88,873) 250,596 --------- -------- --------- Stockholders' Equity (Deficit) Preferred stock, $.01 par value....... 40 -- 40 Common stock, $.01 par value.......... 101 32 (c) 133 Common stock options outstanding...... 259 -- 259 Additional paid-in capital............ 117,567 90,440 (c) 208,007 Notes receivable from sale of stock... (5,109) -- (5,109) Accumulated deficit................... (219,752) 16,300 (b) (205,091) (1,639)(a) --------- -------- --------- Total stockholders' equity (defi- cit)............................... (106,894) 105,133 (1,761) --------- -------- --------- Total liabilities and stockholders' equity (deficit)................... $ 232,575 $ 16,260 $ 248,835 ========= ======== =========
- ------- NOTES TO UNAUDITED PRO FORMA BALANCE SHEET (a) Reflects pro-rata write-off of unamortized debt costs related to the portion of debt to be extinguished. (b) Reflects deferred tax asset that will be recognized as a result of the Offering due to reduced interest expense as a result of the repayment, in part, of the Company's senior secured indebtedness. (c) Reflects the Offering, net of estimated underwriting discount and Offering expenses, and use of proceeds from the Offering to repay, in part, the Company's senior secured indebtedness. P-2 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, 1996
L.J. MELODY CB COMMERCIAL SIX MONTHS PRO FORMA PRO FORMA NINE MONTHS ENDED ENDED ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA SEPTEMBER 30, JUNE 30, ----------- ACQUISITION ----------- ACQUISITION 1996 1996 ACQUISITION ONLY OFFERING AND OFFERING ----------------- ---------- ----------- ----------- ----------- ------------ Revenue................. $ 390,863 $ 3,417 $ -- $ 394,280 $ -- $ 394,280 Costs and Expenses: Commissions, fees and other incentives ..... 195,465 3,612 (1,070)(a) 198,240 -- 198,240 233 (b) Operating, administrative and other................. 159,196 1,545 -- 160,741 -- 160,741 Depreciation and amor- tization ............. 9,749 163 355 (c) 10,267 10,267 ---------- ------- ------- ---------- ------- ---------- Operating income (loss). 26,453 (1,903) 482 25,032 -- 25,032 Interest income......... 1,035 145 -- 1,180 -- 1,180 Interest expense........ 17,883 -- 216 (d) 18,099 (5,126)(f) 13,672 (479)(g) 1,178 (h) ---------- ------- ------- ---------- ------- ---------- Income (loss) before provision (benefit) for income tax............. 9,605 (1,758) 266 8,113 4,427 12,540 ---------- ------- ------- ---------- ------- ---------- Provision (benefit) for income tax ............ 4,610 -- (287)(e) 4,323 1,771 (i) 6,094 Reduction of valuation allowances............. (40,400) -- -- (40,400) -- (40,400) ---------- ------- ------- ---------- ------- ---------- Net provision (benefit) for income tax......... (35,790) -- (287) (36,077) 1,771 (34,306) ---------- ------- ------- ---------- ------- ---------- Net income (loss)....... $ 45,395 $(1,758) $ 553 $ 44,190 $ 2,656 $ 46,846 ========== ======= ======= ========== ======= ========== Per share data: Net income per common and common equivalent share outstanding..... $ 3.29 $ 3.20 $ 3.37 ========== ========== ========== Weighted average common and common equivalent shares outstanding (j)................... 13,815,434 13,815,434 13,006,876 ========== ========== ==========
- ------- NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ACQUISITION: (a) Reflects the reversal of an accrual for a one-time acquisition related bonus to L.J. Melody employees prior to the acquisition. (b) Reflects additional compensation expense attributable to Lawrence J. Melody's employment. (c) Reflects the amortization of net $9.0 million in intangible assets and goodwill. Amortization period is 30 years. (d) Reflects interest on acquisition financing. (e) Reflects deferred tax benefit of certain pro forma adjustments relating to L.J. Melody purchase accounting entries, consisting of additional compensation expense, interest expense and amortization of intangible assets. OFFERING: (f) Reflects interest expense savings resulting from the repayment of $88.9 million of the total indebtedness, bearing interest estimated at 8.2% for senior secured debt and 6.2% for senior subordinated debt. Debt paydown results from the net proceeds of the Offering. (g) Represents reduction in amortization expense for portion of unamortized debt costs written off. (h) Reflects the additional interest expense resulting from the higher interest rate on senior subordinated indebtedness after the Offering. (i) Represents tax effect of income and expenses from Offering adjustments. P-3 (j) Reflects the effect of the Recapitalization as follows: Weighted average common and common equivalent shares--histori- cal........................................................... 13,815,434 Remove the Preferred Stock which will not be a common stock equivalent after the Offering................................. (4,000,000) Net reduction in shares of common stock resulting from the con- version of Class C-1 stock.................................... (355,556) Reduction in shares of common stock resulting from the repur- chase of Class C-R and Class J stock.......................... (800,002) Shares issued in the Offering.................................. 4,347,000 ---------- Weighted average common and common equivalent shares--pro forma......................................................... 13,006,876 ==========
P-4 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1995
WESTMARK CB COMMERCIAL SIX MONTHS L.J. MELODY PRO FORMA PRO FORMA YEAR ENDED ENDED YEAR ENDED ADJUSTMENTS-- ADJUSTMENTS-- DECEMBER 31, JUNE 30, DECEMBER 31, ------------- PRO FORMA ------------- PRO FORMA 1995 1995 1995 ACQUISITIONS ACQUISITIONS OFFERING COMBINED ------------- ---------- ------------ ------------- ------------ ------------- ----------- Revenue................. $ 468,460 $10,887 $10,337 $ -- $ 489,684 $ -- $ 489,684 Costs and Expenses: Commissions, fees and other incentives...... 239,018 -- 6,546 -- 245,564 -- 245,564 Operating, administrative and other................. 187,968 9,285 2,393 50 (a) 200,341 -- 200,341 178 (b) 467 (c) Depreciation and amortization.......... 11,631 163 438 17 (d) 14,502 14,502 2,253 (e) ----------- ------- ------- ------- ----------- ------- ----------- Operating income........ 29,843 1,439 960 (2,965) 29,277 -- 29,277 Interest income......... 1,674 36 216 -- 1,926 -- 1,926 Interest expense........ 23,267 19 -- 2,794 (f) 26,080 (6,834)(i) 20,177 1,570 (j) (639)(k) ----------- ------- ------- ------- ----------- ------- ----------- Income (loss) before provision (benefit) for income tax............. 8,250 1,456 1,176 (5,759) 5,123 5,903 11,026 Provision (benefit) for income tax............. 841 -- -- 2 (g) 220 2,361 (l) 2,581 (623)(h) ----------- ------- ------- ------- ----------- ------- ----------- Net income (loss)....... $ 7,409 $ 1,456 $ 1,176 $(5,138) $ 4,903 $ 3,542 $ 8,445 =========== ======= ======= ======= =========== ======= =========== Per share data: Net income per common and common equivalent share outstanding..... $ 0.56 $ 0.37 $ 0.35 =========== =========== =========== Weighted average common and common equivalent shares outstanding.... 13,168,975 13,168,975 12,605,879(m) =========== =========== ===========
- ------- NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ACQUISITIONS: (a) Reflects elimination of Westmark's historical amortization of deferred leasing concessions (free rent). (b) Reflects increased compensation resulting from new employment agreements with certain Westmark executives, and the straight-lining of rents from the date of the Westmark acquisition. (c) Reflects additional compensation expense relating to Lawrence J. Melody's employment. (d) Reflects increase in depreciation expense associated with reducing the useful life of Westmark's computers from 5 to 3 years. (e) Reflects the amortization of $41.4 million (Westmark) and net $9.0 million (L.J. Melody) in intangible assets and goodwill. Amortization expense is $1.5 million for Westmark and $0.7 million for L.J. Melody. (f) Reflects interest on acquisition financing ($2.3 million for Westmark and $0.5 million for L.J. Melody). (g) Reflects the additional minimum tax resulting from combined operations of Westmark. (h) Reflects deferred tax benefit of certain pro forma adjustments relating to L.J. Melody purchase accounting entries, consisting of additional compensation expense, interest expense and amortization of intangible assets. P-5 OFFERING: (i) Reflects interest expense savings resulting from the repayment of $88.9 million of the total indebtedness, bearing interest estimated at 8.2% for the senior secured debt and 6.2% for senior subordinated debt, from Offering proceeds. (j) Reflects additional interest expense resulting from the higher interest rate on senior subordinated indebtedness after the Offering. (k) Represents reduction in amortization expense for portion of unamortized debt costs written off. (l) Represents tax effect of income and expenses from Offering adjustments. (m) Reflects the effect of the Recapitalization as follows: Weighted average common and common equivalent shares--histori- cal........................................................... 13,414,437 Remove the Preferred Stock which will not be a common stock equivalent after the Offering................................. (4,000,000) Net reduction in shares of common stock resulting from the con- version of Class C-1 stock............................................... (355,556) Reduction in shares of common stock resulting from the repur- chase of Class C-R stock and Class J stock............................. (800,002) Shares issued in the Offering.................................. 4,347,000 ---------- Weighted average common and common equivalent shares--pro forma......................................................... 12,605,879 ==========
P-6 INDEX TO FINANCIAL STATEMENTS
PAGE ---- CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES (TO BE RENAMED CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. EFFECTIVE UPON THE CONSUMMATION OF THE OFFERING) Report of Independent Public Accountants................................ F-3 Consolidated Balance Sheets as of September 30, 1996 (Unaudited), Decem- ber 31, 1995 and 1994.................................................. F-4 Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1995 (Unaudited) and for the years ended December 31, 1995, 1994 and 1993... F-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 (Unaudited) and for the years ended December 31, 1995, 1994 and 1993....................................... F-6 Consolidated Statements of Stockholders' Equity (Deficit) for the nine months ended September 30, 1996 and for the years ended December 31, 1995, 1994 and 1993................................................................... F-7 Notes to Consolidated Financial Statements.............................. F-8 WESTMARK REALTY ADVISORS JUNE 30, 1995 AND 1994 (UNAUDITED) Statements of Income for the six months ended June 30, 1995 and 1994.... F-24 Statements of Changes in Owners' Equity (Deficit) for the six months ended June 30, 1995 and 1994........................................... F-25 Statements of Cash Flows for the six months ended June 30, 1995 and 1994................................................................... F-26 Notes to Financial Statements........................................... F-27 DECEMBER 31, 1994 AND 1993 Independent Auditors' Report............................................ F-29 Balance Sheets as of December 31, 1994 and 1993......................... F-30 Statements of Income for the years ended December 31, 1994 and 1993..... F-31 Statements of Changes in Partners' Capital for the years ended December 31, 1994 and 1993...................................................... F-32 Statements of Cash Flows for the years ended December 31, 1994 and 1993. F-33 Notes to Financial Statements........................................... F-34 L.J. MELODY & COMPANY JUNE 30, 1996 (UNAUDITED) Consolidated Balance Sheet as of June 30, 1996.......................... F-37 Consolidated Statement of Operations and Retained Earnings for the six months ended June 30, 1996............................................. F-38 Consolidated Statement of Cash Flows for the six months ended June 30, 1996................................................................... F-39 Notes to Consolidated Financial Statements.............................. F-40 DECEMBER 31, 1995 Report of Independent Public Accountants................................ F-44 Consolidated Balance Sheet as of December 31, 1995...................... F-45 Consolidated Statement of Operations and Retained Earnings for the year ended December 31, 1995................................................ F-46 Consolidated Statement of Cash Flows for the year ended December 31, 1995................................................................... F-47 Notes to Consolidated Financial Statements.............................. F-48
F-1
PAGE ---- L.J. MELODY & COMPANY OF CALIFORNIA JUNE 30, 1996 (UNAUDITED) Balance Sheet as of June 30, 1996...................................... F-52 Statement of Operations for the six months ended June 30, 1996......... F-53 Statement of Shareholders' Equity for the six months ended June 30, 1996.................................................................. F-54 Statement of Cash Flows for the six months ended June 30, 1996......... F-55 Notes to Financial Statements.......................................... F-56 DECEMBER 31, 1995 Report of Independent Public Accountants............................... F-59 Balance Sheet as of December 31, 1995.................................. F-60 Statement of Operations for the year ended December 31, 1995........... F-61 Statement of Shareholders' Equity for the year ended December 31, 1995. F-62 Statement of Cash Flows for the year ended December 31, 1995........... F-63 Notes to Financial Statements.......................................... F-64
F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CB Commercial Holdings, Inc.: We have audited the accompanying consolidated balance sheets of CB Commercial Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995, and 1994, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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 CB Commercial Holdings, Inc. and subsidiaries as of December 31, 1995, and 1994, and the results of their operations and their cash flows for the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Los Angeles, California Arthur Andersen LLP January 31, 1996 (Except with respect to the matters discussed in Notes 1, 2 and 13, as to which the date is November 1, 1996) F-3 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30, -------------------- 1996 1995 1994 ------------- --------- --------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents................. $ 24,903 $ 23,045 $ 28,770 Receivables, less allowance of $3,959, $4,400 and $4,544 for doubtful accounts at September 30, 1996, December 31, 1995 and 1994, respectively................... 30,741 28,322 23,723 Deferred taxes............................ 3,983 765 -- Prepaid expenses and other................ 7,498 4,889 3,682 --------- --------- --------- Total current assets..................... 67,125 57,021 56,175 Property and equipment, net................ 41,795 44,500 47,140 Goodwill, net of accumulated amortization of $6,949, $5,194 and $3,672 at September 30, 1996, December 31, 1995 and 1994...... 62,999 59,491 22,251 Other intangible assets, net of accumulated amortization of $251,690, $249,726 and $245,722 at September 30, 1995 and 1994... 12,138 10,783 6,192 Inventoried property....................... 7,355 7,355 7,355 Deferred taxes............................. 34,562 -- -- Other assets, net.......................... 6,601 11,804 10,987 --------- --------- --------- Total assets............................. $ 232,575 $ 190,954 $ 150,100 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Compensation and employee benefits........ $ 28,489 $ 28,324 $ 26,989 Accounts payable and accrued expenses..... 17,931 19,245 19,429 Senior revolving credit lines............. 8,000 -- -- Reserve for bonus and profit sharing...... 11,292 12,997 11,573 Current maturities of long-term debt...... 16,541 8,250 4,500 Current portion of capital lease obliga- tions.................................... 2,669 2,592 1,493 --------- --------- --------- Total current liabilities................ 84,922 71,408 63,984 --------- --------- --------- Long-term debt, less current maturities: Senior term loans......................... 142,101 160,394 160,390 Senior subordinated term loans............ 78,462 78,963 63,694 Inventoried property loan................. 7,470 7,470 7,470 Other long-term debt...................... 3,953 3,315 2,017 --------- --------- --------- Total long-term debt..................... 231,986 250,142 233,571 --------- --------- --------- Other long-term liabilities................ 22,561 24,092 17,093 --------- --------- --------- Total liabilities........................ 339,469 345,642 314,648 --------- --------- --------- Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $.01 par value........... 40 40 40 Common stock, $.01 par value.............. 101 93 89 Common stock options outstanding.......... 259 263 294 Additional paid-in capital................ 117,567 110,063 107,708 Notes receivable from sale of stock....... (5,109) -- -- Accumulated deficit....................... (219,752) (265,147) (272,679) --------- --------- --------- Total stockholders' equity (deficit)..... (106,894) (154,688) (164,548) --------- --------- --------- Total liabilities and stockholders' eq- uity (deficit).......................... $ 232,575 $ 190,954 $ 150,100 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------- -------------------------------- 1996 1995 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Revenue................. $ 390,863 $ 324,890 $ 468,460 $ 428,988 $ 392,037 Costs and Expenses: Commissions, fees and other incentives...... 195,465 167,569 239,018 225,085 206,070 Operating, administra- tive and other........ 159,196 134,839 187,968 170,234 160,073 Depreciation and amor- tization.............. 9,749 8,173 11,631 8,091 49,606 ---------- ---------- ---------- ---------- ---------- Operating income (loss). 26,453 14,309 29,843 25,578 (23,712) Interest income......... 1,035 1,228 1,674 1,109 915 Interest expense........ 17,883 16,944 23,267 17,362 14,240 ---------- ---------- ---------- ---------- ---------- Income (loss) before provision for income tax.................... 9,605 (1,407) 8,250 9,325 (37,037) Provision for income tax ....................... 4,610 238 841 152 112 Reduction of valuation allowances............. (40,400) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax......... (35,790) 238 841 152 112 ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 45,395 $ (1,645) $ 7,409 $ 9,173 $ (37,149) ========== ========== ========== ========== ========== Per share data: Net income (loss) per common and common equivalent share outstanding........... $ 3.29 $ (0.14) $ 0.55 $ 0.70 $ (3.26) ========== ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding.... 13,815,434 11,732,012 13,414,437 13,179,014 11,378,540 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, -------------------- ---------------------------- 1996 1995 1995 1994 1993 --------- --------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net income (loss)......... $ 45,395 $ (1,645) $ 7,409 $ 9,173 $(37,149) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amorti- zation excluding de- ferred financing fees... 9,749 8,173 11,631 8,091 49,606 Amortization of deferred financing costs......... 1,065 1,018 1,392 1,551 1,784 Equity interest in (earn- ings) loss of unconsoli- dated subsidiaries...... -- -- 180 (44) (35) Provision for (reversal of) doubtful accounts... (44) 71 306 696 3,525 Deferred interest........ 6,515 4,946 7,738 2,338 -- Deferred compensation.... 1,672 1,286 1,762 877 -- Deferred taxes........... (36,906) -- -- -- -- (Decrease) increase in re- ceivables................ (2,242) (1,110) (1,778) 1,534 (6,319) Decrease (increase) in prepaid expenses and other assets............. (158) 236 396 (885) 1,179 (Decrease) increase in compensation and employee benefits payable......... (147) (5,537) 3,276 7,222 5,841 (Decrease) increase in other operating liabili- ties..................... (729) (6,887) (1,680) 865 1,177 --------- --------- -------- -------- -------- Net cash provided by (used in) operating ac- tivities................ 24,170 551 30,632 31,418 19,609 --------- --------- -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment................ (2,302) (1,798) (2,143) (4,250) (4,841) Proceeds from collections on notes receivable...... 2,721 205 215 445 121 Disposition of property and equipment............ 10 94 128 195 107 Acquisitions of businesses including net assets ac- quired, intangibles and goodwill................. (8,625) (20,049) (22,376) -- -- Other investing activi- ties, net................ (1,321) (412) (712) (255) (1,016) --------- --------- -------- -------- -------- Net cash used in invest- ing activities.......... (9,517) (21,960) (24,888) (3,865) (5,629) --------- --------- -------- -------- -------- Cash flows from financing activities: Proceeds from senior re- volving credit line...... 21,000 14,000 14,000 11,000 9,038 Repayment of senior re- volving credit line...... (13,000) (4,000) (14,000) (11,000) (23,038) Repayment of senior term loans.................... (18,233) (14,797) (18,997) (4,100) -- Proceeds from inventoried property loan............ -- -- -- -- 270 Repayment of capital leases................... (2,167) (1,524) (2,167) -- -- Proceeds from senior sub- ordinated loan........... -- 10,000 10,000 -- -- Other financing activi- ties, net................ (395) (198) (305) (823) (932) --------- --------- -------- -------- -------- Net cash provided by (used in) financing ac- tivities................ (12,795) 3,481 (11,469) (4,923) (14,662) --------- --------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents. 1,858 (17,928) (5,725) 22,630 (682) Cash and cash equivalents, at beginning of period.... 23,045 28,770 28,770 6,140 6,822 --------- --------- -------- -------- -------- Cash and cash equivalents, at end of period.......... $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 ========= ========= ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the pe- riod for: Interest (none capital- ized)................... $ 11,677 $ 9,585 $ 14,410 $ 12,172 $ 12,610 Federal and state income taxes................... $ 622 $ 364 $ 497 $ 152 $ 162 Non-cash investing and fi- nancing activities: Portion of Westmark ac- quisition financed by notes payable........... $ -- $ 20,283 $ 20,283 $ -- $ -- Portion of Melody acqui- sition financed by notes payable................. $ 3,667 $ -- $ -- $ -- $ -- Equipment acquired under capital leases.......... $ 1,255 $ 2,658 $ 3,347 $ 4,569 $ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE PREFERRED COMMON OPTIONS PAID-IN FROM SALE ACCUMULATED STOCK STOCK OUTSTANDING CAPITAL OF STOCK DEFICIT TOTAL --------- ------ ------------ ---------- ---------- ----------- --------- Balance, December 31, 1992................... $ 40 $ 86 $260 $105,945 $ -- $(244,687) $(138,356) Net loss............... -- -- -- -- -- (37,149) (37,149) Common stock issued for bonus and profit sharing............... -- 2 -- 668 -- -- 670 Common stock options granted............... -- -- 34 -- -- -- 34 Foreign currency translation adjustment............ -- -- -- -- -- (59) (59) ---- ---- ---- -------- ------- --------- --------- Balance, December 31, 1993................... 40 88 294 106,613 -- (281,895) (174,860) Net income............. -- -- -- -- -- 9,173 9,173 Common stock issued for deferred compensation, bonuses and profit sharing............... -- 1 -- 1,095 -- -- 1,096 Foreign currency translation adjustment............ -- -- -- -- -- 43 43 ---- ---- ---- -------- ------- --------- --------- Balance, December 31, 1994................... 40 89 294 107,708 -- (272,679) (164,548) Net income............. -- -- -- -- -- 7,409 7,409 Common stock issued for deferred compensation. -- 4 -- 2,322 -- -- 2,326 Common stock options exercised............. -- -- (31) 33 -- -- 2 Foreign currency translation adjustment............ -- -- -- -- -- 123 123 ---- ---- ---- -------- ------- --------- --------- Balance, December 31, 1995................... 40 93 263 110,063 -- (265,147) (154,688) Net income (unaudited). -- -- -- -- -- 45,395 45,395 Common stock issued for deferred compensation, bonuses and profit sharing (unaudited)... -- 8 -- 7,404 -- -- 7,412 Common stock options exercised............. -- -- (4) 100 -- -- 96 Notes receivable from sale of stock......... -- -- -- -- (5,109) -- (5,109) ---- ---- ---- -------- ------- --------- --------- Balance, September 30, 1996 (unaudited)............ $ 40 $101 $259 $117,567 $(5,109) $(219,752) $(106,894) ==== ==== ==== ======== ======= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-7 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED) 1. ORGANIZATION AND ACQUISITIONS ORGANIZATION. CB Commercial Holdings, Inc. ("CB Holdings") was organized to acquire Coldwell Banker Commercial Group, Inc. and had no operations prior to the acquisition on April 19, 1989 (the "Acquisition"). In 1991 Coldwell Banker Commercial Group, Inc. was renamed CB Commercial Real Estate Group, Inc. CB Holdings is a holding company that conducts its operations solely through CB Commercial Real Estate Group, Inc. and its subsidiaries (collectively, the "Company"). Concurrently with the closing of the Offering (as defined), CB Holdings will be renamed CB Commercial Real Estate Services Group, Inc. (see Note 13). The results of operations for interim periods are not necessarily indicative of results for a full year. NATURE OF OPERATIONS. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (facilitating sales and leases), investment properties (acquisitions and sales), corporate services, property management, and real estate market research (collectively, "Property and User Services"), and (ii) mortgage banking (loan origination and servicing), investment management and advisory services and valuation and appraisal services (collectively, "Investor Services"). The Company's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. ACQUISITIONS. On June 30, 1995, CB Commercial Real Estate Group, Inc., through a general partnership ("WREAP") in which it directly or indirectly owns all of the partnership interests, acquired Westmark Realty Advisors L.L.C. ("Westmark"). Westmark is a realty advisory business headquartered in Los Angeles. The purchase price consisted of an aggregate initial purchase price of $37.5 million plus $2.9 million in net liabilities assumed and an additional $1 million in costs related to the Westmark acquisition. Approximately $20.0 million of the $37.5 million is payable to the sellers ("Westmark Senior Notes") over periods ranging from one to five years. The sellers may also be entitled to a supplemental purchase price based on the operating results of Westmark payable over a period of six years and subject to a maximum aggregate payment of $18.0 million. The supplemental purchase price will be recorded as additional goodwill, if and when earned. As of December 31, 1995, approximately $0.9 million was earned and was paid to the sellers on March 31, 1996. Approximately $17.5 million of the purchase price was paid in cash using $7.5 million contributed to WREAP by CB Commercial Real Estate Group, Inc. and $10.0 million of proceeds from a senior subordinated loan ("Westmark Senior Subordinated Loan") bearing interest at 20% per annum issued to WREAP, which is nonrecourse to CB Commercial Real Estate Group, Inc. (except for a portion of the interest payable). The interest is deferred until the Westmark Senior Notes are paid or cash collateralized in full and is, therefore, reflected as an increase in principal amounts. The acquisition was accounted for as a purchase. The Company has allocated approximately $6.9 million of the total purchase price of $41.4 million to identifiable intangible assets acquired, consisting of asset management contracts, employment agreements, and trade name and the remaining $34.5 million was recorded as goodwill. The intangibles will be amortized over their estimated useful lives of 6 years, 5 years, and 10 years, respectively. Based on the nature of the business, Westmark's market position, its workforce and other factors, management estimates that the goodwill resulting from this acquisition has a useful life of approximately thirty years and will be amortized on a straight line basis over this period. Based upon future experience, this useful life could be decreased. In that event, the charge for intangibles and goodwill would be increased and earnings decreased. (See Note 6). F-8 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 On April 11, 1995, the Company acquired certain assets of Langdon Rieder, a tenant advisory business. The purchase price consisted of a closing payment of $1.5 million cash and a deferred payment of $1.9 million payable over three years ($633,333 payable on each of January 2, 1997, 1998 and 1999), plus interest on the entire outstanding portion of the deferred payment at an annual rate of 8%. The deferred payment is subject to forfeiture under certain circumstances. The purchase price has largely been allocated to intangibles and goodwill, which will be amortized on a straight line basis over their useful lives ranging from three to seven years. The assets and liabilities of the acquired companies, along with the related goodwill, intangibles and indebtedness, are reflected in the accompanying consolidated financial statements as of December 31, 1995. The results of operations of the acquired companies are included in the consolidated results from the dates they were acquired, and were not material to the Company's results for the year ended December 31, 1995. The pro forma results of operations of the Company for the six months ended June 30, 1995 and for the years ended December 31, 1995 and 1994, assuming the acquisitions had occurred on January 1, 1994, would have been as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- 1995 1995 1994 ----------------- ----------- ----------- (UNAUDITED) (UNAUDITED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.......................... $337,041 $ 481,057 $ 452,284 Net income (loss)................. (5,681) 4,824 4,092 Net income (loss) per common and common equivalent share outstanding...................... (.49) .37 .32
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL INFORMATION The accompanying unaudited consolidated financial statements as of September 30, 1996 and 1995 have been prepared in accordance with generally accepted accounting principles and the requirements of Regulation S-X for interim financial information. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation, have been included. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The Company provides for income taxes during interim periods based on the estimated annual effective tax rate. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of less than three months. F-9 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 INTANGIBLE ASSETS AND GOODWILL The Company had approximately $214.0 million of intangible assets (other than goodwill) arising from the Acquisition, comprised of a covenant not to compete, a trademark, deferred financing costs and other items, which had been substantially amortized through December 31, 1993 partly through shortening of their estimated lives. The change in useful lives resulted in a $16.5 million increase in depreciation and amortization in 1993. Of the remaining intangibles of approximately $10.8 million at December 31, 1995, approximately $4.8 million relates to deferred financing costs, and $6.0 million are intangibles stemming from the Westmark and Langdon Rieder acquisitions. (See Note 1) Other intangible assets at September 30, 1996 include approximately $3.7 million of deferred financing costs and $8.5 million of intangibles stemming from the Westmark, Langdon Rieder and L.J. Melody acquisitions. Goodwill of $63.0 million and $59.5 million at September 30, 1996 and December 31, 1995, respectively, consists of $21.1 million and $21.6 million, respectively, related to the Acquisition and $41.9 million and $37.9 million, respectively, related to Westmark and other acquisitions. Goodwill related to the Acquisition is being amortized over an estimated useful life of 40 years. Goodwill related to the Westmark and other acquisitions is being amortized over a useful life of 30 years. The Company periodically evaluates the recoverability of the carrying amounts of goodwill and other intangible assets. In this assessment the Company considers the expected useful lives of its goodwill and intangibles and the estimated future cash flows associated with these assets. If any of the significant assumptions inherent in the estimated future cash flows change in a material way due to market, economic and/or other factors, the recoverability is assessed based on the revised assumptions, and any resulting impairment would be recorded in the period such changes occur. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES Investments in unconsolidated subsidiaries in which the Company does not have majority control are accounted for under the equity method. (See Note 4) INCOME 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 upon date of occupancy. Realty advisor incentive fees are recognized when earned under the provisions of the related advisory agreements. Other commissions and fees are recorded as income at the time the related services have been performed unless significant future contingencies exist. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates provide a reasonable basis for the fair presentation of its financial condition and results of operations. F-10 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 CERTAIN SIGNIFICANT ESTIMATES DEFERRED TAXES. The Company has net deferred tax assets of approximately $87.5 million at December 31, 1995 all of which has been reserved through a valuation allowance. The valuation allowance is based on management's conclusion regarding the realizability of this asset on a more likely than not basis, as defined in SFAS No. 109. In reaching this conclusion management considered the Company's past operating results, the current year events and trends, including the impact if any, of the acquisitions that were concluded during the year and other factors. Management will continue to evaluate the appropriateness of all or part of this valuation allowance on a periodic basis and if its conclusions change with respect to realizability, any necessary adjustments will be made at that time. The impact of these adjustments, if any, could be material to the Company's financial statements. (See Note 9) PER SHARE INFORMATION Earnings per share is calculated based on weighted average common shares and dilutive stock options outstanding. When the Company is in a net loss position for a particular reporting period, the Class C-1 and Class C-R shares, as well as the stock options outstanding, are excluded as they are anti-dilutive. This may result in variations in the weighted average number of shares outstanding between periods. Weighted average common and common equivalent shares outstanding are comprised of the following:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, --------------------- -------------------------------- 1996 1995 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Preferred stock: Series A-1............. 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Series A-2............. 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Series A-3............. 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Common stock: Class B-1.............. 1,854,113 1,850,000 1,850,034 1,850,000 1,850,000 Class B-2.............. 6,079,259 5,636,550 5,678,262 5,442,839 5,283,078 Class C-1.............. 800,000 -- 800,000 800,000 -- Class C-R.............. 800,000 -- 800,000 800,000 -- Promotional shares...... 245,462 245,462 245,462 245,462 245,462 Stock options: Service Providers Plan. 36,600 -- 40,679 40,713 -- ---------- ---------- ---------- ---------- ---------- 13,815,434 11,732,012 13,414,437 13,179,014 11,378,540 ========== ========== ========== ========== ==========
NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards ("'SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of," SFAS No. 122, "Accounting for Mortgage Servicing Rights" and SFAS No. 123, "Accounting for Stock-Based Compensation," on January 1, 1996. These statements did not have a material impact on the financial statements. In June 1996 the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This F-11 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 statement is required to be adopted by the Company in 1997. Management of the Company has not yet determined the impact, if any, that the adoption of this statement will have on the Company's financial position or results of operations. RESTATEMENT Certain reclassifications, which do not have any effect on net income, have been made to the 1994 and 1993 financial statements to conform to the 1995 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands):
DECEMBER 31, ------------------ 1995 1994 -------- -------- Land..................................................... $ 11,843 $ 11,843 Buildings and improvements............................... 26,553 26,646 Furniture and equipment.................................. 35,828 34,057 Equipment under capital leases........................... 7,916 4,569 -------- -------- 82,140 77,115 Accumulated depreciation and amortization................ (37,640) (29,975) -------- -------- Property and equipment, net.............................. $ 44,500 $ 47,140 ======== ========
The Company capitalizes expenditures that materially increase the life of the related assets and charges the costs of maintenance and repairs to expense. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in income. Depreciation is computed primarily using the straight-line method over estimated useful lives ranging from 3 to 45 years. Leasehold improvements are amortized over the term of the leases, excluding options to renew. Equipment under capital leases is depreciated over the related term of the leases. 4. OTHER ASSETS Included in other assets at December 31, 1995 and 1994 are $1.7 million and $2.4 million, respectively, of investments in limited partnerships managed for a fee for institutional investors. The Company has a 1% general partner interest in each of the limited partnerships which is accounted for under the equity method. Although the Company is the general partner of each limited partnership, it does not have majority control over investment decisions in any of the limited partnerships. Management fee income from the partnerships was approximately $11.0 million, $4.8 million and $5.7 million for the years ended December 31, 1995, 1994, and 1993, respectively. The limited partnerships' total assets were approximately $1.27 billion and $259.6 million and total liabilities were approximately $162.4 million and $19.3 million as of December 31, 1995 and 1994, respectively. The partnerships' net income (loss) for the years ended December 31, 1995, 1994, and 1993 was approximately $22.0 million, $(18.3) million and $2.5 million, respectively. The general partner capital contributions for four of the partnerships are in the form of unsecured notes payable totaling approximately $3.2 million and $2.0 million at December 31, 1995 and 1994, respectively. (See Note 6) F-12 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 Also included in other assets are investments in four and five unconsolidated commercial real estate broker subsidiaries as of December 31, 1995 and 1994, respectively: 25% interest in CB Commercial Real Estate Group Canada Inc.; 40% interest in CB Comercial de Mexico, S.A. de C.V.; 19% interest in DTZ Leung Pte Ltd.; and 50% interest in CB Commercial/Hampshire L.L.C. On August 31, 1995, the Company increased its interest in CB Commercial Real Estate Group of Hawaii, Inc., from 35.04% to 76%, thus making it a consolidated subsidiary. Investments in and advances to (from) unconsolidated subsidiaries are as follows (in thousands):
DECEMBER 31, -------------- 1995 1994 ------ ------ CB Commercial Real Estate Group Canada Inc................... $1,604 $1,523 CB Comercial de Mexico, S.A. de C.V.......................... (294) (221) DTZ Leung Pte Ltd............................................ 210 -- CB Commercial/Hampshire L.L.C................................ 22 --
Equity interest in earnings (losses) of the unconsolidated subsidiaries of $180,000, $(44,000) and $35,000 for the years ended December 31, 1995, 1994 and 1993, respectively, have been included in "Operating, administrative and other" on the Consolidated Statements of Operations. In addition, included in other assets were notes receivable aggregating $5.0 million and $5.2 million at December 31, 1995 and 1994, respectively. During the second quarter of 1996, payment in full on the 9.0% note totaling $2.7 million was received. The remaining 9.5% note has been reclassified to current and is secured by a first mortgage lien on hotel properties. Unpaid principal is due at maturity in July 1997. 5. EMPLOYEE BENEFIT PLANS OPTION PLANS. One million shares of Class B-2 stock have been reserved for issuance under the CB Commercial Holdings, Inc. 1990 Stock Option Plan. Options for 1,000,000 shares, at an exercise price of $10 per share, were granted pursuant to the plan and vest over one to four year periods, expiring April 1999. Options for 960,000 Class B-2 shares were outstanding as of December 31, 1995. Options for 920,000 Class B-2 shares were outstanding as of September 30, 1996. A total of 600,000 shares of Class B-1 stock have been reserved for issuance under the CB Commercial Holdings, Inc. 1991 Service Providers Stock Option Plan to enable the Company to pay certain service providers with options to purchase shares of the Company's common stock instead of with cash. In 1993 below market options were granted to certain directors in partial payment of director fees. All options vested at grant date and expire at various dates through October 2003. During 1995 options to purchase 4,106 shares of Class B-1 stock were exercised. As of December 31, 1995, options to purchase 36,607 shares of Class B-1 stock are outstanding at $262,500. As of September 30, 1996, options to purchase 36,140 shares of Class B-1 stock are outstanding at $258,750. A total of 90,750 shares of Class B-2 Common Stock have been reserved for issuance under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the Board of Directors in September 1996. Options for all of such shares have been issued at an exercise price of $10 per share and vest over a period of five years at the rate of five percent per quarter. Options for 90,750 shares of Class B-2 Common Stock are outstanding as of September 30, 1996. F-13 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 STOCK PURCHASE PLAN. The Company has a restricted stock purchase plan covering certain key employees including senior management. A total of 550,000 shares of Class B-2 stock have been reserved for issuance under the 1996 Equity Incentive Plan of CB Holdings. The shares may be issued to senior executives for a purchase price equal to the greater of $10 per share or fair market value. The purchase price for shares under this plan must be paid either in cash or by delivery of a full recourse promissory note. As of September 30, 1996, the Company issued 510,906 shares of Class B-2 stock to certain key employees at $10 per share and received promissory notes. BONUSES. The Company has bonus programs covering certain 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 $10.2 million, $10.3 million and $8.7 million for the years ended December 31, 1995, 1994, and 1993, respectively. 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. Under the Cap Plan, each participating employee may elect to defer a portion of his or her earnings and the Company may make additional contributions from the Company's current or accumulated net profits to the Cap Plan in such amounts as determined by the Board of Directors. The Company expensed, in connection with the Cap Plan, $1.0 million, $1.0 million and $0.9 million for the years ended December 31, 1995, 1994, and 1993, respectively. (See Note 8) DEFERRED COMPENSATION PLAN (THE "DCP"). In the last quarter of 1993, the Company's Board of Directors approved the adoption and implementation of the DCP effective January 1, 1994. Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive amounts deferred at a future date either in cash, which accrues at a rate of interest determined in accordance with the DCP and is an unsecured long term liability of the Company, or in newly issued shares of Class B-2 stock of the Company which elections are recorded as additions to Stockholders' Equity. For the year ended December 31, 1995 approximately $0.7 million (including interest) and $1.1 million has been deferred in cash and stock, respectively, all of which was charged to expense in 1995. The accumulated deferrals as of December 31, 1995 were approximately $1.0 million in cash (including interest) and $1.6 million in stock for a total of $2.6 million. The accumulated deferrals at September 30, 1996 were approximately $1.5 million in cash (including interest) and $2.8 million in stock, for a total of $4.3 million. Of the $2.8 million deferred in stock, all but approximately $16,000, which will be issued in the fourth quarter of 1996, have been issued in Class B-2 stock. (See Note 8) F-14 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 6. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, ----------------- 1995 1994 -------- -------- Senior Term Loans, with interest at variable rates based on LIBOR plus 2.5% (7% and 6.98% weighted average at December 31, 1995 and 1994, respectively) Senior Term Loan due in quarterly installments of $1,500 commencing June 30, 1995, $2,250 commencing June 30, 1996, and $2,750 commencing June 30, 1997, with the remaining balance due March 31, 1999................... $130,021 $146,820 Mortgage Term Loan due in full March 31, 1999............ 18,340 18,070 Westmark Senior Notes, with interest at 12%, $1 million due January 2, 1997, $5,722 million due June 30, 1998, with the remaining balance due June 30, 2000............ 20,283 -- Senior Subordinated Term Loan, with interest at LIBOR plus .25% (6% and 6.5625% at December 31, 1995 and 1994, respectively) due in full on July 23, 2000.............. 67,896 63,694 Westmark Senior Subordinated Loan, with interest at 20%, due in full July 31, 2001............................... 11,067 -- Inventoried Property Loan, secured by inventoried property, with interest at short-term commercial paper borrowing rate plus 3.5% (9.37% and 8.5% at December 31, 1995 and 1994, respectively) due in full April 30, 1997.......................................... 7,470 7,470 Other Loans, secured by computer equipment with interest at the prime rate plus .5% (9.25% at December 31, 1995). 164 -- Unsecured Notes Payable, with fixed interest ranging from 6% to 13% and variable interest at the higher of the Applicable Federal Rate or Consumer Price Index plus 6% (Note 4)................................................ 3,151 2,017 -------- -------- Total................................................... 258,392 238,071 Less current maturities................................. 8,250 4,500 -------- -------- $250,142 $233,571 ======== ========
Annual aggregate maturities of long-term debt as of December 31, 1995 are as follows (in thousands): 1996--$8,250; 1997--$18,970; 1998--$16,722; 1999--$124,671; 2000--$75,561; and $14,218 thereafter. The Company has two Senior Revolving Credit Lines of $10.0 million and $20.0 million expiring in December 1996 and March 1999, respectively. Commitment fees of 0.5% and 0.375% per annum are payable quarterly in arrears on the unused portion of the lines. As of December 31, 1995, there were no amounts outstanding under the lines. Up to $10.0 million of the Senior Revolving Credit Lines may be used to secure letters of credit. As of December 31, 1995, $1.0 million of letters of credit have been issued. During 1994, the terms of the Senior Term Loans and Senior Subordinated Term Loan were modified. Under the modified terms, the Company has the right to invest a portion of its excess cash flow discretionarily and is required to apply a portion of excess cash flow not available for investments to the prepayment of principal. The other key provisions of the debt modifications include: 1) lower scheduled principal payments on the senior debt consisting of $1.5 million per quarter for four quarters, commencing June 1995, increasing to $2.25 million for four quarters and then increasing to $2.75 million per quarter until maturity; and 2) interest on the senior secured indebtedness of LIBOR plus 2.5% and on the senior F-15 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 subordinated indebtedness of LIBOR plus 0.25%. A portion of the interest payments on the Senior Term Loans is deferred until maturity. All of the interest on the Senior Subordinated Term Loan is deferred until repayment of the Senior Term Loans. Deferred interest amounts are included in the reported outstanding principal balances. These interest rates are effective through the maturity of both the senior and the subordinated debt, in 1999 and 2000, respectively. The Senior Term Loans, Mortgage Term Loan and the Senior Revolving Credit Lines are secured by substantially all of the personal and real property assets of CB Commercial Real Estate Group, Inc. and its subsidiaries. Collectively these loans are guaranteed by CB Commercial Real Estate Group, Inc. and all the common stock of CB Commercial Real Estate Group, Inc. is pledged to secure the guarantee. The Senior Subordinated Term Loan is secured by a second priority lien on the common stock of CB Commercial Real Estate Group, Inc. The Senior Term Loan agreement contains numerous restrictive covenants that, among other things, limit the Company's ability to incur or repay other indebtedness, make advances or loans to subsidiaries and other entities, make capital expenditures, incur liens, enter into mergers or effect other fundamental corporate transactions, sell its assets, or declare dividends. As of December 31, 1995, the Company did not have any dividend payment capacity based on the terms of its loan covenants. In addition, the Company is required to meet certain ratios relating to its adjusted net worth, level of indebtedness, fixed charges and interest coverage. The Company is in compliance with all covenants as of December 31, 1995. The Company had an interest rate swap agreement on $50.0 million of its Senior Subordinated Term Loan for the period from December 27, 1990 to December 27, 1994 under which the Company made payments at the fixed rate of 12.35% and received payments at a variable rate of LIBOR plus 4.0%. During 1994, the net effect was to increase interest expense by approximately 4.1 percentage points. See Note 1 for indebtedness regarding the Westmark acquisition and Note 13 for contemplated amendments to the Company's long-term debt. 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 consolidated financial position or results of operations of the Company. Future minimum rental commitments for noncancelable operating leases at December 31, 1995 are as follows (in thousands): 1996--$18,767; 1997-- $15,781; 1998--$13,505; 1999--$10,822; 2000--$8,448; and $14,430 thereafter. Future minimum lease commitments for noncancelable capital leases at December 31, 1995 are as follows (in thousands): 1996--$2,820; 1997-- $2,044; 1998--$482; 1999--$30; and $0 thereafter. The interest portion of these payments totals $362. Capital lease payments due within one year are classified as current liabilities. Substantially all leases require the Company to pay maintenance, insurance and property taxes, and generally may be renewed for five year periods. Total rental expense under noncancelable operating leases was $22.5 million, $21.3 million and $22.2 million for the years December 31, 1995, 1994, and 1993, respectively. F-16 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 8. STOCKHOLDERS' EQUITY Stockholders' equity by class of stock as of December 31, 1995 and 1994 is as follows:
VOTES SHARES ORIGINAL PURCHASE PER SHARES ISSUED AND PRICE OF SHARES SHARE AUTHORIZED OUTSTANDING OUTSTANDING ----- ---------- ----------- ----------------- DECEMBER 31, 1995 Preferred stock: Series A-1................... 2 2,000,000 1,000,000 $10,000,000 Series A-2................... 1 4,000,000 2,000,000 20,000,000 Series A-3................... -- 2,000,000 1,000,000 10,000,000 ---------- --------- ----------- 8,000,000 4,000,000 $40,000,000 ========== ========= =========== Common stock: Class B-1.................... 1 4,000,000 1,854,106 $18,532,892 Class B-2.................... 1 12,000,000 5,836,142 55,483,519 Class C-1.................... -- 1,600,000 800,000 8,000 Class C-R.................... -- 1,600,000 800,000 8,000 Class J...................... -- 2 2 -- ---------- --------- ----------- 19,200,002 9,290,250 $74,032,411 ========== ========= =========== DECEMBER 31, 1994 Preferred stock: Series A-1................... 2 2,000,000 1,000,000 $10,000,000 Series A-2................... 1 4,000,000 2,000,000 20,000,000 Series A-3................... -- 2,000,000 1,000,000 10,000,000 ---------- --------- ----------- 8,000,000 4,000,000 $40,000,000 ========== ========= =========== Common stock: Class B-1.................... 1 4,000,000 1,850,000 $18,500,000 Class B-2.................... 1 12,000,000 5,480,235 53,055,852 Class C-1.................... -- 1,600,000 800,000 8,000 Class C-R.................... -- 1,600,000 800,000 8,000 Class J...................... -- 2 2 -- ---------- --------- ----------- 19,200,002 8,930,237 $71,571,852 ========== ========= ===========
The preferred stock has a 10% preferential dividend which became cumulative upon the earlier of the date on which certain thresholds were met or January 2, 1992. Unpaid dividends were to bear interest at 12% if such thresholds were met. Effective January 1, 1991 the Preferred Stockholders waived their rights to dividends and agreed that no dividends would accrue until such time as all amounts under the Senior Term Loans and Senior Subordinated Term Loan are paid in full. (See Note 13) Extraordinary distributions to stockholders, if any, and any proceeds available to stockholders from any sale of all or substantially all of the Company's assets, or a merger or liquidation of the Company, will be applied first to pay accumulated but unpaid preference dividends, should they exist, and thereafter to the return of the original purchase price of the shares outstanding to all stockholders on a pro rata basis, regardless of class or series. After payment in full of the original purchase price, additional distributions, if any, will be made on a share-for-share basis, but each share of preferred stock will be counted as 60% of a share. F-17 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 The Company's Class J stock does not participate in any dividends or liquidation proceeds and has no voting rights except for the nomination and election of Class J Directors or as required by law. The Class C-1 and C-R shares are non-voting (other than as required by law) and upon liquidation do not share in the return of the first $10 of capital to stockholders to the extent of their par value of $.01 per share but participate fully in proceeds in excess of $10 per share and in all dividends declared on common stock. In 1996 the Company issued 125,389 shares of its Class B-2 stock with a stated value of approximately $1.0 million to the Cap Plan for the year ended December 31, 1995, 8,501 shares to sales professionals who elected to receive a portion of their annual premium on earnings payments in stock rather than cash and 96,917 shares in connection with the DCP (including bonuses deferred in stock). In 1995 the Company issued 159,432 shares of its Class B-2 stock to the Cap Plan in connection with the profit sharing contribution, 33,636 shares to sales professionals who elected to receive a portion of their annual premium on earnings payments in stock rather than cash and 162,839 shares in connection with the DCP, for a total of 355,907 Class B-2 shares issued in 1995. In 1994 the Company issued 134,270 shares of its Class B-2 stock in connection with the profit sharing contribution. (See Note 5) As of September 30, 1996, 6,620,154 shares of Class B-2 stock were outstanding. 9. INCOME TAXES The regular federal tax return loss carryforward is $202.5 million as of September 30, 1996, expiring in the years 2004 through 2008 as follows: $11.6 million--2004; $61.9 million--2005; $76.2 million--2006; 38.0 million--2007; and $14.8 million--2008. Use of the federal tax loss carryforward is limited to the lesser of 90.0% of the year's alternative minimum taxable income or the remaining alternative minimum tax loss carryforward. The loss carryforward for federal alternative tax purposes is $196.0 million as of September 30, 1996 due to depreciation differences. The current federal tax includes alternative minimum tax paid, for which credit carryforwards are available, totaling $0.6 million as of September 30, 1996. Loss carryforwards for state income tax purposes expire in various states beginning in 1995. The tax provision for the nine months ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993 consisted of the following:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- 1996 1995 1994 1993 -------------- ------- ------- ------- Federal: Current......................... $ 388 $ 503 $ 47 $ -- Deferred tax.................... 3,549 1,231 (3,563) 7,758 Reduction of valuation allow- ances.......................... (40,400) (1,231) 3,563 (7,758) -------- ------- ------- ------- $(36,463) $ 503 $ 47 $ -- State: Current......................... 419 338 105 112 Deferred........................ 254 209 (773) 1,683 Reduction of valuation allow- ances.......................... -- (209) 773 (1,683) -------- ------- ------- ------- 673 338 105 112 -------- ------- ------- ------- $(35,790) $ 841 $ 152 $ 112 ======== ======= ======= =======
F-18 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 The following is a reconciliation, stated as a percentage of pre-tax income, of the U.S. statutory federal income tax rate to the Company's effective tax rate on income (loss) from operations:
NINE MONTHS YEAR ENDED DECEMBER ENDED 31, SEPTEMBER 30, -------------------------- 1996 1995 1994 1993 ------------- ------ ------ ------ Federal statutory tax rate......... 35 % 34 % 35 % (35)% Permanent differences, including goodwill, meals and entertainment. 8 14 9 1 State taxes, net of federal bene- fit............................... 5 3 6 (4) Utilization of previously unrecog- nized net operating losses........ -- (41) (48) -- Valuation allowance for net operat- ing losses and other deferred tax assets............................ (421) -- -- 38 ---- ------ ------ ------ Effective tax rate................. (373)% 10 % 2 % 0 % ==== ====== ====== ======
Beginning in 1992 the Company implemented Statement of Financial Accounting Standards No. 109, the modified liability method of accounting for income taxes. Until the third quarter of 1996, the resulting net deferred tax asset had been fully reserved except for utilization against earnings as realized. Such asset was being recognized to the extent of the tax effect of current taxable earnings. Cumulative tax effects of temporary differences are shown below as of December 31, 1995 and 1994 (in thousands):
SEPTEMBER 30, 1996 1995 1994 ------------- -------- -------- ASSET (LIABILITY) Property and equipment.................... $ 2,823 $ 1,289 $ 1,655 Reserves for bad debts, building write down, legal expenses..................... 3,785 3,860 3,628 Intangible amortization................... 75 1,213 4,211 Bonus, unexercised restricted stock, de- ferred compensation...................... 2,047 1,901 1,819 Partnership income........................ 608 608 705 Debt modification......................... 1,599 1,549 1,470 Net operating loss carryforwards.......... 71,169 77,600 79,832 ------- -------- -------- Total deferred tax assets............... 82,106 88,020 93,320 Unconsolidated affiliates............... (218) (218) (218) All other, net.......................... 1,448 (273) (200) ------- -------- -------- Total deferred tax assets liabilities..... 1,230 (491) (418) ------- -------- -------- Net deferred tax assets................... 83,336 87,529 92,902 Valuation allowances...................... (44,513) (87,529) (92,902) ------- -------- -------- $38,545 $ -- $ -- ======= ======== ========
Management evaluated the appropriateness of all or part of this valuation allowance on a periodic basis and if the Company concludes there is a change with respect to realizability, any necessary adjustments are made at that time. As of September 30, 1996, the Company has experienced continuing profitability due to a variety of reasons, including the strength of the commercial real estate markets. In addition, the Company has operated Westmark for one full year since acquiring Westmark in June 1995, and as a result has concluded that Westmark should make a positive contribution to the Company's consolidated taxable F-19 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 income. Finally, the acquisition of L.J. Melody in July 1996 should make a positive contribution to the Company's consolidated taxable income. As a result of these factors, management has determined that it now has sufficient reliable information to conclude that part of the Company's NOLs are realizable on a more likely than not basis. During the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of the net operating loss carryforwards ("NOL") would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income tax provision). With the recognition of deferred tax assets, the current period and the future periods provisions for income tax will be recorded at the full effective tax rate. For the nine months ended September 30, 1996, a $4.6 million provision for income taxes has been recorded. Net income for the nine months ended September 30, 1996 was $45.4 million ($3.29 per share of common stock), which includes the $40.4 million tax benefit ($2.92 per share of common stock). The $40.4 million recognized tax benefit has a material effect on the reported net income for the nine months ended September 30, 1996. The ability of the Company to utilize NOLs may also be limited in the future if an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, were deemed to occur. Such an ownership change may be deemed to occur if the Company engages in certain transactions involving the issuance of shares of Common Stock, including the issuance of shares of Common Stock in connection with an acquisition or otherwise or by reason of a sale of capital stock by an existing shareholder. If an ownership change were to occur, Section 382 would impose an annual limit on the amount of NOLs the Company could utilize. The Company believes that the Offering and Recapitalization will not result in an ownership change. An ownership change may not be within the control of the Company, however, and therefore there is no assurance that an ownership change will not occur in the future. The availability of NOLs is, in any event, subject to uncertainty since their validity is not reviewed by the Internal Revenue Service until such time as they are utilized to offset income. 10. FIDUCIARY FUNDS The consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $28.4 million and $24.2 million as of December 31, 1995 and 1994, respectively. 11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS NOTES RECEIVABLE. The Company has determined that it is not practicable to estimate the fair value of the notes receivable due to the cost involved in developing the information as such notes are not publicly traded. LONG-TERM DEBT. The Senior Term Loans, the Senior Subordinated Term Loan, the Senior Revolving Credit Lines and the Westmark Senior Notes are discussed in Note 6. Estimated fair values for these liabilities are not presented because the Company determined it was impracticable to incur the costs to engage an investment banker to perform a fair value analysis of these liabilities. The fair value of the Inventoried Property Loan discussed in Note 6 is not materially different from the carrying value of the debt. The Unsecured Notes Payable discussed in Note 6, which represent the Company's share of unfunded equity participation, are not considered financial instruments. F-20 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 12. INDUSTRY SEGMENTS The Company operates in two business segments--Property and User Services and Investor Services. Property Services including brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management and real estate market research. Investor Services includes mortgage banking (loan origination and servicing), investment management and advisory services, and valuation and appraisal services.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- Revenue Property and User Services..................... $422,833 $400,250 $364,172 Investor Services.............................. 45,627 28,738 27,865 -------- -------- -------- $468,460 $428,988 $392,037 ======== ======== ======== Operating income (loss) Property and User Services..................... $ 26,142 $ 25,118 $(19,915) Investor Services.............................. 3,701 460 (3,797) -------- -------- -------- 29,843 25,578 (23,712) Interest income................................. 1,674 1,109 915 Interest expense................................ 23,267 17,362 14,240 -------- -------- -------- Income (loss) before provision for income taxes. $ 8,250 $ 9,325 $(37,037) ======== ======== ======== Depreciation and amortization Property and User Services..................... $ 8,889 $ 7,485 $ 44,268 Investor Services.............................. 2,742 606 5,338 -------- -------- -------- $ 11,631 $ 8,091 $ 49,606 ======== ======== ======== Capital expenditures (purchases) Property and User Services..................... $ 1,987 $ 3,984 $ 4,509 Investor Services.............................. 156 266 332 -------- -------- -------- $ 2,143 $ 4,250 $ 4,841 ======== ======== ========
AS OF DECEMBER 31, ----------------- 1995 1994 -------- -------- Identifiable assets Property and User Services................................ $ 85,182 $ 89,011 Investor Services......................................... 58,800 10,682 Corporate................................................. 46,972 50,407 -------- -------- $190,954 $150,100 ======== ========
Identifiable assets by industry segment are those assets used in the Company operations in each segment. Corporate identified assets are principally made up of cash and cash equivalents, inventoried property, general prepaids and deferred taxes. F-21 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 13. SUBSEQUENT EVENTS ACQUISITION. Effective July 1, 1996, CB Commercial Mortgage Company, Inc. ("CB Mortgage"), a wholly-owned subsidiary of the Company, acquired all of the outstanding capital stock of L.J. Melody & Company, a Texas corporation, and L.J. Melody & Company of California, a Texas corporation ("LJMCal"). On July 9, 1996, CB Mortgage merged into L.J. Melody & Company. As a result, LJMCal is a wholly-owned subsidiary of L.J. Melody & Company. L.J. Melody & Company and LJMCal (collectively "L.J. Melody") are commercial mortgage banking firms engaged in loan origination and loan servicing. L.J. Melody is headquartered in Houston, Texas. The purchase consideration for L.J. Melody was $15.0 million, including a $2.3 million note to the principal seller bearing 10.0% interest with principal payments starting in 1998, $9.0 million in cash and $3.7 million in additional notes. The notes bear interest of 10.0% per annum, with maturities through June 2001. The $2.3 million note will be accounted for as compensation over the term of the note. The payment of this note is contingent upon the principal seller's continued employment with the Company. The acquisition was accounted for as a purchase. The Company allocated approximately $3.7 million of the total purchase price to identifiable intangible assets acquired, consisting of loan servicing and asset management contracts, trade name, a covenant not to compete and other intangibles. The remaining $9.0 million and a $1.5 million deferred tax liability on identifiable intangibles were recorded to goodwill. The intangibles are being amortized over their estimated useful lives or the lives of the underlying contracts, as applicable, over periods ranging from three to 13 years. Goodwill is being amortized on a straight line basis over 30 years. STOCK OFFERING. During August 1996 the Company announced its intent to provide liquidity to its common stockholders by publicly registering its common stock and to raise additional capital in an initial public offering ("IPO"). The proceeds from the IPO will be used to repay a portion of the Company's senior secured indebtedness. The Company also announced a recapitalization which will be contingent upon and executed in conjunction with the IPO. The following summarizes the terms of the recapitalization: . Class B-1 and B-2 stock of the Company will be converted into the common stock to be issued in the IPO ("Common Stock") on a one-for-one basis; . Class C-1 stock of the Company will be converted into the IPO Common Stock at a conversion ratio based on the initial public offering price per share; . The Company will acquire all issued and outstanding shares of the Class C-R and Class J stock at $.01 per share; . The Preferred Stock is convertible into Common Stock at the holder's option after the completion of this Offering at a ratio based upon the per share market price of the Common Stock, ranging from .60 shares of Common Stock per share of Preferred Stock at a market price of $30.00 or more per share of Common Stock to .78 shares of Common Stock per share of Preferred Stock at a market price of $10.00 to $21.99 per share of Common Stock. No conversion of the Preferred Stock is permitted when the market price of the Common Stock is below $10.00 per share. DEBT MODIFICATIONS. In connection with the IPO, the Company's senior secured lenders have agreed to amend the terms of the senior secured indebtedness effective upon consummation of the IPO. F-22 CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 As amended, the senior secured indebtedness will bear interest at the rate of LIBOR plus 2.5%, all of which interest will be payable currently, will have a final maturity date of December 31, 2001 and will provide for quarterly principal repayments of $2.625 million with a final payment of $9.5 million on December 31, 2001. The terms of the Company's senior subordinated indebtedness will also be amended effective upon consummation of the IPO. As amended, from January 1, 1997 through December 31, 1998, the senior subordinated indebtedness will bear interest at a rate of LIBOR plus 1.25%, all of which interest will be payable currently. The interest rate will increase to LIBOR plus 2.0% during 1999, LIBOR plus 3.0% during 2000 and LIBOR plus 4.0% during 2001 and subsequent periods. Interest in excess of LIBOR plus 1.25% would be deferred and added to the principal balance of the senior subordinated indebtedness until the final maturity of the senior subordinated indebtedness. The senior subordinated indebtedness will have a final maturity date of July 23, 2002. The senior subordinated indebtedness may be prepaid at any time without penalty. F-23 WESTMARK REALTY ADVISORS L.L.C. STATEMENTS OF INCOME SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
1995 1994 ----------- ----------- Revenues: Fee income (note 2)................................... $10,873,613 $10,922,274 Other................................................. 44,225 51,714 ----------- ----------- 10,917,838 10,973,988 ----------- ----------- Expenses: Salaries and related expenses......................... 7,034,219 7,076,791 General and administrative expenses (including interest expense of $61,088 in 1995 and $21,979 in 1994)..................................... 1,324,877 1,085,573 Occupancy expense (note 4)............................ 569,546 676,671 Business promotion, travel and advertising expense.... 406,509 365,728 Office expense........................................ 269,447 298,679 ----------- ----------- 9,604,598 9,503,442 ----------- ----------- Net income........................................... $ 1,313,240 $ 1,470,546 =========== ===========
See accompanying notes to financial statements. F-24 WESTMARK REALTY ADVISORS L.L.C. STATEMENTS OF CHANGES IN OWNERS' EQUITY (DEFICIT) SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
1995 1994 ------------ ----------- Owners' equity at beginning of six-month periods ended June 30...................................... $ 2,108,326 $ 1,875,446 Net income.......................................... 1,313,240 1,470,546 Cash distributions.................................. (2,550,000) (1,055,000) Noncash distribution................................ (2,177,244) -- ------------ ----------- Owners' equity (deficit) at end of six-month periods ended June 30...................................... $ (1,305,678) $ 2,290,992 ============ ===========
See accompanying notes to financial statements. F-25 WESTMARK REALTY ADVISORS L.L.C. STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
1995 1994 ----------- ---------- Cash flows from operating activities: Net income........................................... $ 1,313,240 $1,470,546 ----------- ---------- Adjustments to reconcile net income to net cash pro- vided by operating activities: Depreciation and amortization....................... 162,692 173,359 Distributions of income from TCW Realty Funds VB and VIB................................................ 13,289 30,503 Decrease in fee income receivable................... 247,144 646,819 Increase in other assets............................ 65,959 51,326 Increase in accounts payable and other liabilities.. 634,208 800,456 Decrease in deferred leasing concessions............ (56,539) (56,539) ----------- ---------- Total adjustments................................. 1,066,753 1,645,924 ----------- ---------- Net cash provided by operating activities......... 2,379,993 3,116,470 ----------- ---------- Cash flows from investing activities--acquisition of property and equipment............................... (148,268) (10,083) ----------- ---------- Net cash used in investing activities............. (148,268) (10,083) ----------- ---------- Cash flows from financing activities: Repayments of notes payable to bank.................. (69,437) (81,480) Distributions to owners.............................. (2,550,000) (1,055,000) ----------- ---------- Net cash used in financing activities............. (2,619,437) (1,136,480) ----------- ---------- Net (decrease) increase in cash................... (387,712) 1,969,907 Cash at beginning of six-month period ended June 30... 492,039 105,044 ----------- ---------- Cash at end of six-month period ended June 30......... $ 104,327 $2,074,951 =========== ========== Supplemental disclosures of cash flow information--in- terest paid.......................................... $ 21,088 $ 21,979 =========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY: As of the close of business on June 30, 1995, the Company was acquired by CB Commercial Real Estate Group, Inc. In connection with such acquisition, a distribution totaling $2,177,244 to the former owners was declared. Such amount was paid by the Company subsequent to June 30, 1995. See accompanying notes to financial statements. F-26 WESTMARK REALTY ADVISORS L.L.C. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 AND 1994 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Westmark Realty Advisors, a California general partnership, was formed on January 7, 1982 under the laws of the state of California and effective January 1, 1995 became a limited liability company known as Westmark Realty Advisors L.L.C. (hereinafter referred to as Westmark). The primary purpose of Westmark is to provide real estate investment and property management services. Effective as of the close of business on June 30, 1995, CB Commercial Real Estate Group, Inc. acquired ownership of Westmark Realty Advisors L.L.C. INVESTMENT IN TCW REALTY FUNDS VB AND VIB The equity method of accounting is used for Westmark's general partnership interests in TCW Realty Fund VB, a limited partnership, and TCW Realty Fund VIB, a limited partnership, as Westmark has significant influence as one of the two general partners of these limited partnerships. FEE INCOME Fee income is recorded in the period in which it is earned. PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated using the straight- line method over the estimated useful lives (five years) of the assets. Amortization of leasehold improvements is calculated using the straight- line method over the shorter of the asset or remaining lease life. INCOME TAXES No income taxes are provided by Westmark since the owners' proportionate shares of Westmark's operating results are includable in the owner's respective income tax returns. (2) FEE INCOME AND RECEIVABLE Westmark has an agreement with Trust Company of the West (TCW) to form real estate investment funds and to provide for the sale of participating interests to qualified pension and profit sharing trusts or other permitted investors for the purpose of investing in real estate or interests therein. TCW serves as trustee of the various real estate investment funds. In addition to providing real estate services to real estate investment funds, TCW and Westmark provide similar services to individual pension plans that invest in real estate. Westmark has been engaged by TCW to provide administrative services and act as investment consultant and portfolio manager. For these services, Westmark is paid consulting fees up to a maximum of 85% of the fees received by TCW from the real estate investment funds and pension plans. F-27 WESTMARK REALTY ADVISORS L.L.C. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1995 AND 1996 (UNAUDITED) (3) INVESTMENT IN TCW REALTY FUNDS VB AND VIB AND NOTES PAYABLE TO TCW REALTY FUND VB Westmark and an affiliate of TCW are general partners in TCW Realty Fund VB, a limited partnership (Fund VB), and TCW Realty Fund VIB, a limited partnership (Fund VIB). Westmark's percentage interest is .85% for Fund VB and Fund VIB. (4) LEASES In December 1991, Westmark moved its headquarters and the new landlord granted leasing concessions to Westmark, including assumption of all of Westmark obligations under the old lease and payment of a move-in bonus to Westmark. These amounts have been deferred as leasing concessions and will be amortized over the term of the lease. Rental expense related to Westmark's office leases totaled $672,530 and $779,655 for the six months ended June 30, 1995 and 1994, respectively, and income related to space subleased by Westmark to other tenants totaled $102,984 for the six months ended June 30, 1995 and June 30, 1994. Future minimum rental commitments, net of minimum sublease payments for office leases, are as follows:
MINIMUM MINIMUM RENTAL SUBLEASE PAYMENTS PAYMENTS NET ----------- -------- ----------- Year ending June 30: July through December 1995................ $ 656,503 $131,820 $ 524,683 1996...................................... 1,539,150 167,332 1,371,818 1997...................................... 1,539,150 157,152 1,381,998 1998...................................... 1,501,278 161,079 1,340,199 1999...................................... 1,540,524 172,860 1,367,664 2000...................................... 1,540,524 72,025 1,468,499 Thereafter................................ 6,289,998 -- 6,289,998 ----------- -------- ----------- $14,607,127 $862,268 $13,744,859 =========== ======== ===========
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS CASH, RECEIVABLES AND ACCOUNTS PAYABLE The fair value of these financial instruments is approximately equal to the carrying value due to the short-term nature of the instruments. NOTES PAYABLE The fair value of the notes payable is approximately equal to the carrying value as the interest rates on the notes payable to banks are variable rates that are considered to be market rates, and the interest rates on the notes payable to Fund VB are considered to be approximately equal to current market rates for similar debt. F-28 INDEPENDENT AUDITORS' REPORT The Members of Westmark Realty Advisors L.L.C. (formerly Westmark Realty Advisors, a partnership): We have audited the accompanying balance sheets of Westmark Realty Advisors (a partnership) as of December 31, 1994 and 1993 and the related statements of income, changes in partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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 Westmark Realty Advisors as of December 31, 1994 and 1993 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California February 25, 1995 F-29 WESTMARK REALTY ADVISORS (A PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 1994 AND 1993
1994 1993 ---------- ---------- ASSETS Cash...................................................... $ 492,039 $ 105,044 Fee income receivable (note 2)............................ 3,102,515 3,325,074 Property and equipment (note 3)........................... 623,311 788,333 Investment in TCW Realty Funds VB and VIB (note 4)........ 1,446,127 1,457,991 Other assets.............................................. 180,089 153,470 ---------- ---------- $5,844,081 $5,829,912 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Notes payable to bank (note 5)............................ $ 381,430 $ 531,813 Notes payable to TCW Realty Fund VB (note 4).............. 952,172 952,172 Accounts payable and other liabilities.................... 1,046,117 1,001,442 ---------- ---------- Total liabilities........................................ 2,379,719 2,485,427 Deferred leasing concessions (note 6)..................... 1,356,036 1,469,039 Partners' capital......................................... 2,108,326 1,875,446 ---------- ---------- $5,844,081 $5,829,912 ========== ==========
See accompanying notes to financial statements. F-30 WESTMARK REALTY ADVISORS (A PARTNERSHIP) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ----------- ----------- Revenues: Fee income (note 2)................................... $22,035,883 $22,944,148 Other................................................. 151,293 378,683 ----------- ----------- 22,187,176 23,322,831 ----------- ----------- Expenses: Salaries and related expenses......................... 13,884,136 14,233,320 General and administrative expenses (including inter- est expense of $120,762 in 1994 and $95,688 in 1993)................ 2,259,390 2,857,709 Occupancy expense (note 6)............................ 1,369,230 1,507,359 Business promotion, travel and advertising expense.... 813,143 978,012 Office expense........................................ 553,397 670,858 ----------- ----------- 18,879,296 20,247,258 ----------- ----------- Net income............................................ $ 3,307,880 $ 3,075,573 =========== ===========
See accompanying notes to financial statements. F-31 WESTMARK REALTY ADVISORS (A PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ----------- ----------- Balance at beginning of year.......................... $ 1,875,446 $ 2,042,274 Net income............................................ 3,307,880 3,075,573 Cash distributions.................................... (3,075,000) (3,242,401) ----------- ----------- Balance at end of year................................ $ 2,108,326 $ 1,875,446 =========== ===========
See accompanying notes to financial statements. F-32 WESTMARK REALTY ADVISORS (A PARTNERSHIP) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ----------- ----------- Cash flows from operating activities: Net income.......................................... $ 3,307,880 $ 3,075,573 ----------- ----------- Adjustments to reconcile net income to net cash pro- vided by operating activities: Depreciation and amortization...................... 335,632 444,647 Equity in income from TCW Realty Funds VB and VIB.. (54,136) (20,824) Distributions of income from TCW Realty Funds VB and VIB........................................... 66,000 17,000 Decrease (increase) in fee income receivable....... 222,559 (256,124) Increase in other assets........................... (26,619) (51,396) Increase in accounts payable and other liabilities. 44,675 183,637 Decrease in deferred leasing concessions........... (113,003) (113,003) ----------- ----------- Total adjustments................................ 475,108 203,937 ----------- ----------- Net cash provided by operating activities........ 3,782,988 3,279,510 ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment............... (170,610) (214,751) Investment in TCW Realty Fund VIB................... -- (75,000) ----------- ----------- Net cash used in investing activities............ (170,610) (289,751) ----------- ----------- Cash flows from financing activities: Proceeds from notes payable to bank................. -- 400,000 Repayments of notes payable to bank................. (150,383) (84,626) Distributions to partners........................... (3,075,000) (3,242,401) ----------- ----------- Net cash used in financing activities............ (3,225,383) (2,927,027) ----------- ----------- Net increase in cash............................. 386,995 62,732 Cash at beginning of year............................ 105,044 42,312 ----------- ----------- Cash at end of year.................................. $ 492,039 $ 105,044 =========== =========== Supplemental disclosures of cash flow information-- interest paid....................................... $ 38,000 $ 23,000 =========== ===========
See accompanying notes to financial statements. F-33 WESTMARK REALTY ADVISORS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Westmark Realty Advisors, a California general partnership, was formed on January 7, 1982 under the laws of the state of California and effective January 1, 1995 became a limited liability company known as Westmark Realty Advisors, L.L.C. (hereinafter referred to as Westmark). The primary purpose of Westmark is to provide real estate investment and property management services. INVESTMENT IN TCW REALTY FUNDS VB AND VIB The equity method of accounting is used for Westmark's general partnership interests in TCW Realty Fund VB, a limited partnership, and TCW Realty Fund VIB, a limited partnership, as Westmark has significant influence as one of the two general partners of these limited partnerships. FEE INCOME Fee income is recorded in the period in which it is earned. ALLOCATION OF INCOME AND LOSSES Net income and losses are allocated to the partners in accordance with the partnership agreement, in proportion to their respective ownership percentages. PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated using the straight- line method over the estimated useful lives (five years) of the assets. Amortization of leasehold improvements is calculated using the straight- line method over the shorter of the asset or remaining lease life. INCOME TAXES No income taxes are provided by Westmark since the partners' proportionate shares of Westmark's operating results are includable in their respective income tax returns. (2) FEE INCOME AND RECEIVABLE Westmark has an agreement with Trust Company of the West (TCW) to form real estate investment funds and to provide for the sale of participating interests to qualified pension and profit sharing trusts or other permitted investors for the purpose of investing in real estate or interests therein. TCW serves as trustee of the various real estate investment funds. In addition to providing real estate services to real estate investment funds, TCW and Westmark provide similar services to individual pension plans that invest in real estate. Westmark has been engaged by TCW to provide administrative services and act as investment consultant and portfolio manager. For these services, Westmark is paid consulting fees up to a maximum of 85% of the fees received by TCW from the real estate investment funds and pension plans. F-34 WESTMARK REALTY ADVISORS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (3) PROPERTY AND EQUIPMENT Property and equipment as of December 31 is summarized as follows:
1994 1993 ----------- ----------- Furniture and equipment............................ $ 2,980,926 $ 2,853,643 Leasehold improvements............................. 72,467 96,623 ----------- ----------- Total cost........................................ 3,053,393 2,950,266 Less accumulated depreciation and amortization..... (2,430,082) (2,161,933) ----------- ----------- $ 623,311 $ 788,333 =========== ===========
(4) INVESTMENT IN TCW REALTY FUNDS VB AND VIB AND NOTES PAYABLE TO TCW REALTY FUND VB Westmark and an affiliate of TCW are general partners in TCW Realty Fund VB, a limited partnership (Fund VB), and TCW Realty Fund VIB, a limited partnership (Fund VIB). Westmark's percentage interest is .85% for Fund VB and Fund VIB. The general partner capital contributions for Fund VB are in the form of notes payable. As of December 31, 1994 and 1993, Westmark has 21 notes payable outstanding totaling $952,172 with interest rates ranging from 8.25% to 9.01%. The interest, and then the principal, will be paid as Westmark receives cash distributions of operating cash flow from Fund VB. Any unpaid interest and principal will be due on December 31, 1997. (5) NOTES PAYABLE TO BANK Notes payable to bank as of December 31 consists of the following:
1994 1993 -------- -------- Principal of $6,667, payable monthly, and remaining principal balance due on December 1, 1998. Interest payable monthly at the prime rate (8.5% and 6.0% at December 31, 1994 and 1993, respectively) plus .5%.... $321,222 $400,000 Principal of $6,021, payable monthly, and remaining principal balance due on November 1, 1995. Interest payable monthly at the prime rate (8.5% and 6.0% at December 31, 1994 and 1993, respectively) plus 1%..... 60,208 131,813 -------- -------- $381,430 $531,813 ======== ========
Principal payments are as follows: 1995............................................................ $140,208 1996............................................................ 80,000 1997............................................................ 80,000 1998............................................................ 81,222 -------- Total......................................................... $381,430 ========
F-35 WESTMARK REALTY ADVISORS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (6) LEASES In December 1991, Westmark moved its headquarters and the new landlord granted leasing concessions to Westmark, including assumption of all of Westmark obligations under the old lease and payments of a move-in bonus to Westmark. These amounts have been deferred as leasing concessions and will be amortized over the term of the lease. Rental expense related to Westmark's office leases totaled $1,568,698 and $1,575,241 for the years ended December 31, 1994 and 1993, respectively, and income related to space subleased by Westmark to other tenants totaled $199,468 and $68,508 for the years ended December 31, 1994 and 1993, respectively. Future minimum rental commitments, net of minimum sublease payments for office leases, are as follows:
MINIMUM MINIMUM RENTAL SUBLEASE PAYMENTS PAYMENTS NET ----------- -------- ----------- Year ending December 31: 1995...................................... $ 1,313,007 $206,016 $ 1,106,991 1996...................................... 1,539,150 167,332 1,371,818 1997...................................... 1,539,150 157,152 1,381,998 1998...................................... 1,501,278 161,079 1,340,199 1999...................................... 1,540,524 172,860 1,367,664 Thereafter................................ 7,830,522 72,025 7,758,497 ----------- -------- ----------- $15,263,631 $936,464 $14,327,167 =========== ======== ===========
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS CASH RECEIVABLES AND ACCOUNTS PAYABLE The fair value of these financial instruments is approximately equal to the carrying value due to the short-term nature of the instruments. NOTES PAYABLE The fair value of the notes payable is approximately equal to the carrying value as the interest rates on the notes payable to banks are variable rates that are considered to be market rates, and the interest rates on the notes payable to Fund VB are considered to be approximately equal to current market rates for similar debt. F-36 L.J. MELODY & COMPANY CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (UNAUDITED)
1996 ---------- CURRENT ASSETS: Cash and cash equivalents......................................... $ 375,706 Investment in mutual funds, at fair value......................... 2,403,590 Accounts receivable and other current assets...................... 480,178 Short-term investment in note receivable.......................... -- ---------- Total current assets............................................. 3,259,474 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.......................... 147,590 NOTES RECEIVABLE FROM OFFICER...................................... -- OTHER ASSETS, net.................................................. 44,856 ---------- TOTAL ASSETS..................................................... $3,451,920 ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued employee benefits......................................... $ 159,735 Accounts payable and accrued expenses............................. 127,575 Warehouse credit line............................................. -- ---------- Total current liabilities........................................ 287,310 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, par value $100 per share, 3,000 shares authorized, 1,350 shares issued and outstanding.............................. 135,000 Unrealized depreciation on investment in mutual funds............. (75,021) Retained earnings................................................. 3,104,631 ---------- 3,164,610 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................... $3,451,920 ==========
F-37 L.J. MELODY & COMPANY CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1996 ----------- REVENUES: Loan placement and brokerage...................................... $ 958,096 Loan servicing and asset management............................... 987,016 Other income...................................................... 350,846 ----------- 2,295,958 EXPENSES: Salaries and other compensation................................... 2,536,662 General and administrative........................................ 920,922 Depreciation and amortization..................................... 35,711 ----------- 3,493,295 NET LOSS........................................................... (1,197,337) RETAINED EARNING AT BEGINNING OF PERIOD............................ 4,766,968 DISTRIBUTIONS TO SHAREHOLDERS...................................... (465,000) ----------- RETAINED EARNINGS AT END OF PERIOD................................. $ 3,104,631 ===========
F-38 L.J. MELODY & COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1996 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................ $ (1,197,337) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization.................................. 35,711 Equity in loss of joint venture................................ 22,187 Loss on disposal of equipment.................................. 148,877 Reinvestment of dividends on investment in mutual funds........ (62,375) Origination of multifamily mortgage loans for sale............. (20,550,000) Proceeds from sales of multifamily mortgage loans.............. 27,950,000 Changes in operating assets and liabilities-- Accounts receivable and other current assets................... 244,998 Accrued employee benefits...................................... (344,335) Accounts payable and accrued expenses.......................... (473,141) ------------ Net cash provided by (used in) operating activities............. 5,774,585 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment........................................... -- Payments received on notes receivable from officers............. 361,749 Purchase of other assets........................................ (4,092) ------------ Net cash provided by (used in) investing activities............. 357,657 CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders................................... (465,000) Payment of dividends............................................ -- Advances on warehouse line...................................... 20,550,000 Payments on warehouse line...................................... (27,950,000) ------------ Net cash provided by (used in) financing activities............. (7,865,000) ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS........................ (1,732,758) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 2,108,464 ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 375,706 ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest........................ $ 218,967 Cash paid during the period for state income taxes.............. $ 43,192
F-39 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING MATTERS: L.J. Melody & Company (the Company) is a commercial mortgage banker and is registered with the Securities and Exchange Commission as an investment adviser. The Company services commercial mortgages and manages real estate investments for institutional clients. As of June 30, 1996, the Company was servicing loans for others with principal balances aggregating approximately $1.9 billion. During the six-month period ended June 30, 1996, approximately 25 percent of loan servicing and asset management fees and 40 percent of loan placement and brokerage fees were earned from one of the Company's clients. In addition, approximately 45 percent of loan servicing and asset management fees and 10 percent of loan placement and brokerage fees were earned from two separate clients. The Company primarily operates in the southwestern United States; however, it pursues mortgage banking operations in other areas of the country as they arise. L.J. Melody Investments, Inc., a majority-owned subsidiary, operates as a commercial mortgage broker doing business in Colorado. The following is a summary of significant accounting matters. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. Minority interest amounts relating to such subsidiary are not material to the financial statements. All significant intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operation. The consolidated financial statements for the interim period have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In March 1995 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." Effective January 1, 1996, the Company adopted SFAS No. 121 and 122. The adoption of these standards did not have a material effect on the Company's financial position or results of operations. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement is required to be adopted F-40 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 (UNAUDITED) by the Company in 1997. Management of the Company has not yet determined the impact, if any, that the adoption of this statement will have on the Company's financial position or results of operations. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and money market mutual funds, the fair value of which approximates cost. The Company considers all investments with an original maturity of less than three months to be cash equivalents. INVESTMENTS IN MUTUAL FUNDS The Company accounts for its investments in mutual funds in accordance with SFAS No. 115, "Accounting for Investments in Debt and Equity Securities," whereby investments classified as "available for sale" are reported at fair value, with unrealized appreciation and depreciation excluded from earnings and reported as a separate component of shareholders' equity. During the six months ended June 30, 1996, interest received on the Company's investments of $62,375 was reinvested in the mutual funds. Additionally, unrealized appreciation/depreciation on investments reflected as a separate component of shareholders' equity decreased $101,711 during the six months ended June 30, 1996. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are carried at cost. Direct costs incurred in connection with software development for internal use are capitalized. Depreciation and amortization are computed using the straight- line or double-declining methods over the assets' estimated useful lives, which range from three to ten years. LOAN PLACEMENT AND BROKERAGE REVENUES Revenue from loan placement and brokerage is recognized at the time that a noncontingent commitment is obtained and the Company has no significant remaining obligations for performance in connection with the transaction. Loan placement and brokerage expenses are charged to income as incurred. LOAN SERVICING AND ASSET MANAGEMENT REVENUES Loan servicing revenue represents a participation in interest collections on loans serviced for investors, normally based upon a stipulated percentage of the outstanding monthly principal balance of such loans. These revenues are credited to income as monthly principal and interest payments are collected from mortgagors, and expenses of loan servicing are charged to income as incurred. F-41 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 (UNAUDITED) FEDERAL INCOME TAXES The Company operates under Subchapter S of the Internal Revenue Code and, consequently, is not subject to federal income tax. The shareholders include the Company's taxable income or loss in their individual tax returns. 2. INVESTMENT IN JOINT VENTURE: In June 1994 the Company entered into a joint venture with W. L. Case Holding Company (Case), an Ohio corporation, to form WLC Real Estate Finance L.L.C. (WLC), a Delaware limited liability company. WLC was formed for the purpose of developing and originating mortgage loans under programs developed by certain lenders. The Company and Case each contributed $100,000 for 50 percent interests in WLC. Case applied to Freddie Mac and received approval as a Multifamily Program Plus Seller/Servicer. In connection therewith, the Company signed an agreement effectively guaranteeing the performance of Case to Freddie Mac of any and all obligations, as defined, up to a maximum amount of $1,000,000. WLC has entered into an exclusive mortgage correspondent agreement dated December 1, 1994, whereby WLC will serve as Case's exclusive mortgage correspondent in connection with the origination, underwriting and closing of commercial and multifamily mortgage loans for certain lenders. WLC is jointly managed by Case and the Company and, accordingly, is accounted for under the equity method of accounting. During the six months ended June 30, 1996, the Company recorded equity in losses of WLC of approximately $22,000, representing its pro rata share of WLC's net loss. Such amount has been included as a component of other income on the accompanying consolidated statements of operations while the Company's net investment in the joint venture of approximately $13,000 at June 30, 1996, has been included as a component of other assets in the accompanying consolidated balance sheet. 3. WAREHOUSE CREDIT LINE: During 1994, the Company entered into a warehouse credit line (the Line) with a bank to provide funding for 99 percent of the principal balance of multifamily loans originated and warehoused for sale to Freddie Mac. Under the terms of the Line, interest is paid on outstanding borrowings at the Freddie Mac-required net yield as specified in the Freddie Mac purchase contract issued to the Company and borrowings are repaid upon purchase of the notes receivable from Freddie Mac. The Line includes covenants which require the Company to meet certain ratios and levels of tangible net worth and debt coverage and maintain a minimum loan servicing portfolio. As of June 30, 1996, the Company was in compliance with the covenants contained in the Line. At June 30, 1996, no amount was outstanding under the line. 4. RELATED-PARTY TRANSACTIONS: At June 30, 1995, the Company had unsecured notes receivable from two officers (who are also shareholders of the Company) in the amounts of $363,245 and $16,622. The outstanding borrowings have maturity dates ranging from December 31, 1995, to December 31, 1999, and bear interest ranging from 7.5 percent to 9 percent payable annually in arrears. The Company recognized $14,622 of interest income on these notes for the six months ended June 30, 1996. In May 1996 the notes, including accrued interest, were repaid in full. L.J. Melody & Company of California (LJMCal) is owned 99 percent by one of the shareholders of the Company. The Company provides loan servicing on certain loans obtained by LJMCal for which services F-42 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 (UNAUDITED) the Company earned $130,608 during the six months ended June 30, 1996. The Company also provides accounting and other administrative services for LJMCal for which the Company received $36,000 during the six months ended June 30, 1996. 5. REGULATORY REQUIREMENTS: The Company is a Department of Housing and Urban Development (HUD) approved Title II mortgagee as well as a Freddie Mac-approved Multifamily Program Plus Seller/Servicer. The Company is subject to the minimum net worth requirements of HUD and Freddie Mac. At June 30, 1996, the Company's net worth, as calculated in accordance with HUD and Freddie Mac guidelines, was in excess of the minimum required net worth. Additionally, as of June 30, 1996, the Company carried errors and omission insurance coverage of $5,000,000 and fidelity bond insurance coverage of $4,000,000, which are in excess of the minimum required insurance coverage of each program. As a Freddie Mac Multifamily Program Plus Seller/Servicer, the Company is obligated to advance funds to ensure the timely payment of insurance and taxes on loans serviced on behalf of Freddie Mac. Advances are recovered through subsequent collections from the borrower or from Freddie Mac in the event of default by the borrower. At June 30, 1996, no amount was outstanding for advances made by the Company for insurance and taxes on behalf of Freddie Mac. 6. SUBSEQUENT EVENT: Effective July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired all of the outstanding capital stock of the Company and of LJMCal. Concurrent with this transaction the Company distributed approximately $3.9 million of assets to its shareholders. On July 9, 1996, CB Mortgage merged into the Company, with the Company surviving the merger. As a result of the merger, LJMCal became a wholly owned subsidiary of the Company, and it is intended that at the end of 1996 LJMCal will be merged into the Company. F-43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of L.J. Melody & Company: We have audited the accompanying consolidated balance sheet of L.J. Melody & Company (a Texas corporation) and subsidiary as of December 31, 1995, and the related consolidated statements of operations and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the financial position of L.J. Melody & Company and subsidiary as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Houston, Texas Arthur Andersen LLP March 18, 1996 (except with respect to the matter discussed in Note 10, as to which the date is July 12, 1996) F-44 L.J. MELODY & COMPANY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents......................................... $ 2,108,464 Investment in mutual funds, at fair value......................... 2,442,926 Accounts receivable and other current assets...................... 725,176 Short-term investment in notes receivable......................... 7,400,000 ----------- Total current assets............................................. 12,676,566 EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Furniture and fixtures............................................ 558,879 Computer hardware and software.................................... 750,672 Leasehold improvements............................................ 229,404 ----------- 1,538,955 Less--Accumulated depreciation and amortization................... (1,206,777) ----------- 332,178 NOTES RECEIVABLE FROM OFFICER...................................... 361,749 OTHER ASSETS, net.................................................. 62,951 ----------- Total assets..................................................... $13,433,444 =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued employee benefits......................................... $ 504,070 Accounts payable and accrued expenses............................. 600,716 Warehouse credit line............................................. 7,400,000 ----------- Total current liabilities........................................ 8,504,786 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Common stock, par value $100 per share, 3,000 shares authorized, 1,350 shares issued and outstanding.............................. 135,000 Unrealized appreciation on investment in mutual funds............. 26,690 Retained earnings................................................. 4,766,968 ----------- 4,928,658 ----------- Total liabilities and shareholders' equity....................... $13,433,444 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-45 L.J. MELODY & COMPANY CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 REVENUES: Loan placement and brokerage....................................... $4,395,956 Loan servicing and asset management................................ 2,035,147 Other income....................................................... 643,002 ---------- 7,074,105 EXPENSES: Salaries and other compensation.................................... 4,453,309 General and administrative......................................... 1,416,630 Depreciation and amortization...................................... 164,897 ---------- 6,034,836 NET INCOME.......................................................... $1,039,269 ========== RETAINED EARNINGS AT BEGINNING OF YEAR.............................. $4,254,490 DISTRIBUTIONS TO SHAREHOLDERS....................................... (526,791) NET INCOME.......................................................... 1,039,269 ---------- RETAINED EARNINGS AT END OF YEAR.................................... $4,766,968 ==========
The accompanying notes are an integral part of these consolidated financial statements. F-46 L.J. MELODY & COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................... $ 1,039,269 Adjustments to reconcile net income to net cash used in operating activities-- Depreciation and amortization.................................. 164,897 Equity in loss of joint venture................................ 37,403 Reinvestment of dividends on investment in mutual funds........ (128,474) Origination of multifamily mortgage loans for sale............. (33,169,500) Proceeds from sales of multifamily mortgage loans.............. 25,769,500 Changes in operating assets and liabilities-- Accounts receivable and other current assets.................. 133,598 Accrued employee benefits..................................... 192,229 Accounts payable and accrued expenses......................... (196,138) ----------- Net cash used in operating activities........................ (6,157,216) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment............................................ (103,747) Payments received on notes receivable from officers.............. 18,118 Purchase of other assets......................................... (13,499) ----------- Net cash used in investing activities........................ (99,128) CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders.................................... (526,791) Advances on warehouse line....................................... 33,169,500 Payments on warehouse line....................................... (25,769,500) ----------- Net cash provided by financing activities.................... 6,873,209 ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 616,865 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 1,491,599 ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 2,108,464 =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest........................... $ 247,425 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-47 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. SIGNIFICANT ACCOUNTING MATTERS: L.J. Melody & Company (the Company) is a commercial mortgage banker and is registered with the Securities and Exchange Commission as an investment adviser. The Company services commercial mortgages and manages real estate investments for institutional clients. As of December 31, 1995, the Company was servicing loans for others with principal balances aggregating approximately $2.1 billion. Approximately 28 percent of loan servicing and asset management fees and 41 percent of loan placement and brokerage fees were earned from one of the Company's clients. In addition, approximately 44 percent of loan servicing fees and asset management fees and approximately 11 percent of loan placement and brokerage fees were earned from two separate clients. The Company primarily operates in the southwestern United States; however, it pursues mortgage banking operations in other areas of the country as they arise. L.J. Melody Investments, Inc., a majority-owned subsidiary, operates as a commercial mortgage broker doing business in Colorado. The following is a summary of significant accounting matters. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. Minority interest amounts relating to such subsidiary are not material to the financial statements. All significant intercompany transactions and balances have been eliminated upon consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement established the recognition and measurement standards related to the impairment of long-lived assets. Effective January 1, 1996, the Company adopted SFAS No. 121. The adoption of this standard did not have a material effect on the Company's financial position or results of operations. In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." This statement requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. This statement is required to be adopted by the Company in 1996. Management of the Company has not yet determined the impact, if any, that the adoption of this statement will have on the Company's financial position or results of operations. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and money market mutual funds, the fair value of which approximates cost. F-48 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 INVESTMENTS IN MUTUAL FUNDS The Company accounts for its investments in mutual funds in accordance with SFAS No. 115, "Accounting for Investments in Debt and Equity Securities," whereby investments classified as "available for sale" are reported at fair value, with unrealized appreciation and depreciation excluded from earnings and reported as a separate component of shareholders' equity. During the year ended December 31, 1995, interest received on the Company's investments of $128,474 was reinvested in the mutual funds. Additionally, unrealized appreciation/depreciation on investments reflected as a separate component of shareholders' equity increased $216,874 during the year ended December 31, 1995. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are carried at cost. Direct costs incurred in connection with software development for internal use are capitalized. Depreciation and amortization are computed using the straight- line or double-declining methods over the assets' estimated useful lives, which range from three to ten years. LOAN PLACEMENT AND BROKERAGE REVENUES Revenue from loan placement and brokerage is recognized at the time that a noncontingent commitment is obtained and the Company has no significant remaining obligations for performance in connection with the transaction. Loan placement and brokerage expenses are charged to income as incurred. LOAN SERVICING AND ASSET MANAGEMENT REVENUES Loan servicing revenue represents a participation in interest collections on loans serviced for investors, normally based upon a stipulated percentage of the outstanding monthly principal balance of such loans. These revenues are credited to income as monthly principal and interest payments are collected from mortgagors, and expenses of loan servicing are charged to income as incurred. Also included in loan servicing are fees earned under asset management contracts. At December 31, 1995, escrow funds of $38,297,945, held in connection with servicing activities, were on deposit in bank accounts held in trust for investors and are not included in the accompanying balance sheet. FEDERAL INCOME TAXES The Company operates under Subchapter S of the Internal Revenue Code and, consequently, is not subject to federal income tax. The shareholders include the Company's taxable income or loss in their individual tax returns. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are either carried at fair value or cost. The carrying amounts of financial instruments reported at cost approximate their fair values because of the short maturity, short lapse of time between their issuance and year-end, and market interest rates, as applicable, of those instruments. F-49 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 2. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS: The components of accounts receivable and other current assets at December 31, 1995 are as follows:
Loan placement and brokerage fees receivable....................... $512,529 Asset management fees receivable................................... 29,222 Other receivables.................................................. 170,087 Other current assets............................................... 13,338 -------- $725,176 ========
3. SHORT-TERM INVESTMENT IN NOTES RECEIVABLE: On December 20, 1995, the Company originated and funded two notes receivable for $2,300,000 and $5,100,000, respectively, through advances on its warehouse credit line (see Note 4). The Company had received purchase commitments from the Federal Home Loan Mortgage Corporation (Freddie Mac) as of the date of origination and subsequently sold the notes receivable to Freddie Mac on January 19, 1996, and February 28, 1996, respectively. 4. INVESTMENT IN JOINT VENTURE: In June 1994, the Company entered into a joint venture with W. L. Case Holding Company (Case), an Ohio corporation, to form WLC Real Estate Finance L.L.C. (WLC), a Delaware limited liability company. WLC was formed for the purpose of developing and originating mortgage loans under programs developed by certain lenders. The Company and Case each contributed $100,000 for 50 percent interests in WLC. Case applied to Freddie Mac and received approval as a Multifamily Program Plus Seller/Servicer. In connection therewith, the Company signed an agreement effectively guaranteeing the performance of Case to Freddie Mac of any and all obligations, as defined, up to a maximum amount of $1,000,000. WLC has entered into an exclusive mortgage correspondent agreement dated December 1, 1994, whereby WLC will serve as Case's exclusive mortgage correspondent in connection with the origination, underwriting and closing of commercial and multifamily mortgage loans for certain lenders. WLC is jointly managed by Case and the Company and, accordingly, is accounted for under the equity method of accounting. During the period ended December 31, 1995, the Company recorded equity in losses of WLC of approximately $37,000 representing its pro rata share of WLC's net loss. Such amount has been included as a component of other income on the accompanying consolidated statement of operations while the Company's net investment in the joint venture of approximately $36,000 at December 31, 1995, has been included as a component of other assets in the accompanying consolidated balance sheet. 5. WAREHOUSE CREDIT LINE: During 1994, the Company entered into a warehouse credit line (the Line) with a bank to provide funding for 99 percent of the principal balance of multifamily loans originated and warehoused for sale to Freddie Mac. Under the terms of the Line, interest is paid on outstanding borrowings at the Freddie Mac-required net yield as specified in the Freddie Mac purchase contract issued to the Company and borrowings are repaid upon purchase of the notes receivable from Freddie Mac (see Note 2). The Line includes covenants which require the Company to meet certain ratios and levels of tangible net worth and debt coverage and maintain a minimum loan servicing portfolio. As of December 31, 1995, the Company was in compliance with the covenants contained in the Line. At December 31, 1995, $7,400,000 was outstanding under the line. F-50 L.J. MELODY & COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 6. PROFIT-SHARING PLANS: The Company has a 401(k) profit-sharing plan under which all employees of the Company and its affiliates are eligible for participation after completing six months of service. Participating employees can elect to make contributions to the plan on a pretax salary deduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Under the provisions of the plan, the Company may make discretionary matching contributions. The Company's contribution to the plan in 1995 was $94,300. 7. RELATED-PARTY TRANSACTIONS: At December 31, 1995, the Company had unsecured notes receivable from one officer (who is also a shareholder) in the amounts of $31,749 and $330,000. The outstanding borrowings have a maturity date of December 31, 1999, and bear interest ranging from 7.5 percent to 9 percent payable annually in arrears. The Company recognized $27,742 of interest income on these notes in 1995. L.J. Melody & Company of California (LJMCal) is owned 99 percent by one of the shareholders of the Company. The Company provides loan servicing on certain loans obtained by LJMCal for which services the Company earned $261,246 during 1995. The Company also provides accounting and other administrative services for LJMCal for which the Company received $72,000 during 1995. 8. LEASES: Future minimum lease payments for noncancelable operating leases for office space and equipment approximate $304,000, $49,000, $48,000, $19,000 and $0 for the years ended December 31, 1996 through 2000, respectively. Rent expense under these operating leases aggregated approximately $327,000 for the year ended December 31, 1995. 9. REGULATORY REQUIREMENTS: The Company is a Department of Housing and Urban Development (HUD) approved Title II mortgagee as well as a Freddie Mac-approved Multifamily Program Plus Seller/Servicer. The Company is subject to the minimum net worth requirements of HUD and Freddie Mac. At December 31, 1995, the Company's net worth, as calculated in accordance with HUD and Freddie Mac guidelines, was in excess of the minimum required net worth. Additionally, as of December 31, 1995, the Company carried errors and omission insurance coverage of $5,000,000 and fidelity bond insurance coverage of $4,000,000, which are in excess of the minimum required insurance coverage of each program. As a Freddie Mac Multifamily Program Plus Seller/Servicer, the Company is obligated to advance funds to ensure the timely payment of insurance and taxes on loans serviced on behalf of Freddie Mac. Advances are recovered through subsequent collections from the borrower or from Freddie Mac in the event of default by the borrower. At December 31, 1995, there were no advances outstanding for insurance and taxes. 10. SUBSEQUENT EVENT: On July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired all of the outstanding capital stock of the Company and of LJMCal. Concurrent with this transaction the Company distributed approximately $3.1 million of assets to its shareholders. On July 9, 1996, CB Mortgage merged into the Company, with the Company surviving the merger. As a result of the merger, LJMCal became a wholly owned subsidiary of the Company, and it is intended that, at the end of 1996, LJMCal will be merged into the Company. F-51 L.J. MELODY & COMPANY OF CALIFORNIA BALANCE SHEET JUNE 30, 1996 (UNAUDITED)
1996 ---------- CURRENT ASSETS: Cash and cash equivalents......................................... $ 257,892 Accounts receivable and other current assets...................... 78,753 ---------- Total current assets............................................. 336,645 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.......................... 169,060 OTHER ASSETS: Employment agreements and covenants not to compete, net........... 63,787 Purchased loan servicing rights and related assets, net........... 372,135 ---------- TOTAL ASSETS..................................................... $ 941,627 ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued employee benefits......................................... $ 197,491 Accounts payable and accrued expenses............................. 69,755 ---------- TOTAL CURRENT LIABILITIES........................................ 267,246 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Voting common stock, par value $1 per share, 3,000 shares autho- rized, $1,000 shares issued and outstanding...................... 1,000 Non-voting common stock, par value $1 per share, 1,000 shares au- thorized, 1 share issued and held in treasury.................... -- Additional paid-in capital........................................ 1,179,974 Retained earnings................................................. (506,593) ---------- 674,381 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................... $ 941,627 ==========
F-52 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1996 ---------- REVENUES: Loan placement and brokerage....................................... $ 942,981 Loan servicing..................................................... 326,798 Other income (loss)................................................ (3,350) ---------- 1,266,429 EXPENSES: Salaries and other compensation.................................... 1,074,529 General and administrative......................................... 624,358 Depreciation and amortization...................................... 128,382 ---------- 1,827,269 NET LOSS.......................................................... $ (560,840) ==========
F-53 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
VOTING ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) TOTAL ------ ---------- --------- ---------- Balance, December 31, 1995........... $1,000 $1,407,247 $ 54,247 $1,462,494 Distributions to or on behalf of shareholders........................ -- (227,273) -- (227,273) Net loss............................. -- -- (560,840) (560,840) ------ ---------- --------- ---------- Balance, June 30, 1996............... $1,000 $1,179,974 $(506,593) $ 674,381 ====== ========== ========= ==========
F-54 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1996 --------- OPERATING ACTIVITIES: Net Loss........................................................... $(560,840) Adjustments to reconcile net loss to net cash used in operating activties-- Depreciation and amortization..................................... 128,382 Loss on disposal on equipment..................................... 28,626 Changes in operating assets and liabilities-- Accounts receivable and other current assets..................... 1,089,436 Accrued employee benefits........................................ (227,116) Accounts payable and accrued expenses............................ (60,860) --------- Net cash provided by (used in) operating activities................ 397,628 INVESTING ACTIVITIES: Purchase of other assets........................................... -- Purchase of equipment.............................................. (93,863) --------- Net cash used in investing activities.............................. (93,863) FINANCING ACTIVITIES: Repurchase of non-voting common stock.............................. -- Distributions to shareholders...................................... (227,273) --------- Net cash used in financing activities.............................. (227,273) --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 76,492 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 181,400 --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 257,892 =========
F-55 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING MATTERS: L.J. Melody & Company of California (the Company) is a commercial mortgage banker and servicer of commercial mortgages. As of June 30, 1996, the Company was servicing loans for others with principal balances aggregating approximately $1.6 billion. Approximately 50 percent of loan placement and brokerage revenue and 70 percent of loan servicing revenue were earned from one client. In addition, approximately 10 percent of loan placement and brokerage revenue and 25 percent of loan servicing revenue were earned from two separate clients. The Company primarily operates in southern California and Arizona; however, it pursues mortgage banking operations in other areas of the country as they arise. The following is a summary of the Company's significant accounting matters. BASIS OF PRESENTATION The financial statements for the interim period have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In March 1995 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement established the recognition and measurement standards related to the impairment of long-lived assets. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." Effective January 1, 1996, the Company adopted SFAS No. 121 and 122. The adoption of these standards did not have a material effect on the Company's financial position or results of operations. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement is required to be adopted by the Company in 1997. Management of the Company has not yet determined the impact, if any, that the adoption of this statement will have on the Company's financial position or results of operations. F-56 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 (UNAUDITED) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and money market mutual funds. Cash equivalents are carried at cost, which approximates fair value. The Company considers all investments with an original maturity of less than three months to be cash equivalents. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are carried at cost. Depreciation and amortization are computed using the straight-line or double declining balance methods over the assets' estimated useful lives, which range from three to ten years. PURCHASED LOAN SERVICING RIGHTS The cost of purchased loan servicing rights is being amortized in proportion to and over the period of estimated servicing income and on a straight-line basis. Adjustments are made for unexpected loan prepayments as they occur. EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE Capitalized costs relating to employment agreements and covenants not to compete are amortized on a straight-line basis over the term of the related agreement. LOAN PLACEMENT AND BROKERAGE Revenue from loan placement and brokerage is recognized at the time that a noncontingent commitment is obtained and the Company has no significant remaining obligations for performance in connection with the transaction. Related expenses are charged to income as incurred. LOAN SERVICING Loan servicing revenue represents a participation in interest collections on loans serviced for investors, normally based upon a stipulated percentage of the outstanding monthly principal balance of such loans. These revenues are credited to income as monthly principal and interest payments are collected from mortgagors, and expenses of loan servicing are charged to income as incurred. INCOME TAXES The Company operates under Subchapter S of the Internal Revenue Code and, consequently, is not subject to federal income tax. The shareholders include the Company's taxable income or loss in their individual tax returns. For California state income tax purposes, the Company is taxed under Subchapter S status. 2. RELATED-PARTY TRANSACTIONS: L.J. Melody & Company provides loan servicing on certain loans obtained by the Company and also provides administrative services for which the Company paid $130,608 during the six months ended June 30, 1996. F-57 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 (UNAUDITED) 3. SUBSEQUENT EVENT: Effective July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired all of the outstanding capital stock of the Company and of L.J. Melody & Company (LJMCo), an affiliate of the Company. Concurrent with this transaction the Company distributed approximately $66,000 of assets to its shareholders. On July 9, 1996, CB Mortgage merged into LJMCo, with the LJMCo surviving the merger. As a result of the merger, the Company became a wholly owned subsidiary of LJMCo, and it is intended that at the end of 1996 the Company will be merged into LJMCo. F-58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of L.J. Melody & Company of California: We have audited the accompanying balance sheet of L.J. Melody & Company of California (a Texas corporation) as of December 31, 1995, and the related statements of operations, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the financial position of L.J. Melody & Company of California as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Houston, Texas March 18, 1996 (except with Arthur Andersen LLP respect to the matter discussed in Note 6, as to which the date is July 12, 1996) F-59 L.J. MELODY & COMPANY OF CALIFORNIA BALANCE SHEET DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $ 181,400 Accounts receivable and other current assets....................... 1,168,189 ---------- Total current assets.............................................. 1,349,589 EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Furniture and fixtures............................................. 135,796 Computer hardware and software..................................... 23,744 Leasehold improvements............................................. 65,665 ---------- 225,205 Less--Accumulated depreciation and amortization.................... (103,625) ---------- 121,580 OTHER ASSETS: Employment agreements and covenants not to compete, net of accumulated amortization of $427,816....................... 111,624 Purchased loan servicing rights and related assets, net of accumulated amortization of $540,490....................... 434,923 ---------- Total assets...................................................... $2,017,716 ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued employee benefits.......................................... $ 424,607 Accounts payable and accrued expenses.............................. 130,615 ---------- Total current liabilities......................................... 555,222 COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY: Voting common stock, par value $1 per share, 3,000 shares authorized, 1,000 shares issued and outstanding................... 1,000 Nonvoting common stock, par value $1 per share, 1,000 shares authorized, 1 share issued and held in treasury................... -- Additional paid-in capital......................................... 1,407,247 Retained earnings.................................................. 54,247 ---------- 1,462,494 ---------- Total liabilities and shareholders' equity........................ $2,017,716 ==========
The accompanying notes are an integral part of these financial statements. F-60 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 REVENUES: Loan placement and brokerage....................................... $2,776,119 Loan servicing..................................................... 693,926 Other income....................................................... 8,970 ---------- 3,479,015 EXPENSES: Salaries and other compensation.................................... 2,093,064 General and administrative......................................... 975,849 Depreciation and amortization...................................... 273,393 ---------- 3,342,306 ---------- NET INCOME.......................................................... $ 136,709 ==========
The accompanying notes are an integral part of these financial statements. F-61 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995
VOTING NONVOTING ADDITIONAL RETAINED COMMON COMMON PAID-IN EARNINGS STOCK STOCK CAPITAL (DEFICIT) TOTAL ------ --------- ---------- --------- ---------- BALANCE, December 31, 1994.. $1,000 $ 1 $1,205,025 $(81,268) $1,124,758 DISTRIBUTIONS TO OR ON BE- HALF OF SHAREHOLDERS....... -- -- (25,000) -- (25,000) CAPITAL CONTRIBUTIONS....... -- -- 227,222 -- 227,222 NET INCOME.................. -- -- -- 136,709 136,709 REPURCHASE OF NONVOTING COMMON STOCK............... -- (1) -- (1,194) (1,195) ------ --- ---------- -------- ---------- BALANCE, December 31, 1995.. $1,000 $-- $1,407,247 $ 54,247 $1,462,494 ====== === ========== ======== ==========
The accompanying notes are an integral part of these financial statements. F-62 L.J. MELODY & COMPANY OF CALIFORNIA STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 OPERATING ACTIVITIES: Net income......................................................... $ 136,709 Adjustments to reconcile net income to net cash used in operating activities-- Depreciation and amortization..................................... 273,393 Changes in operating assets and liabilities-- Accounts receivable and other current assets..................... (991,917) Accrued employee benefits........................................ 176,847 Accounts payable and accrued expenses............................ 59,031 --------- Net cash used in operating activities........................... (345,937) INVESTING ACTIVITIES: Proceeds from sale of equipment.................................... 1,577 Purchase of equipment.............................................. (69,483) Purchase of loan servicing rights and related assets............... (41,124) --------- Net cash used in investing activities........................... (109,030) FINANCING ACTIVITIES: Capital contributions.............................................. 227,222 Distributions to shareholders...................................... (25,000) Repurchase of nonvoting common stock............................... (1,195) --------- Net cash provided by financing activities....................... 201,027 --------- NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (253,940) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................... 435,340 --------- CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $ 181,400 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for state income taxes................... $ 800 =========
The accompanying notes are an integral part of these financial statements. F-63 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. SIGNIFICANT ACCOUNTING MATTERS: L.J. Melody & Company of California (the Company) is a commercial mortgage banker and servicer of commercial mortgages. As of December 31, 1995, the Company was servicing loans for others with principal balances aggregating approximately $1.4 billion. Approximately 52 percent of loan placement and brokerage revenue and 71 percent of loan servicing revenue were earned from one investor. In addition, 12 percent of loan placement and brokerage revenue and 25 percent of loan servicing revenue were earned from two separate investors. The Company primarily operates in Southern California and Arizona; however, it pursues mortgage banking operations in other areas of the country as they arise. The following is a summary of the Company's significant accounting matters. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement established the recognition and measurement standards related to the impairment of long-lived assets. In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." This statement requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. Effective January 1, 1996, the Company adopted SFAS No. 121 and 122. The adoption of these standards did not have a material effect on the Company's financial position or results of operations. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and money market mutual funds. Cash equivalents are carried at cost, which approximates fair value. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are carried at cost. Depreciation and amortization are computed using the straight-line or double declining balance methods over the assets' estimated useful lives, which range from three to ten years. PURCHASED LOAN SERVICING RIGHTS The cost of purchased loan servicing rights is being amortized in proportion to and over the period of estimated servicing income and on a straight-line basis. Adjustments are made for unexpected loan prepayments as they occur. F-64 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE Capitalized costs relating to employment agreements and covenants not to compete are amortized on a straight-line basis over the term of the related agreement. LOAN PLACEMENT AND BROKERAGE Revenue from loan placement and brokerage is recognized at the time that a noncontingent commitment is obtained and the Company has no significant remaining obligations for performance in connection with the transaction. Related expenses are charged to income as incurred. LOAN SERVICING Loan servicing revenue represents a participation in interest collections on loans serviced for investors, normally based upon a stipulated percentage of the outstanding monthly principal balance of such loans. These revenues are credited to income as monthly principal and interest payments are collected from mortgagors, and expenses of loan servicing are charged to income as incurred. As of December 31, 1995, escrow funds of $6,691,225, held in conjunction with servicing activities, were on deposit in bank accounts held in trust for investors and are not included in the accompanying balance sheet. INCOME TAXES The Company operates under Subchapter S of the Internal Revenue Code and, consequently, is not subject to federal income tax. The shareholders include the Company's taxable income or loss in their individual tax returns. For California state income tax purposes, the Company is taxed under Subchapter S status. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are either carried at fair value or cost. The carrying amounts of financial instruments reported at cost approximate their fair values because of the short maturity, short lapse of time between their issuance and year-end, and market interest rates, as applicable, of those instruments. 2. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS: The components of accounts receivable and other current assets at December 31, 1995 are as follows:
Loan placement and brokerage fees receivable..................... $1,063,766 Other receivables................................................ 51,715 Other current assets............................................. 52,708 ---------- $1,168,189 ==========
3. RELATED-PARTY TRANSACTIONS: L.J. Melody & Company provides loan servicing on certain loans obtained by the Company and also provides administrative services for which the Company paid $261,246 and $72,000, respectively, during 1995. F-65 L.J. MELODY & COMPANY OF CALIFORNIA NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 4. LEASES: Future minimum lease payments for noncancelable operating leases for office space and equipment approximate $241,000, $230,000, $223,000, $207,000 and $213,000 for the years ended December 31, 1996 through 2000, respectively. Rent expense under these operating leases aggregated approximately $247,000 for the year ended December 31, 1995. 5. PROFIT-SHARING PLANS: The Company has a 401(k) profit-sharing plan under which all employees are eligible for participation after completing six months of service. Participating employees can elect to make contributions to the plan on a pretax salary deduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Under the provisions of the plan, the Company may make discretionary matching contributions. The Company's contribution to the plan in 1995 was $42,867. 6. SUBSEQUENT EVENT: On July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired all of the outstanding capital stock of the Company and of L.J. Melody & Company (LJMCo), an affiliate of the Company. On July 9, 1996, CB Mortgage merged into LJMCo, with LJMCo surviving the merger. As a result of the merger, the Company became a wholly owned subsidiary of LJMCo, and it is intended that, at the end of 1996, the Company will be merged into LJMCo. F-66 Graphic on Inside Back Cover Circular Diagram of arrows illustrating the integration of all of the Company's commercial real estate services with the needs of real estate owners and investors. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO- RIZED BY THE COMPANY, OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE OR, TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 12 The Company............................................................... 16 Use of Proceeds........................................................... 16 Price Range of Common Stock and Dividend Policy........................... 17 Capitalization............................................................ 18 Selected Consolidated Financial and Other Data............................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 36 Management................................................................ 50 Certain Transactions...................................................... 59 Principal Stockholders.................................................... 61 Description of Capital Stock.............................................. 64 The Company's Credit Agreements........................................... 68 Shares Eligible For Future Sale........................................... 69 Underwriting.............................................................. 72 Legal Matters............................................................. 73 Experts................................................................... 73 Additional Information.................................................... 73 Pro Forma Financial Statements............................................ P-1 Financial Statements...................................................... F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,347,000 SHARES [LOGO OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.] CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- MERRILL LYNCH & CO. MONTGOMERY SECURITIES , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
PAYABLE BY REGISTRANT ---------- SEC registration fee............................................. $ 39,205 National Association of Securities Dealers, Inc. filing fee...... 12,250 Nasdaq Stock Market Listing Fee.................................. 38,165 Blue Sky fees and expenses....................................... 20,000 Accounting fees and expenses..................................... 365,000 Legal fees and expenses.......................................... 300,000 Printing and engraving expenses.................................. 250,000 Registrar and Transfer Agent's fees.............................. 15,000 Miscellaneous fees and expenses.................................. 60,380 ---------- Total........................................................ $1,100,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article Six of the Registrant's Fourth Amended Restated Certificate of Incorporation (Exhibit 3(i).2 hereto) provides for the indemnification of the Company's directors and officers to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Purchase Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1996, the Company has sold 510,906 shares of Common Stock to eight executive officers of the Company under the Company's 1996 Equity Incentive Plan. These sales were made by private placement in reliance on the exemption from registration provisions provided for in Section 4(2) of the Securities Act. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. All recipients had adequate access, through employment, to information about the Registrant. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Purchase Agreement. 3(i).1* Third Restated Certificate of Incorporation of Registrant filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 3(i).2+ Form of Fourth Restated Certificate of Incorporation of Registrant to be filed after the effective date of this Registration Statement. 3(ii).1* Second Amended and Restated Bylaws of the Registrant filed as Exhibit 3.4 to Registrant's Post-Effective Amendment No. 1 to its Form S-1 Registration Statement, File No. 33- 29410. 3(ii).2+ Form of Third Amended and Restated Bylaws of the Registrant to be adopted after the effective date of this Registration Statement. 4.1+ Specimen Form of Common Stock Certificate. 4.2* Form of CB Commercial Holdings, Inc. Restricted Stock Agreement between CB Commercial Holdings, Inc. and CB Commercial Holdings, Inc.'s Officer or Employee, filed as Exhibit 4.8 to the CB Commercial Holdings, Inc. Form S-1 Registration Statement, File No. 33-29410. 4.3* First Amendment to CB Commercial Holdings, Inc. Restricted Stock Agreement files as Exhibit 4.9 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1989. 4.4++ Agreement by and between CB Commercial Holdings, Inc. and Kajima U.S.A., Inc., Fukoku Mutual Life Insurance Company, Kasen Development, Inc. and S.R.E.S.--Fifth Avenue, Inc. dated August 30, 1996. 5.1+ Opinion of Pillsbury Madison & Sutro LLP. 10.1(i)* CB Commercial Holdings, Inc. Omnibus Stock and Incentive Plan filed as Exhibit 10.13 to the CB Commercial Holdings, Inc. Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 33-29410. 10.1(ii)* First Amendment to the CB Commercial Holdings, Inc. Omnibus Stock and Incentive Plan filed as Exhibit 10.16 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1990. 10.1(iii)* Second Amendment to the CB Commercial Holdings, Inc. Omnibus Stock and Incentive Plan filed as Exhibit 10.16 (iii) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1993. 10.1(iv)* Third Amendment to the CB Commercial Holdings, Inc. Omnibus Stock and Incentive Plan filed as Exhibit 10.4 (iv) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1994. 10.2(i)* 1990 Stock Option Plan filed as Exhibit 4(a) to the CB Commercial Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 10.2(ii)* First Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.15(ii) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1992.
II-2
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.2(iii)* Second Amendment to the 1990 Stock Option Plan filed as Exhibit 10.8 (iii) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1993. 10.2(iv)* Third Amendment to the 1990 Stock Option Plan filed as Exhibit 10.5 (iv) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1994. 10.3* Form of Incentive Stock Option Agreement filed as Exhibit 4(b) to the CB Commercial Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 10.4* Form of Nonstatutory Stock Option Agreement filed as Exhibit 4(c) to the CB Commercial Holdings, Inc. Quarter Report on Form 10-Q for the quarter ended June 30, 1990. 10.5(i)* Second Amended and Restated Senior Secured Credit Agreement, dated as of June 30, 1994 between CB Commercial Real Estate Group, Inc. and The Sumitomo Bank, Limited filed as Exhibit 10.9 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1994. 10.5(ii)* Limited Waiver, Consent and Amendment No. 1 dated as of June 30, 1995 to Second Amended and Restated Senior Secured Credit Agreement dated as of June 30, 1995 between CB Commercial Real Estate Group, Inc. and The Sumitomo Bank, Limited, filed as to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.5(iii)* Amendment No. 2 dated as of June 30, 1996, to Second Amended and Restated Senior Secured Credit Agreement dated as of June 30, 1994, between CB Commercial Real Estate Group, Inc. and The Sumitomo Bank, Limited filed as Exhibit 10.6(iii) to the Company's Quarterly Report on 10-Q for the quarter ended June 30, 1996. 10.5(iv)+ Form of Third Amended and Restated Senior Secured Credit Agreement between CB Commercial Real Estate Group, Inc. and The Sumitomo Bank, Limited. 10.6(i)* Senior Subordinated Credit Agreement among Coldwell Banker Commercial Group, Inc., CB Commercial Holdings, Inc. and certain subsidiaries of Coldwell Banker Commercial Group, Inc., as guarantors and Sumitomo Finance (Dublin) Limited, dated July 20, 1990 (the "Senior Subordinated Credit Agreement") filed as Exhibit 4(e) to the CB Commercial Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 10.6(ii)* Amendment No. 1 to Senior Subordinated Credit Agreement dated as of October 10, 1991 among CB Commercial Real Estate Group, Inc., as borrower, CB Commercial Holdings, Inc. and certain subsidiaries of CB Commercial Real Estate Group, Inc., as guarantors, and Sumitomo Finance (Dublin) Limited, as lender filed as Exhibit 10.19 to CB Commercial Holdings, Inc. Current Report on Form 8-K dated March 27, 1992. 10.6(iii)* Amendment No. 2 to Senior Subordinated Credit Agreement dated as of June 30, 1994 among CB Commercial Real Estate Group, Inc., as borrower, CB Commercial Holdings, Inc. and certain subsidiaries of CB Commercial Real Estate Group, Inc., as guarantors, and Sumitomo Finance (Dublin) Limited, as lender, filed as Exhibit 10.11 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1994.
II-3
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.6(iv)* Limited Waiver, Consent and Amendment No. 3 dated as of June 30, 1995 to Senior Subordinated Credit Agreement dated as of October 10, 1991 among CB Commercial Real Estate Group, Inc., as borrower, CB Commercial Holdings, Inc. and certain subsidiaries of CB Commercial Real Estate Group, Inc., as guarantors, and Sumitomo Finance (Dublin) Limited, as lender, filed as exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.6(v)* Amendment No. 4 dated as of June 30, 1996, to Senior Subordinated Credit Agreement dated as of October 10, 1991, among CB Commercial Real Estate Group, Inc. as borrower. CB Commercial Holdings, Inc. and certain subsidiaries of CB Commercial Real Estate Group, Inc., as guarantors, and Sumitomo Finance (Dublin) Limited, as lender filed as Exhibit 10.7(v) to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996. 10.7* CB Commercial Holdings, Inc. 1991 Service Providers Stock Option Plan filed as Exhibit 10.27 to the CB Commercial Holdings, Inc. Current Report on Form 8-K dated April 1, 1992. 10.8(i)* CB Commercial Holdings, Inc. Deferred Compensation Plan filed as Exhibit 10.21 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1993. 10.8(ii)* First Amendment to the CB Commercial Holdings, Inc. Deferred Compensation Plan filed as Exhibit 10.13 (ii) to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1994. 10.8(iii)* Second Amendment to the CB Commercial Holdings, Inc. Deferred Compensation Plan, filed as exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.9* 1996 Equity Incentive Plan of CB Commercial Holdings, Inc., filed as exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.10* Form of Indemnification Agreement between CB Commercial Holdings, Inc., CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the CB Commercial Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1992. 10.11* Purchase Agreement dated as of May 15, 1995 among CB Commercial Real Estate Group, Inc., Westmark Real Estate Acquisition Partnership, L.P., and certain individuals signatory thereto, filed as Exhibit 10.1 to the CB Commercial Holdings, Inc. Current Report on Form 8-K dated June 30, 1995. 10.12 Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996. 10.13 Registration Rights Agreement among the Company and Kajima U.S.A., Inc., Fukoko Mutual Life Insurance Company, Kasen Development, Inc. and S.R.E.S.-Fifth Avenue, Inc. dated , 1996. 11.1* Statement of computation of earnings per share. 21.1 Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP regarding CB Commercial. 23.2 Consent of Arthur Andersen LLP regarding L.J. Melody.
II-4
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 23.3 Consent of KPMG Peat Marwick LLP. 23.4 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this Registration Statement). 24.1 Power of Attorney (see page II-6).
- -------- * Incorporated by reference. + To be filed by amendment. ++ Previously filed. (b) FINANCIAL STATEMENT SCHEDULES
PAGE ---- Opinion of Arthur Anderson LLP.......................................... S-1 I--Condensed Financial Information of Registrant....................... S-2 II--Valuation and Qualifying Accounts................................... S-3
All other schedules are not submitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, ON THE 4TH DAY OF NOVEMBER, 1996. CB Commercial Holdings, Inc. /s/ David A. Davidson By: _________________________________ DAVID A. DAVIDSON SENIOR EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, TREASURER (PRINCIPAL FINANCIAL OFFICER) POWER OF ATTORNEY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. NAME TITLE DATE ---- ----- ---- * Chief Executive November 4, 1996 - ------------------------------------- Officer (Principal JAMES J. DIDION Executive Officer) and Director /s/ David A. Davidson Senior Executive November 4, 1996 - ------------------------------------- Vice President, DAVID A. DAVIDSON Chief Financial Officer, Treasurer (Principal Financial Officer) * Executive Vice November 4, 1996 - ------------------------------------- President RONALD J. PLATISHA (Principal Accounting Officer) * Director November 4, 1996 - ------------------------------------- STANTON D. ANDERSON * Director November 4, 1996 - ------------------------------------- GARY J. BEBAN * Director November 4, 1996 - ------------------------------------- RICHARD C. BLUM II-6 NAME TITLE DATE ---- ----- ---- * Director November 4, 1996 - ------------------------------------- * Director November 4, 1996 - ------------------------------------- RICHARD C. CLOTFELTER Director November 4, 1996 - ------------------------------------- DANIEL A. D'ANIELLO Director November 4, 1996 - ------------------------------------- HIROAKI HOSHINO * Director November 4, 1996 - ------------------------------------- PAUL C. LEACH * Director November 4, 1996 - ------------------------------------- GEORGE J. KALLIS * Director November 4, 1996 - ------------------------------------- TAKAYUKI KOHRI * Director November 4, 1996 - ------------------------------------- FREDERIC V. MALEK * Director November 4, 1996 - ------------------------------------- LAWRENCE J. MELODY * Director November 4, 1996 - ------------------------------------- JEFFREY S. MORGAN * Director November 4, 1996 - ------------------------------------- RICHARD A. POGUE II-7 NAME TITLE DATE ---- ----- ---- Director November 4, 1996 - ------------------------------------- PETER V. UEBERROTH * Director November 4, 1996 - ------------------------------------- GARY L. WILSON *By: /s/ David A. Davidson -------------------------------- DAVID A. DAVIDSON ATTORNEY-IN-FACT II-8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CB Commercial Holdings, Inc. We have audited in accordance with generally accepted auditing standards, the financial statements of CB Commercial Holdings, Inc. included in this Registration statement and have issued our report thereon dated January 31, 1996. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Schedule of Condensed Financial Information of the Company and the Schedule of Valuation and Qualifying Accounts of the Company are for purposes of complying with the Securities Exchange Commission rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP January 31, 1996 Los Angeles, California CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 -------- -------- BALANCE SHEET Advances to CB Commercial.................................... $ 42,918 $ 40,682 Investment in CB Commercial and subsidiaries................. 62,124 62,124 -------- -------- Total assets............................................... $105,042 $102,806 ======== ======== Stockholders' Equity......................................... $105,042 $102,806 ======== ========
YEAR ENDED DECEMBER 31, ---------------- 1995 1994 1993 ---- ---- ---- INCOME STATEMENT Expenses--other.............................................. $ 39 $(45) 47 Provision for income taxes................................... 51 -- 1 ---- ---- ---- Net income (loss).......................................... $(90) $ 45 $(48) ==== ==== ====
YEAR ENDED DECEMBER 31, ---------------- 1995 1994 1993 ---- ---- ---- STATEMENT OF CASH FLOWS Net income (loss)............................................ $(90) $ 45 $(48) Adjustments to reconcile net income (loss) to net cash used in operating activities..................................... -- -- -- Advances to CB Commercial................................... 90 (45) 48 ---- ---- ---- Net cash provided by operating activities................... -- -- -- Cash flows from investing activities......................... -- -- -- Cash flows from financing activities......................... -- -- -- Net change in cash and cash equivalents...................... -- -- -- Cash and cash equivalents, at beginning of period............ -- -- -- ---- ---- ---- Cash and cash equivalents, at end of period.................. $ -- $ -- $ -- ==== ==== ====
NOTES TO CONDENSED FINANCIAL INFORMATION Note 1--In connection with the Acquisition, the Company, together with all other CB Commercial subsidiaries, has guaranteed any and all obligations of CB Commercial. S-2 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
RESERVE FOR ALLOWANCE EMPLOYEE FOR BAD LEGAL LOANS DEBTS RESERVE ----------- --------- ------- Balance, December 31, 1992....................... $ -- $1,238 $1,226 Charges to expense.............................. 1,810 4,275 1,500 Write-offs...................................... (42) (975) (117) ------ ------ ------ Balance, December 31, 1993....................... 1,768 4,538 2,609 Charges to expense.............................. -- 1,096 1,250 Write-offs...................................... (23) (1,090) (404) ------ ------ ------ Balance, December 31, 1994....................... 1,745 4,544 3,455 Charges to expense.............................. -- 346 -- Write-offs...................................... (210) (490) -- ------ ------ ------ Balance, December 31, 1995....................... $1,535 $4,400 $3,455 ====== ====== ======
S-3 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 ================================================================================ CB Commercial Holdings, Inc. (a Delaware corporation) . Shares of Common Stock PURCHASE AGREEMENT ------------------ Dated: November __, 1996 ================================================================================ TABLE OF CONTENTS
PAGE ---- PURCHASE AGREEMENT................................................................ 1 SECTION 1. Representations and Warranties.................................. 3 ------------------------------- (a) Representations and Warranties.................................. 3 (i) Compliance with Registration Requirements.............. 3 (ii) Independent Accountants................................ 4 (iii) Financial Statements................................... 4 (iv) No Material Adverse Change in Business................. 4 (v) Good Standing of the Company........................... 4 (vi) Good Standing of Subsidiaries.......................... 5 (vii) Capitalization......................................... 5 (viii) Authorization of Agreement............................. 6 (ix) Authorization and Description of Securities............ 6 (x) Absence of Defaults and Conflicts...................... 6 (xi) Absence of Labor Dispute............................... 7 (xii) Absence of Proceedings................................. 7 (xiii) Accuracy of Exhibits................................... 7 (xiv) Possession of Intellectual Property.................... 7 (xv) Absence of Further Requirements........................ 7 (xvi) Possession of Licenses and Permits..................... 8 (xvii) Title to Property...................................... 8 (xviii) Compliance with Cuba Act............................... 8 (xix) Investment Company Act................................. 8 (xx) Environmental Laws..................................... 9 (xxi) Registration Rights.................................... 9 (xxii) [Others.].............................................. 9 (b) Officer's Certificates.......................................... 9 SECTION 2. Sale and Delivery to Underwriters; Closing...................... 9 ------------------------------------------ (a) Initial Securities.............................................. 9 (b) Option Securities............................................... 10 (c) Payment......................................................... 10 (d) Denominations; Registration..................................... 11 SECTION 3. Covenants of the Company........................................ 11 ------------------------- (a) Compliance with Securities Regulations and Commission Requests........................................................ 11 (b) Filing of Amendments............................................ 11
i (c) Delivery of Registration Statements............................. 11 (d) Delivery of Prospectuses........................................ 12 (e) Continued Compliance with Securities Laws....................... 12 (f) Blue Sky Qualifications......................................... 12 (g) Rule 158........................................................ 13 (h) Use of Proceeds................................................. 13 (i) Listing......................................................... 13 (j) Restriction on Sale of Securities............................... 13 (k) Reporting Requirements.......................................... 13 SECTION 4. Payment of Expenses............................................. 14 ------------------- (a) Expenses........................................................ 14 (b) Termination of Agreement........................................ 14 SECTION 5. Conditions of Underwriters' Obligations......................... 14 --------------------------------------- (a) Effectiveness of Registration Statement......................... 14 (b) Opinion of Counsel for Company.................................. 15 (c) Opinion of Counsel for Underwriters............................. 15 (d) Officers' Certificate........................................... 15 (e) Accountant's Comfort Letter..................................... 15 (f) Bring-down Comfort Letter....................................... 16 (g) Approval of Listing............................................. 16 (h) No Objection.................................................... 16 (i) Lock-up Agreements.............................................. 16 (j) The Recapitalization............................................ 16 (k) Conditions to Purchase of Option Securities..................... 16 (l) Additional Documents............................................ 17 (m) Termination of Agreement........................................ 17 SECTION 6. Indemnification................................................. 17 --------------- (a) Indemnification of Underwriters................................. 17 (b) Indemnification of Company, Directors and Officers.............. 18 (c) Actions against Parties; Notification........................... 18 (d) Settlement without Consent if Failure to Reimburse.............. 19 SECTION 7. Contribution.................................................... 19 ------------ SECTION 8. Representations, Warranties and Agreements to Survive Delivery.. 21 -------------------------------------------------------------- SECTION 9. Termination of Agreement........................................ 21 ----------------------- (a) Termination; General............................................ 21 (b) Liabilities..................................................... 21
ii SECTION 10. Default by One or More of the Underwriters................... 21 ------------------------------------------ SECTION 11. Notices...................................................... 22 ------- SECTION 12. Parties...................................................... 22 ------- SECTION 13. Governing Law and Time....................................... 23 ---------------------- SECTION 14. Effect of Headings........................................... 23 ------------------ SCHEDULE A................................................................ Sch A-1 SCHEDULE B................................................................ Sch B-1 SCHEDULE C................................................................ Sch C-1 Exhibit A................................................................. A-1 Exhibit B................................................................. B-1
iii Draft of October 15, 1996 CB Commercial Holdings, Inc. (a Delaware corporation) . Shares of Common Stock (Par Value $.01 Per Share) PURCHASE AGREEMENT ------------------ November __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery Securities as Representatives of the Several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated 2 North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: CB Commercial Holdings, Inc., a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and Montgomery Securities are acting as representatives (in such capacity, the "Representatives"), with respect to the issue and sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of XXX additional shares of Common Stock to cover over-allotments, if any. The aforesaid . shares of Common Stock (the "Initial Securities") to be purchased by the Underwriters and all or any part of the XXX shares of Common Stock subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities." 1 The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-12757) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated _____, 1996 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). 2 SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties. Each of the Company and CB Commercial Real Estate Group, Inc, a Delaware corporation and wholly-owned subsidiary of the Company ("Real Estate Group"), represent and warrant to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows: (i) Compliance with Registration Requirements. Each of the ----------------------------------------- Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through Merrill Lynch expressly for use in the Registration Statement or Prospectus. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically 3 transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The financial statements included in the -------------------- Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company, Westmark Realty Advisors, L.J. Melody & Company and L.J. Melody & Company of California and their respective consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of such companies and their respective consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly organized ---------------------------- and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform 4 its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) Good Standing of Subsidiaries. Each "significant subsidiary" of ----------------------------- the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are [(a)] the subsidiaries listed on Exhibit 21 to the Registration Statement [and (b) certain other subsidiaries which, considered in the aggregate as a single Subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X.] (vii) Capitalization. Upon the occurrence of the recapitalization -------------- described in the Prospectus under the caption "The Recapitalization" (the "Recapitalization") and after giving effect to (A) the Company's acquisition of L.J. Melody & Company and L.J. Melody & Company of California and (B) the offering of the Securities, the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" in the column entitled "As Further Adjusted" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. Upon completion of the Recapitalization, the shares of capital stock of the Company issued in connection therewith will have been duly authorized and validly issued and will be fully paid and non-assessable; none of the outstanding shares of capital stock of the Company issued in connection with the Recapitalization will have been issued in violation of the preemptive or other similar rights of any securityholder of the Company. 5 (viii) Authorization of Agreement. This Agreement has been duly -------------------------- authorized, executed and delivered by the Company. (ix) Authorization and Description of Securities. The Securities have ------------------------------------------- been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable; upon completion of the Recapitalization, the Common Stock will conform to all statements relating thereto contained in the Prospectus and such description will conform to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) Absence of Defaults and Conflicts. Neither the Company nor any of --------------------------------- its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement (including the Recapitalization, the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder and in connection with the Recapitalization have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will any such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. 6 (xi) Absence of Labor Dispute. No labor dispute with the employees of ------------------------ the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated by the Recapitalization or in this Agreement or the performance by the Company of its obligations thereunder or hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company and its ----------------------------------- subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this 7 Agreement and the Recapitalization, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (xvi) Possession of Licenses and Permits. The Company and its ---------------------------------- subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) Title to Property. The Company and its subsidiaries have good ----------------- and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Compliance with Cuba Act. The Company has complied with, and ------------------------ is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xix) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). 8 (xx) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xxi) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxii) [Others.] ------ (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. 9 (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional XXX shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, Suite 3400, Los Angeles, CA 90071 or at such other place as shall be agreed upon by the Representatives and the Company, at 6:00 A.M. (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Company, on each Date of Delivery as specified in the notice from the Representatives to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment 10 of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each ------------------------ Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representatives immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the 11 Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representatives may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any 12 jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds." (i) Listing. [The Company will use its best efforts to effect the listing of the Common Stock (including the Securities) on the New York Stock Exchange.][The Company will use its best efforts to effect and maintain the quotation of the Securities on the Nasdaq National Market and will file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market.] (j) Restriction on Sale of Securities. During a period of [ ] days from the date of the Prospectus, the Company will not, without the prior written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectus, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan. (k) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. 13 SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay ------------------- all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the listing of the Securities on the [New York Stock Exchange][inclusion of the Securities in the Nasdaq National Market]. (b) Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. Conditions of Underwriters' Obligations. The obligations of --------------------------------------- the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon 14 Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Pillsbury, Madison & Sutro, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the Underwriters may reasonably request. (c) Opinion of Counsel for Underwriters. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of the President or a Vice President of each of the Company and Real Estate Group and of the chief financial or chief accounting officer of each of the Company and Real Estate Group, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) each of the Company and Real Estate Group has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representatives shall have received from each of Arthur Andersen and KPMG Peat Marwick a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing 15 statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (f) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from each of Arthur Andersen and KPMG Peat Marwick a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. [At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance.] [At Closing Time, the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance.] (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Lock-up Agreements. At the date of this Agreement, the Representatives shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons and entities listed on Schedule C hereto. (j) The Recapitalization. The Recapitalization shall have occurred prior to or simultaneously with the Closing Time. [Others.] (k) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of ------------------------------ Pillsbury, Madison & Sutro, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. 16 (iii) Opinion of Counsel for Underwriters. The favorable opinion of ----------------------------------- Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (iv) Bring-down Comfort Letter. A letter from each of Arthur Andersen ------------------------- and KPMG Peat Marwick, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (l) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representatives and counsel for the Underwriters. (m) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities, on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of Underwriters. The Company and Real Estate Group agree jointly and severally to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the 17 Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from 18 any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section 6 ------------ hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Real Estate Group on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Real Estate Group on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. 19 The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover. The relative fault of the Company and Real Estate Group on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company and Real Estate Group or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Real Estate Group and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations 20 to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The Representatives may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or [the New York Stock Exchange] [the Nasdaq National Market], or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by any Federal, New York or California authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more of ------------------------------------------ the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms 21 herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, either the Representatives or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. SECTION 11. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives at 10900 Wilshire Boulevard, Suite 900, Los Angeles, California 90024, attention of David L. Knowles; and notices to the Company shall be directed to it at 533 Fremont Avenue, Los Angeles, CA 90071, attention of Walter V. Stafford. SECTION 12. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No 22 purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company in accordance with its terms. Very truly yours, CB Commercial Holdings, Inc. By: ___________________________________________ Title: CB Commercial Real Estate Group, Inc. By: ___________________________________________ Title: CONFIRMED AND ACCEPTED as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MONTGOMERY SECURITIES By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By _____________________________________ Authorized Signatory For themselves and as Representatives of the other Underwriters named in Schedule A hereto. SCHEDULE A Number of Initial Name of Underwriter Securities ------------------- ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated............................. Montgomery Securities................................ ---------- Total................................................ . ========== Sch A-1 SCHEDULE B CB Commercial Holdings, Inc. . Shares of Common Stock (Par Value $.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $. . 2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $., being an amount equal to the initial public offering price set forth above less $. per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. Sch B-1 SCHEDULE C List of Persons and Entities Subject to Lock-up Sch C-1 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) Upon the occurrence of the recapitalization described in the Prospectus under the caption "The Recapitalization" (the "Recapitalization") and after giving effect to (a) the Company's acquisition of L.J. Melody & Company and L.J. Melody & Company of California and (b) the offering of the Securities, the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" in the column entitled "As Further Adjusted" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. Upon completion of the Recapitalization, the shares of capital stock of the Company issued in connection therewith will have been duly authorized and validly issued and will be fully paid and non-assessable; none of the outstanding shares of capital stock of the Company issued in connection with the Recapitalization will have been issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Company pursuant to the Purchase Agreement against payment of the consideration set A-1 forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Company. (vii) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (ix) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus and each amendment or supplement to the Registration Statement and Prospectus as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) If Rule 434 has been relied upon, the Prospectus was not "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. A-2 (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the [New York Stock Exchange/Nasdaq National Market]. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated by the Recapitalization or in the Purchase Agreement or the performance by the Company of its obligations thereunder. (xiv) The information in the Prospectus under "Description of Capital Stock" and "The Company's Credit Agreements" and in the Registration Statement under Item 14, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and by-laws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectus that are not described as required. (xvi) All descriptions in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xvii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement. (xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the A-3 various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance or sale of the Securities. (xix) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including the Recapitalization and the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement and in connection with the Recapitalization do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will any such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xx) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxii) [Others.] Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the A-4 Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-5 Exhibit B November __, 1996 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, and MONTGOMERY SECURITIES as Representatives of the several Underwriters to be named in the within-mentioned Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated 2 North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by CB Commercial Holdings, Inc. -------------------------------------------------------- Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of CB Commercial Holdings, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Montgomery Securities propose to enter into a Purchase Agreement (the "Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, par value $.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreement that, during a period of [ ] days from the date of the Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file or cause to be filed any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause B-1 (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Very truly yours, Signature: ___________________________________ Print Name: __________________________________ B-2 EX-10.12 3 EMPLOYMENT AGREEMENT DATED JULY 1, 1996 EXHIBIT 10.12 6/29/96 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement is made the 1st day of July, 1996, by and between CB Commercial Mortgage Company, Inc., a Delaware corporation (the "COMPANY") and Lawrence J. Melody (the "EXECUTIVE"). RECITALS -------- Whereas Executive was a principal owner and an executive officer of L.J. Melody & Company, a Texas corporation ("LJMCO") and L.J. Melody of California, a Texas corporation ("LJMCAL"), each of which has been in the business of real estate loan originations, real estate loan servicing and pension advisory/asset management services; and, Whereas Executive, who is a highly respected and experienced individual in the mortgage banking area of loan originations, loan servicing and pension advisory/asset management services, has sold his interests in LJMCo and LJMCal to the Company (the "ACQUISITION") pursuant to two separate Stock Purchase Agreements, each dated as of June 27, 1996 (the "STOCK PURCHASE AGREEMENTS"), subject to the condition that he become an executive of the Company and, following the merger of the Company with and into LJMCo that he remain an executive of LJMCo; and, Whereas CB Commercial Real Estate Group, Inc., a Delaware corporation ("CB COMMERCIAL"), the parent corporation of the Company, has transferred and contributed, or within thirty (30) days after the date hereof will transfer and contribute, its real estate loan origination and servicing business to LJMCo for consolidation with the similar businesses of LJMCo and LJMCal. AGREEMENT --------- Now therefore, the parties hereto hereby agree as follows: SECTION I. POSITION AND REPORTING RELATIONSHIP On the terms and conditions set forth herein, the Company agrees to employ Executive as its President and Chief Executive Officer and Executive agrees to be so employed on a full-time basis. Executive shall not (a) render services which are competitive to the real estate loan origination, loan servicing and pension advisory/asset management services business of the Company to any other person or entity (other than an Affiliate of the Company) or (b) engage in any other active business endeavor (as distinguished from investments and other activities referred to below) that diverts any significant time from the business of the Company or performance of Executive's duties pursuant to this Agreement, in either case without the express prior approval of the Company's Board of Directors or the Chief Executive Officer of CB Commercial. The foregoing notwithstanding, the Company understands and agrees that Executive may engage in civic, charitable, religious or comparable activities and may devote a reasonable amount of time to private investments that are not competitive with and do not unreasonably interfere or conflict with Executive's responsibilities to the Company. Executive shall report to the Board of Directors of the Company and the Chief Executive Officer of CB Commercial. SECTION II. EXECUTIVE'S REQUIRED WORK; EXECUTIVE'S JOB DESCRIPTION AND GOALS A. REQUIRED WORK. Executive shall work on the business of the Company on ------------- a "FULL TIME BASIS," which for purposes hereof shall mean such time as Executive determines, in his own judgment, to be necessary to discharge his duties under this Agreement. Executive shall perform his responsibilities to the Company in good faith, without engaging in activities which he knows would be in conflict or be competitive with the real estate loan origination, loan servicing and pension advisory and asset management services business of the Company, and will not render his services to any other person or entity (other than an Affiliate of the Company) for such person's or entity's business except as approved by the Company's Board of Directors or the Chief Executive Officer of CB Commercial and except that Executive may engage in civic, charitable, religious or comparable activities and may devote a reasonable amount of time to investments that are not competitive with and do not unreasonably interfere or conflict with Executive's responsibilities to the Company). B. EXECUTIVE'S JOB DESCRIPTION AND GOALS. Generally, Executive shall ------------------------------------- fulfill responsibilities with the Company comparable to those which he performed previously for LJMCo and/or LJMCal, with the objective of sustaining and increasing the business and profitability of the Company. In discharge of his responsibilities, Executive shall: (1) INTEGRATION. Use his best efforts to cause the integration, on a ----------- cost-effective basis, of the real estate loan origination and real estate loan servicing businesses of LJMCo, LJMCal and CB Commercial. On a combined basis for 1995, such companies produced a pre-tax return of approximately 9.3% on $20 million of combined revenues, without adjustment for the excluded costs referred to below and without taking into account the changes in personnel and offices to be completed pursuant to the Merger Agreement. One of the goals which Executive and Company mutually agree that the Company should pursue is to seek to attain, over time, a pre-tax income for the Company (computed before CB Commercial and other allocated overhead, loan amortization and Executive's incentive compensation) of at least 20% of the Company' s revenues. -2- (2) NEW LOAN SOURCES. Use his best efforts to develop loan sources ---------------- which (a) will help to permit the establishment of the network described below in this Section and (b) will help to serve the needs of the clients of the Investment Properties Division of CB Commercial, with particular emphasis on loan sources for loans in the $1,000,000 to $5,000,000 range. In working to develop such loan sources, Executive will use reasonable efforts to work closely with the head of the Investment Properties Division of CB Commercial. (3) DIRECTIVES OF BOARD OF DIRECTORS. Use reasonable efforts to carry -------------------------------- out the lawful directives of the Board of Directors of the Company and the Chief Executive Officer of CB Commercial from time to time. (4) ESTABLISHMENT OF ORIGINATION NETWORK. To the extent funds for ------------------------------------ such purposes are provided by the Company, use his best efforts to establish on or before December 31, 1998, a loan origination network which has offices in each of the cities set forth on Exhibit A; provided, however, Executive shall --------- have no obligation to establish an office in any location which in his reasonable judgment cannot both access multiple competitive loan sources on a reasonable basis and employ high quality, experienced loan producers, unless the cost of such office is borne by someone other than the Company; and provided further Executive shall have no obligation to establish an office in any location in which he reasonably concludes an acquisition of an existing mortgage banking business should be made rather than the Company establishing a "start- up" office in such city. (5) BUSINESS DEVELOPMENT/CLIENT RELATIONS. Spend such time and ------------------------------------- energies as Executive considers appropriate in maintaining contact and working relations with existing clients (borrowers and lenders) of the Company and in efforts to expand the business of the Company with prospective borrowers or lenders with which the Company seeks to do business. SECTION III. EXECUTIVE'S AUTHORITY Subject to the applicable limitations referred to in Section IV, as the Chief Executive Officer of the Company, Executive shall have all authority reasonably appropriate to that position, including the authority to: A. manage the day-to-day activities of the Company; B. fulfill his duties under this Agreement including the right to hire and fire employees and other service providers and, subject to applicable law, the right to establish compensation levels (hourly wage, salary, commissions and incentives) and other terms and conditions of engagement for all employees and service providers of the Company, subject to any compensation decision by Executive not being contrary to or inconsistent with -3- any compensation plan, policy or limitation adopted by the Company's Board of Directors and communicated to Executive; C. sign agreements, including real and personal property leases and other documents on behalf of the Company, in the ordinary course of business; and D. subject to Section II.B.2. (New Loan Sources), select the lending sources used by the Company to provide borrowers with funds to acquire, improve or refinance real property related projects. SECTION IV. LIMITATIONS ON EXECUTIVE'S AUTHORITY Executive shall not take any action which is materially contrary to or inconsistent with any operating or capital budget or other limitation adopted by the Company's Board of Directors and communicated to Executive. Executive shall not, in the course of his employment, take any action or omit to take any action which is contrary to Executive's duties under this Agreement, or any code of conduct applicable to all senior executive officers in CB Commercial and its major subsidiaries, as any such code of conduct may be established by the Company's Board of Directors and communicated to Executive from time to time. SECTION V. TERM Unless earlier terminated pursuant to an express provision in this Agreement, this Agreement shall be in effect from July 1, 1996 through June 30, 2001 (the "Term"). SECTION VI. COMPENSATION, INCENTIVE COMPENSATION AND EMPLOYEE BENEFITS A. SALARY. During the Term of this Agreement and thereafter while an ------ employment relationship (as defined in Section VII.H. hereof) continues to exist, Employee shall receive a salary of $25,000 per month (payable semimonthly in accordance with the Company's regular payroll procedures) plus a car allowance of $1,000 per month (such salary and car allowance are collectively referred to as the "BASE SALARY"); however, Company shall not be obligated to continue paying such Base Salary for any period after this Agreement is terminated for other cause pursuant to Section VII.A.2. hereof. The Board of Directors of the Company will review Executive's Base Salary at least annually and may increase or decrease the monthly salary and car allowance of Executive upon each such annual review for the coming year, but in no event shall the sum of such items be less than the initial $26,000 monthly Base Salary stated in this paragraph. B. INCENTIVE COMPENSATION. Executive shall be entitled to incentive ---------------------- compensation ("INCENTIVE COMPENSATION") for each year -4- during the Term of this Agreement equal to ten percent (10%) of the Company's Adjusted Pre-Tax Profits provided he is employed by the Company on December 31 of such year, and in certain cases as herein expressly provided Executive shall be entitled to receive a pro rated percentage of such incentive compensation for a partial year. Such incentive compensation for any year shall be paid on or before March 15 of the next following year. The term "ADJUSTED PRE-TAX PROFIT" means the annual pre-tax net income of the Company determined under generally accepted accounting principles, consistently applied throughout the Term, without deducting any of the items listed in paragraph 1. below but after deducting all of the items listed in paragraph 2. below: 1. Items Not To Be Deducted In Determining Executive's Incentive ------------------------------------------------------------- Compensation. The following items shall not be deducted in calculated ------------ Adjusted Pre-Tax Profit: a. Executive's incentive compensation; b. Payments to and/or accruals of any employee equity equivalent or other profit sharing arrangement established as contemplated by Section 9.7 of the Merger Agreement relating to the Acquisition; c. Any amortization (or other cost) associated with goodwill relating to the Acquisition of LJMCo or LJMCal by the Company; d. Any interest on any debt associated with or fees paid for any letter of credit obtained in connection with the Acquisition of LJMCo and LJMCal by the Company; e. Any expenses or one time costs related to the Acquisition of LJMCo or LJMCal by the Company, including, without limitation, legal fees, accounting fees, travel costs, filing fees, employee termination costs, office closing or consolidation costs, and other costs of the Acquisition and the combination of the Company's and CB Commercial's real estate loan origination and servicing operations; f. Except as provided in subparagraph 2.d. below, any centralized costs or overhead allocations of CB Commercial or any of its Affiliates otherwise allocated to the Company; and g. Any costs of key man or similar life insurance on the life of Executive purchased by the Company after the date hereof -5- (including any policy obtained pursuant to Section 9.12 of the LJMCO Stock Purchase Agreement). 2. Items To Be Deducted For Determining Executive's Incentive ---------------------------------------------------------- Compensation. The following items shall be deducted in calculating ------------ Adjusted Pre-Tax Profit: a. The actual cost to CB Commercial of providing employee benefits to the employees of the Company (other than as provided in subparagraphs 1.a. and 1.b. above); b. Interest on working capital provided by CB Commercial which is reasonably required for the successful operation of the Company and not available from cash flow from Company operations, but the rate of such interest shall not exceed the rate charged to CB Commercial by its principal lender (currently, The Sumitomo Bank, Ltd.); c. Interest, goodwill amortization and expenses associated with any acquisition made by the Company (subject to the limitations on future acquisitions as provided in Section 9.8 of the LJMCO Stock Purchase Agreement) other than the Acquisition of LJMCo and LJMCal; d. 1.5% of the Company's revenues in excess of $20.5 Million, as the only allocation of overhead and central costs of CB Commercial and any of its Affiliates; and e. The actual cost to CB Commercial of providing the Company with liability, errors and omissions and other insurance, the actual cost of providing the Company with accounting services and the actual cost of any other goods or services provided to the Company by CB Commercial at the Company's express request and with the approval of Executive. With respect to 1996 only, in computing the Adjusted Pre-Tax Profits, loan origination fees attributable to CB Commercial producers with respect to loans which were committed or under application on or before June 30, 1996 and which close on or before July 31, 1996, shall be excluded from revenue, but all other loan origination fees attributable to CB Commercial producers shall be included in revenue in computing Adjusted Pre-Tax Profits. C. EMPLOYEE BENEFITS. In addition to his participation in the Company's ----------------- benefit and other plans available to selected -6- officers in the Company (such as the employee equity equivalent plan), Executive shall be entitled to participate in each employee pension, welfare, fringe benefit and deferred compensation plan (but not any bonus or incentive compensation plans) (such pension, welfare, fringe benefit and deferred compensation plans being herein referred to as the "EMPLOYEE BENEFIT PLANS") available to Senior Executive Vice Presidents of CB Commercial, but subject to the terms and conditions of each such plan and applicable legal requirements. D. MEMORIAL CITY SHOPPING CENTER FEE. Within ten (10) days after all or --------------------------------- any part of a fee is collected by L.J. Melody & Company or Company with respect to Memorial City Shopping Center, the Company or L.J. Melody & Company shall pay to Executive thirty-five percent (35%) of such fee so collected, whether or not Executive is then employed by the Company or L.J. Melody & Company and regardless of the cause for termination of such employment. The fee payable under this paragraph is separate and distinct from Base Salary and incentive compensation provided for herein and shall not be taken into account for purposes of any severance benefits payable under Section VIII hereof. SECTION VII. TERMINATION A. COMPANY'S RIGHT WITH CAUSE. -------------------------- 1. Material Cause. The Company may terminate Executive's employment -------------- and his employment relationship hereunder at any time, upon notice to Executive (and after an opportunity to cure as provided in Section VII.I. hereof) provided it has Material Cause (as defined in Section IX.A.) for such termination. In the event of termination by the Company for Material Cause, Executive's sole rights for Claims (as herein defined) under this Agreement as a result of such termination of employment shall be as set forth in Section VIII.A. (Accrued Salary and Benefits). 2. Other Cause. If no Material Cause for termination of the ----------- employment relationship exists, Company may nevertheless terminate Executive's employment by the Company at any time, upon notice (and after opportunity to cure as provided in Section VII.I. hereof), if in Company's good faith judgment Executive has failed to comply with his duty of loyalty to the Company or has failed to use his best or reasonable efforts (as specified in Section II hereof) to discharge the duties and responsibilities and/or reach the goals set under Section II.B. (Executive's Job Description and Goals) or Executive exceeds his authority under Article III (Executive's Authority). Without limiting the generality of the foregoing, Company may terminate Executive's employment pursuant to this Agreement (without terminating his employment relationship) if Executive commits any material breach of his obligations under Section I. (Position and Reporting Relationship), -7- Section II.B.(3) (Directives of Board of Directors), Section IV. (Limitations on Executive's Authority) or Section X. (Proprietary Information) of this Agreement or if Executive repetitively and willfully breaches any such obligations whether or not each such breach is material. A failure to achieve any of the goals described in subparagraphs (1), (2) or (4), Section II.B. (Executive's Job Description and Goals) shall not constitute a breach of this Agreement by Executive, and Executive's failure to perform any of his duties under Section II to the satisfaction of the Board of Directors of the Company shall not constitute Material Cause. B. COMPANY'S RIGHT WITHOUT CAUSE. The Company may terminate Executive's ----------------------------- employment hereunder, without impact on the continued existence of Executive's employment relationship hereunder, without Material Cause or without other cause as provided above in Section VII A.2. (Other Cause) upon notice to Executive; however such termination shall be deemed a breach by Company hereof and require the payment of severance benefits pursuant to Section VIII. A. and C (Termination Without Terminating Employment Relationship). C. EXECUTIVE'S RIGHT WITH GOOD REASON. Executive may terminate his ---------------------------------- employment hereunder at any time upon notice to the Company (and after an opportunity to cure as provided in Section VII.I. below) with Good Reason (as defined in Section IX. B.) upon notice to the Company. In such event Executive shall be entitled to severance benefits pursuant to Section VIII. A. and C. D. EXECUTIVE'S RIGHT WITHOUT GOOD REASON. Executive may terminate his ------------------------------------- employment hereunder without Good Reason at any time upon notice to the Company, but in such event he shall be deemed to be in breach of this Agreement and in such case Company's sole obligation shall be to make the payments accrued under Section VIII.A. hereof and Company shall not be obligated to pay and Executive shall not be entitled to receive any then unpaid incentive compensation for the year in which such termination occurs. E. DEATH. Executive's employment hereunder shall automatically terminate ----- in the event of his death. In such event Executive shall be entitled to severance benefits as provided in Section VIII. A. and B, with incentive compensation for the year in which death occurs prorated to the date of death. F. DISABILITY. The Company may terminate Executive's employment pursuant ---------- to this Agreement at any time upon 30 days' written notice to Executive if as a result of a physical or mental condition, Executive has been unable, with reasonable accommodation provided by the Company, for a period of three consecutive months and will continue to be unable for an additional period exceeding six consecutive months to -8- substantially perform his duties and obligations under Section II. A. (Required Work) of this Agreement. In such event, Executive shall be entitled to severance benefits as provided in Section VIII. A. and B, with incentive compensation for the year in which termination occurs prorated to the date of termination under this provision. G. GENERAL. Regardless of whether or not expressly so stated in this ------- Agreement, in the event of any termination of Executive's employment or termination of this Agreement, Sections VIII., IX., X., XI., XII., and XIII. shall survive such termination for the full Term of this Agreement. H. EMPLOYMENT RELATIONSHIP. For all purposes of this Agreement, ----------------------- Executive shall have and be deemed to have an "EMPLOYMENT RELATIONSHIP" with the Company as of the date of execution and delivery of this Agreement, and such relationship shall continue or be deemed to continue, even after termination of Executive's employment, unless this Agreement is terminated by Company for Material Cause or by Executive pursuant to Section VII.D. without Good Reason. I. OPPORTUNITY TO CURE. For purposes of Section VII.A.1, VII.A.2 and ------------------- VII.C., Executive or the Company (a) shall have the right to cure if within a period not to exceed 60 days he or it is reasonably likely to be able to restore the other party to substantially the same position it would have been in but for the act or omission which established, as applicable, Material Cause, other cause or Good Reason and (b) shall be considered to have cured only if in fact within such 60 day period the other party is restored to substantially the same position it would have been in but for such act or omission. SECTION VIII. REMEDIES; SEVERANCE BENEFITS In the event of any termination of Executive's employment by the Company or Executive pursuant to any provision of this Agreement, Executive's sole remedies for termination of his employment shall be as set forth in this Section VIII, subject to the Company's performance of its obligations under this Agreement, including making all payments and providing all benefits required pursuant to this Section VIII. Such payments shall be in full satisfaction of any claims, liabilities, demands or causes of action directly or indirectly arising out of Executive's employment by the Company (whether based upon legal theories of contract, tort or otherwise), other than claims which had no material relationship to the Company's decision to terminate Executive's employment pursuant to Section VII.A. or B. or Executive's decision to terminate employment pursuant to Section VII.C. (such claims relating to termination of Executive's employment are collectively referred to herein as "CLAIMS") that Executive may have against the Company, or any Affiliate of the Company or any director, officer, employee or agent of the Company or any Affiliate of the Company, for -9- termination of Executive's employment. In such event, Executive shall be deemed to have waived any other rights or remedies which he might otherwise have with respect to such Claims; however, Executive's waiver of Claims shall not alter Executive's rights or relieve Company and its Affiliates of their duties, obligations and liabilities under the Stock Purchase Agreement and the Notes given to consummate the Acquisition. A. ACCRUED SALARY AND BENEFITS. If Executive's employment is terminated --------------------------- pursuant to any provision of this Agreement, Executive shall be paid any Base Salary earned to the date of the termination and shall be entitled to receive any benefits payable under the terms of the Company's Employee Benefit Plans which are payable as a result of his employment termination or for reasons unrelated to his termination. Executive's waivers herein shall not constitute a waiver of benefits and rights generally available under applicable law upon termination of employment (e.g., COBRA rights and similar benefits). B. DEATH OR DISABILITY. If Executive's employment is terminated pursuant ------------------- to Section VII.E. (Death) or VII.F. (Disability), then in addition to the amounts due under Section VIII.A. above, Executive (or his heirs or representative) shall be paid incentive compensation pursuant to Section VI.B. which is payable with respect to the year in which the termination occurs on a pro rated basis (which shall mean the amount computed as incentive compensation for the whole year, as though Executive's employment had not been terminated, multiplied by a fraction representing the portion of the year to the date of termination of Executive's employment). C. TERMINATION WITHOUT TERMINATING EMPLOYMENT RELATIONSHIP. If ------------------------------------------------------- Executive's employment hereunder is terminated pursuant to Section VII. B. (Company's Right Without Cause) or C. (Executive's Right With Good Reason), then in addition to the amounts due under Section VIII.A. above, Executive shall be entitled to a lump sum cash severance payment equal to: 1. If the termination occurs prior to July 1, 1997, $43,750 multiplied by the difference between (a) the number of calendar months elapsed from July 1, 1996 to the date of the termination and (b) thirty- six; 2. If the termination occurs on or after July 1, 1997, but prior to July 1, 2000, an amount equal to $25,000 multiplied by the number of months from the date of termination to June 30, 2001, but not more than $600,000, plus the greater of (a) twice his incentive compensation pursuant to Section VI. B. (Incentive Compensation) for the calendar year preceding the year of termination and (b) twice the incentive compensation he would have received pursuant to Section VI. B. (Incentive Compensation) for the year of the termination if the termination had not occurred; or -10- 3. If the termination occurs on or after July 1, 2000, the sum of: (a) $25,000 multiplied by the number of months (and prorated for any partial months) between the date of such termination and July 1, 2001; (b) a fraction, with numerator equal to the number of months elapsed from July 1, 2000 to the date of such termination and a denominator of 12, multiplied by the greater of (i) his incentive compensation pursuant to Section VI.B. (Incentive Compensation) for the calendar year preceding the year of termination and (ii) the incentive compensation he would have received pursuant to Section VI.B. (Incentive Compensation) for the year of the termination if the termination had not occurred. Each amount payable pursuant to any provision of this Section VIII. C. shall be paid within 15 business days after such amount can reasonably be determined (and in the case of 2 and 3 above, the minimum known at time of termination shall be so paid, with subsequent adjustment if a greater amount is due under such provisions) unless a dispute exists with respect to such amount and an arbitration proceeding has been commenced pursuant to Section XII. with respect to such dispute; however, in lieu of such cash payment promptly following determination, Company may pay such sums at the times payments would have been payable under this Agreement if it had not been terminated if the full amount of such payment obligation is secured by an irrevocable letter of credit in form and substance and issued by a bank satisfactory to Executive in his sole discretion (and in such case, Executive may draft on such letter of credit if Company fails to make a subsequent payment when due or fails to renew such letter of credit at least 15 business days prior to expiration). D. TERMINATION BY COMPANY FOR MATERIAL CAUSE OR BY EXECUTIVE WITHOUT GOOD ---------------------------------------------------------------------- REASON. If Executive's employment and employment relationship are terminated by - ------ the Company pursuant to Section VII.A.1. (Material Cause) or Executive pursuant to Section VII.D. (without Good Reason), then Executive shall be entitled to receive the accrued payments under Paragraph A above, but shall not receive any unpaid incentive compensation for the year in which termination occurs or receive any severance payment under Section VIII.C. above. E. TERMINATION FOR OTHER CAUSE. If Executive's employment is terminated ---------------------------- by the Company pursuant to Section VII.A.2. (Other Cause), then Executive shall be entitled to receive the accrued payments under Paragraph A above, but shall not be entitled to any unpaid incentive compensation for the year in which -11- termination occurs and shall not receive any severance payment under Section VIII.C. above. F. COMPANY'S REMEDIES. In the event of any failure of Executive to ------------------ perform under this Agreement or any termination of Executive's employment by Company or Executive pursuant to this Agreement, Company's sole remedies (in addition to termination of Executive's employment) shall be to obtain specific performance or injunctive relief for any violation of the terms of Section X hereof and, solely in the event of termination for Material Cause, to cancel certain contingent notes issued by the Company in connection with the Acquisition of LJMCo stock pursuant to the LJMCO Stock Purchase Agreement. SECTION IX. DEFINITIONS A. MATERIAL CAUSE. The Company shall have "MATERIAL CAUSE" pursuant to -------------- Section VII.A.1. hereof to terminate both Executive's employment hereunder and Executive's employment relationship if: 1. Executive commits a material breach of his obligation to work for the Company in good faith on a full time basis, as provided in Section II.A.1.; 2. Executive commits a material breach of the Covenant Not To Compete attached hereto as Exhibit B; ---------- 3. Subject to the limitations and exceptions (for up to $100,000 of liabilities) contained in Section 11.2 of the LJMCO Stock Purchase Agreement, Executive commits a material breach of the LJMCO Stock Purchase Agreement (such a breach shall be deemed cured if Executive pays to the Company the damages which the Company has suffered as a result of the breach); or 4. Executive is convicted (a plea of nolo contendere shall be deemed --------------- to be a conviction) of fraud, violation of state or federal securities law or violation of any other law where such conviction would or would be reasonably likely to materially and adversely affect the Company's relationship with its clientele if Executive's employment were to continue; and any of the foregoing events shall continue after Executive's right to cure period pursuant to Section VII.I. hereof. The existence of Material Cause must be confirmed by a written notice provided to Executive and signed by a majority of the members of the Board of Directors, setting forth the act, or acts, upon the basis of which the majority of the Board of Directors has confirmed the existence of Material Cause. -12- B. GOOD REASON. Executive shall have "GOOD REASON" to terminate his ----------- employment under this Agreement if: 1. The Company (a) commits any material breach of any of its material obligations under this Agreement or (b) repetitively breaches such obligations whether or not each breach is material. 2. The Company or any of its Affiliates commits a material breach of any of its obligations to Executive under the Stock Purchase Agreements relating to the Acquisition of LJMCo or LJMCal, including any breach of any promissory note, guaranty or other agreement which is an exhibit to or is referred to in such Stock Purchase Agreements. 3. The Company, CB Commercial or CB Commercial Holdings, Inc. voluntarily files a bankruptcy or insolvency proceeding or is adjudicated bankrupt or insolvent in an involuntary proceeding. 4. Executive is removed as or is not elected a director of the Company. 5. Without Executive's express consent, the location of the Company's principal place of business is changed from the greater Houston, Texas area. 6. Executive's title (President and Chief Executive Officer) is changed. 7. Executive's job responsibilities are changed in a material way unless such change is reasonably attributable to Executive's material lack of performance hereunder whether or not such lack of performance constitutes other cause for termination pursuant to Section VII.A.2. SECTION X. PROPRIETARY INFORMATION A. "PROPRIETARY INFORMATION" includes all information and any idea in whatever form, tangible or intangible, pertaining in any manner to the business of the Company, CB Commercial or any person directly or indirectly controlled by, in control of or under common control with the Company or CB Commercial (collectively, the "CBC GROUP"), unless (1) the information is or becomes publicly known through lawful means, (2) the information was rightfully in Executive's possession or part of his general knowledge prior to his employment by the Company and did not come into his possession or knowledge as a result of his position as a shareholder or executive of LJMCo or LJMCal or (3) the information is subsequently disclosed to Executive by a third party without Executive's knowledge of a breach of any agreement and without restriction of its use. Executive acknowledges and agrees that he has acquired, and is likely to continue to acquire by virtue of his employment with the Company and his previous -13- positions with LJMCo and LJMCal, extensive Proprietary Information regarding the CBC Group's products, costs, finances, operations, business plans and strategies, marketing strategies and methods, customer base and prospective customers, customer preferences and contact persons, and the identities and roles of the key employees of the CBC Group. Executive agrees to hold all Proprietary Information in confidence and not to directly or indirectly disclose, use, copy, publish, summarize or remove from the CBC Group's premises any Proprietary Information, except (1) during the term of this Agreement to any extent necessary to carry out Executive's responsibilities under this Agreement, including the use of Proprietary Information at Executive's home or while traveling, and (2) after the termination of this Agreement as specifically authorized in writing by the President or Chief Executive Officer of CB Commercial. In the event of any termination of Executive's employment by the Company, or at any time upon the Company's request, Executive shall return immediately to the Company all Proprietary Information held by Executive wherever it may be located. B. NON-SOLICITATION. In consideration of the engagement of his services ---------------- and the compensation and benefits accorded him as described in this Agreement, and acknowledging and agreeing that he could not undertake the following activities without necessarily benefiting from and making use of Proprietary Information, Executive covenants and agrees that, during his employment hereunder and during the Restricted Period after his employment terminates for any reason, he shall not, for himself or any third party, directly or indirectly (1) solicit the real estate loan or mortgage servicing business of, or otherwise interfere with the Company's relationship with, any person who at any time during the eighteen (18) months preceding the date of the termination was a lender or a borrower in a transaction in which the Company received 50% or more of the fees or for whom the Company was servicing one or more loans on the date of termination or (2) employ or solicit for employment any person currently employed by the CBC Group or within the last year preceding any such action has been employed by the CBC Group who has (or during such preceding year had) an active role with respect to the real estate loan or mortgage servicing business of the Company on the date Executive's employment hereunder terminates. The term "RESTRICTED PERIOD" means the period determined from the following chart:
Reason for Termination Restricted Period ---------------------- ----------------- Any termination by Executive for None Good Reason or by the Company without Cause
-14- Any termination by Executive other Until the later to than for Good Reason or by the occur of the 3rd Company with Cause Other than Anniversary of the Material Cause or by the Company Date of this Agreement for Disability or 24 months from the date of termination, but not later than the 5th Anniversary of the Date of this Agreement Any termination by the Company for The balance of the Material Cause Term
Nothing in this Agreement, however, is intended to limit any remedy of the Company or CB Commercial under the California Uniform Trade Secrets Act (California Civil Code Section 3426) or Texas law relating to the misuse of trade secret or proprietary information, or which is otherwise available under law. SECTION XI. INDEMNIFICATION The Company and CB Commercial, jointly and severally, agree to the maximum extent permitted under Delaware law to indemnify Executive against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any action, suit or proceeding which arises by reason of the fact that, subsequent to the Acquisition, Executive is or was an officer or employee or a director of the Company excluding (a) actions, suits or proceedings which relate to this Agreement and which are brought by or on behalf of Executive and (b) counter or cross claims by Executive against the Company or CB Commercial or their respective employees, officers or directors and which relate to this Agreement. Furthermore, at all times that insurance is provided for any officers and/or directors of CB Commercial, the Company or CB Commercial will maintain in force and effect officers' and directors' liability insurance, providing coverage to Executive on the same terms and conditions for the same maximum amount provided to any officer or director of CB Commercial. SECTION XII. ARBITRATION A. All disputes or controversies arising under or in connection with this Agreement shall be settled exclusively by final and binding arbitration in accordance with Section 14.11 of the LJMCO Stock Purchase Agreement, dated as of June 27, 1996, between Executive, John M. Bradley, and the Company relating to the merger and the LJMCal Stock Purchase Agreement dated June 27, relating to the purchase of all of the outstanding stock of LJMCal. B. Section XII.A. to the contrary notwithstanding, the Company may seek interim relief (temporary restraining order, -15- preliminary injunction, etc.) in any court of competent jurisdiction with respect to any violation of Section X. by Executive. SECTION XIII. MISCELLANEOUS A. NOTICE. All notices, requests, demands and other communication called ------ for or contemplated hereunder shall be in writing and shall be deemed to have been duly given when delivered personally or three days after the date mailed by United States certified or registered mail, postage prepaid, addressed to the parties or their successors in interest at the following addresses or such other addresses as the parties may designate by notice in the manner aforesaid: If to Company: CB Commercial Mortgage, Inc. c/o CB Commercial Real Estate Group, Inc. 533 S. Fremont Avenue Los Angeles, California 90071-1798 Attn.: Chief Executive Officer With Copy to: CB Commercial Real Estate Group, Inc. 533 S. Fremont Avenue Los Angeles, California 90071-1798 Attn.: General Counsel If to Executive: Lawrence J. Melody 506 Ramblewood Houston, Texas 77079 With Copy to: Baker & Botts, L.L.P. 3000 One Shell Plaza 910 Louisiana Houston, Texas 77002-4995 Attn.: Fred H. Dunlop B. LAW GOVERNING. This Agreement and the resolution of any disputes ------------- hereunder shall be governed by and construed in accordance with the laws of the State of Texas. C. ENTIRE AGREEMENT. The terms of this Agreement are intended by the ---------------- parties to be the final expression of their agreement with respect to Executive's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous agreements, course of dealing or any former employment agreements. The parties further intend that the Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative or other legal proceeding involving this Agreement. D. VALIDITY. If any provision of this Agreement, or the application -------- thereof to any person, place or circumstance, shall be held by an arbitrator or court of competent jurisdiction to be -16- invalid, unenforceable or void, the remainder of this Agreement and such provision as applied to other persons, places and circumstances shall remain in full force and effect. E. AMENDMENT. This Agreement may not be modified or amended except by an --------- instrument in writing signed by the Executive, the President or Chief Executive Officer of CB Commercial and an officer of the Company other than the Executive. F. EFFECT ON SUCCESSORS IN INTEREST; ASSIGNMENT. This Agreement shall -------------------------------------------- inure to the benefit of and be binding upon the heirs, administrators, executors and successors of each of the parties hereto. Without limiting the foregoing, upon the merger of CB Commercial Mortgage, Inc. with and into LJMCo, LJMCo as the surviving corporation shall be the successor to (and thereafter constitute) the "Company" under this Agreement. The obligations and duties of Executive under this Agreement are personal to and may not be assigned by Executive. In WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. CB COMMERCIAL MORTGAGE COMPANY, INC. By: /s/ David A. Davidson ---------------------------------- Name: -------------------------------- Title: ------------------------------- CB COMMERCIAL REAL ESTATE GROUP, INC. By: /s/ Walter V. Stafford ---------------------------------- Name: Walter V. Stafford Title: Senior Executive Vice President and General Counsel EXECUTIVE /s/ Lawrence J. Melody -------------------------------------- Lawrence J. Melody -17- EX-10.13 4 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.13 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of the ____ day of __________________, by and among CB Commercial Holdings, Inc., a Delaware corporation (the "Company"), and Kajima U.S.A. Inc., a corporation organized under the laws of Delaware ("Kajima"), Fukoku Mutual Life Insurance Company, a corporation organized under the laws of Japan ("Fukoku"), Kasen Development, Inc., a corporation organized under the laws of Japan ("Kasen"), and S.R.E.S.-Fifth Avenue, Inc., a corporation organized under the laws of Delaware ("SRESFA") (Kajima, Fukoku, Kasen and SRESFA are hereinafter individually referred to as "Preferred Stockholder" and collectively referred to as "Preferred Stockholders"). RECITALS WHEREAS, the Preferred Stockholders currently hold collectively an aggregate of 4,000,000 shares of the Company's Series A-1, Series A-2 and Series A-3 Preferred Stock (the "Existing Preferred Stock"); WHEREAS, subject to the issuance of a number of shares of a new class of common stock, par value $.01 per share (the "New Common Stock"), not to exceed 5,000,000 shares, pursuant to a Proposed Public Offering (as defined below), the Company has proposed a recapitalization (the "Recapitalization") pursuant to which, among other things, each share of Series A-1, Series A-2 and Series A-3 Existing Preferred Stock will be automatically converted into a new class of Series A-1, Series A-2 and Series A-3 preferred stock, respectively, which will replace the Series A-1, Series A-2 and Series A-3 Existing Preferred Stock (the 4,000,000 shares of new Series A-1, Series A-2 and Series A-3 preferred stock held collectively by the Preferred Stockholders into which the Existing Preferred Stock automatically converts pursuant to the Recapitalization is referred to herein as the "New Preferred Stock"); WHEREAS, the New Preferred Stock is convertible into a lesser number of shares of New Common Stock at the option of the holder thereof; WHEREAS, pursuant to that certain Agreement dated as of August 30, 1996 between the Company and the Preferred Stockholders (the "Voting Agreement"), each Preferred Stockholder agreed to vote in favor of amending and restating the Company's Certificate of Incorporation (the "New Certificate") and By-laws, effective upon completion of the Proposed Public Offering, to effectuate the Recapitalization, and the Company and the Preferred Stockholders agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree as follows: SECTION 1 Restrictions on Transferability of Securities; Registration Rights ------------------- 1.1 Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the meanings set forth below: (a) "Affiliate" with respect to any Preferred Stockholder or Holder means any entity that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with, such Preferred Stockholder or Holder or any Affiliate thereof. (b) "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (c) "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (d) "Holder" means any Preferred Stockholder who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been validly transferred in compliance with Sections 1.2, 1.3 and 1.9 hereof. (e) "Proposed Public Offering" means a sale of New Common Stock, not to exceed 5,000,000 shares, for not less than $18.75 per share in an underwritten offering registered under the Securities Act, which is completed on or before March 31, 1997, which results in aggregate proceeds to the Company (prior to underwriters' discounts and expenses relating to the issuance) of $75,000,000 or more and which results in the approval for quotation of such New Common Stock on the National Association of Securities Dealers Automated Quotation System or the listing of such New Common Stock on The New York Stock Exchange. (f) "Registrable Securities" means (i) shares of New Common Stock issued or issuable pursuant to the conversion of the New Preferred Stock in accordance with the New Certificate following consummation of the Proposed Public Offering and (ii) any New Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; provided, however, that Registrable Securities shall not include any shares of New Common Stock which have previously been registered or which have been sold to the public and any shares of New Common Stock acquired other than pursuant to the conversion of New Preferred Stock which was acquired by the automatic conversion of Existing Preferred Stock pursuant to the Recapitalization. -2- (g) "Registration Expenses" means all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses. (h) "Restricted Period" means the period commencing on the first date any of the New Common Stock to be sold in the Proposed Public Offering is released for sale to the public and continuing until and including a date twelve (12) months thereafter. (i) "Rule 144" means Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (j) "Rule 144 Period" means the period beginning on the first date any of the New Common Stock to be sold in the Proposed Public Offering is released for sale to the public pursuant to the Proposed Public Offering and continuing until the offer and sale of New Common Stock acquired by a Preferred Stockholder upon conversion of the New Preferred Stock is no longer subject to the volume limitation provisions of Rule 144, either by this Agreement or by operation of law. (k) "Rule 145" means Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (l) "Securities Act" means the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (m) "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder. 1.2 Restrictions on Transfer at Any Time. Each Preferred Stockholder and ------------------------------------ each Holder agrees not to make any disposition of all or any portion of the New Preferred Stock or any Registrable Securities at any time unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 1.2 and: (a) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Such Preferred Stockholder or Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition and such other information as is reasonably requested by the Company, and (ii) at the request of the Company, such Preferred -3- Stockholder or Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. Each certificate representing the New Preferred Stock and Registrable Securities shall be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES REPRESENTED HEREBY ARE ALSO SUBJECT TO RESTRICTIONS ON TRANSFER WHICH ARE SET FORTH IN A REGISTRATION RIGHTS AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE CORPORATION. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF IT, AGREES TO BE BOUND BY THE PROVISIONS OF SUCH AGREEMENT. 1.3 Restrictions on Transfer During Restricted Period. ------------------------------------------------- In addition to the obligations set forth in Section 1.2 hereof, each Preferred Stockholder and each Holder further agrees (i) not to directly or indirectly sell, offer, pledge, hypothecate, make any short sale of, contract to sell, grant any option to purchase or otherwise transfer or dispose of or in any way transfer the economic risk of ownership in any Registrable Securities or New Preferred Stock or any other securities convertible into, exchangeable for or exercisable for New Common Stock or New Preferred Stock or any rights to purchase or acquire New Common Stock or New Preferred Stock, owned either of record or beneficially by the undersigned for up to 180 days from the date the New Common Stock to be sold in the Proposed Public Offering is released for sale to the public (the "Lockup Period"); and (ii) that if, after the Lockup Period, but during the Restricted Period, any Preferred Stockholder or Holder sells, offers to sell or otherwise disposes of Registrable Securities or New Preferred Stock convertible into Registrable Securities, whether or not in connection with a distribution, or participates or has a direct or indirect participation in any such undertaking, at a price less than the price at which New Common Stock is sold to the public in the Proposed Public Offering, such Preferred Stockholder or Holder, as the case may be, shall comply with the volume limitations set forth in Rule 144(e) of the Securities Act, regardless of whether the provisions of Rule 144 would otherwise apply to such a transaction, unless such sale, offer for sale or other disposition is pursuant to one or more block trades made from time to time which do not involve a brokers' transaction executed on any exchange or in the over-the-counter market. The Company may impose stop transfer instructions with respect to the New Preferred Stock and Registrable Securities subject to the -4- foregoing restriction. The transfer restrictions of this Section 1.3 shall also apply to any Affiliate of a Preferred Stockholder or Holder to which Registrable Securities are transferred and each Preferred Stockholder and Holder hereby agrees to cause any of its Affiliates to which it intends to transfer Registrable Securities to agree in writing to be so bound prior to making any such transfer. 1.4 Company Registration. -------------------- (a) If during the Rule 144 Period the Company shall determine to register any New Common Stock for its own account or for the account of any entity exercising registration rights (other than pursuant to (i) the Proposed Public Offering, (ii) a registration, other than a firmly underwritten registration, pursuant to a written request by securityholders pursuant to registration rights granted by the Company with respect to shares issued after the date hereof, (iii) a registration relating to an employee benefit plan, a dividend or interest reinvestment plan or other similar plan, (iv) a registration relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act, a reclassification, merger, consolidation or acquisition, (v) a registration on any registration form that does not permit secondary sales or (vi) a registration relating to shares of New Common Stock issued or issuable upon the exercise of rights, options or warrants to acquire New Common Stock or upon the conversion or exchange of indebtedness, shares of capital stock or other securities other than New Preferred Stock), the Company will: (i) promptly give to each Holder written notice thereof which shall describe the proposed registration and distribution; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.4(b) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within fifteen (15) days after the Company provides the written notice described in clause (i) above. Such written request may specify all or a part of a Holder's Registrable Securities and any other Registrable Securities held by an Affiliate of such Holder which such Holder is entitled to register pursuant to Section 1.9. (b) Underwriting. If the registration with respect to which the Company ------------ gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.4(a)(i). In such event, the right of any Holder to registration pursuant to this Section 1.4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute Registrable Securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. -5- Notwithstanding any other provision of this Section 1.4, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten or offered or sold for the account or persons other than the Company, the representative may exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company may limit, to the extent so advised by the underwriters, the amount of securities (including Registrable Securities) to be included in the registration by the Company's shareholders (including the Holders), or may exclude, to the extent so advised by the underwriters, such underwritten or other securities entirely from such registration. The Company shall so advise all holders of securities requesting registration pursuant to Section 1.4(a)(ii), and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 1.11. If any person does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 1.5 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to Section 1.4 shall be borne by the Company. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. 1.6 Registration Procedures. In the case of each registration effected by ----------------------- the Company pursuant to Section 1.4, at its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period equal to the earlier of (i) the date the Holder or Holders have completed the distribution described in the registration statement relating thereto or (ii) sixty (60) days; provided, -------- however, that such 60-day period shall be extended for a period of time equal to - ------- the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Registrable Securities of the Company; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement and otherwise use its best efforts to comply with all applicable rules and regulations of the Commission; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; and (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating to the registration is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result -6- of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. (e) Cause all such Registrable Securities registered pursuant hereto to be listed on each securities exchange on which similar securities issued by the Company are then listed. 1.7 Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel, and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to Section 1.4 hereof, and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, or settlements in respect thereof) (collectively, "Losses") arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or registration statement incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel, and accountants and each person controlling such Holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such Loss, provided that the Company will not be liable in any such case to the extent that (i) any such Loss arises out of or is based on any untrue statement or omission based upon written infor- mation furnished to the Company by such Holder or underwriter expressly for use therein or (ii) the Company has advised such Holder of an event as a result of which the prospectus included in the registration statement covering any Registrable Securities, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and any such claim, loss, damage, liability or expense is caused by such Holder having offered or sold Registrable Securities notwithstanding such notice prior to receipt of a supplement or amended prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and the omission or misstatement was caused by such event and corrected in the supplement or amended prospectus; provided, -------- however, that the Company shall not be liable in any such case to the extent - ------- that any such claim, loss, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if (i) such Holder failed to send or deliver a copy of the prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities to the person asserting such claim, loss, damage, liability or expense who purchased such Registrable Securities which are the subject thereof and (ii) the -7- prospectus would have corrected such untrue statement or omission or alleged untrue statement or alleged omission; and provided further, that the Company shall not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is corrected in an amendment or supplement to the prospectus and if, having previously been furnished by or on behalf of the Company, with copies of the prospectus as so amended or supplemented, such Holder thereafter fails to deliver such prospectus as so amended or supplemented, prior to or concurrently with the sale of a Registrable Security to the person asserting such claim, loss, damage, liability or expense who purchased such Registrable Security which is the subject thereof from such Holder. It is agreed that the indemnity agreement contained in this Section 1.7(a) shall not apply to amounts paid in settle ment of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent has not been unreasonably withheld). (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification, or compliance is being effected, furnish to the Company in writing such information as the Company reasonably requests for use in connection with any prospectus, preliminary prospectus, offering circular or registration statement, and will indemnify the Company, each of its directors, officers, partners, legal counsel, and accountants and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and each of its officers, directors, and partners, and each person controlling such Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for inclusion therein; provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons expressly for use in any prospectus, registration statement, offering circular or other document. -8- (c) Each party entitled to indemnification under this Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1.7, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into by a Holder in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 1.8 Information by Holder. Each Holder of Registrable Securities shall --------------------- furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing and as shall be reasonably required in con nection with any registration, qualification, or compliance referred to in Section l. 1.9 Transfer or Assignment of Registration Rights. The rights to cause --------------------------------------------- the Company to register securities granted to a Holder by the Company under this Section 1 may be -9- transferred or assigned by a Preferred Stockholder only to a transferee or assignee of all (but not less than all) shares of New Preferred Stock and Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like) held by such Preferred Stockholder, provided that the Company is given written notice prior to such transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes the obligations of such Preferred Stockholder under this Agreement. Notwithstanding the foregoing, a Preferred Stockholder may, pursuant to its registration rights granted hereunder, cause Registrable Securities validly transferred pursuant to this Agreement to an Affiliate of such Preferred Stockholder to be registered to the same extent and subject to the same terms and conditions as the Registrable Securities held by such Preferred Stockholder. 1.10 "Market Stand-Off" Agreement in Connection with an Underwritten --------------------------------------------------------------- Public Offering. If requested by the Company and an underwriter of New Common - --------------- Stock (or other securities) of the Company, a Holder shall not sell or otherwise transfer or dispose of any Registrable Securities (or other securities) of the Company held by such Holder (other than those included in the registration) during a reasonable and customary period of time (not to exceed 180 days) after the effective date of a registration statement of the Company filed under the Securities Act. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction. 1.11 Allocation of Registration Opportunities. In any circumstance in ---------------------------------------- which all of the Registrable Securities and other shares of New Common Stock of the Company (other than shares of New Common Stock issued or issuable upon conversion of shares of any currently unissued series of New Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling shareholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling shareholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion; provided, however, so that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling shareholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling shareholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares which would be held by such Holders and other selling shareholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and other selling shareholders have been so allocated. -10- 1.12 Delay of Registration. No Holder shall have any right to take any --------------------- action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.13 Termination of Registration Rights. The right of any Holder to ---------------------------------- request inclusion in any registration pursuant to this Agreement shall terminate at the expiration of the Rule 144 Period. SECTION 2 Representations and Warranties of Holders. ----------------------------------------- Each Preferred Stockholder and each Holder hereby severally represents and warrants on behalf of itself to the Company that: 2.1 Authorization. It has full power and authority to enter into this ------------- Agreement, and this Agreement constitutes its valid and legally binding obligation. 2.2 Purchase Entirely for Own Account. The New Preferred Stock and the --------------------------------- New Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agree- ment, each Preferred Stockholder and each Holder further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 2.3 Disclosure of Information. Such Preferred Stockholder and such Holder ------------------------- believes it has received all the information it considers necessary or appropriate for making an investment decision with respect to the Recapitalization, the conversion of the Existing Preferred Stock into New Preferred Stock. Such Preferred Stockholder and such Holder further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Recapitalization and the conversion of the Existing Preferred Stock into New Preferred Stock. 2.4 Investment Experience. It is an experienced investor in securities --------------------- and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. 2.5 Restricted Securities. Each Preferred Stockholder and each Holder --------------------- represents that it is familiar with Rule 144 and understands the resale limitations imposed thereby and by the Securities Act. SECTION 3 -11- Miscellaneous ------------- 3.1 Covenant Regarding Prepayment of Certain Indebtedness. ----------------------------------------------------- Notwithstanding any other agreement among the parties hereto, including the Voting Agreement, the Company hereby covenants and agrees with the Preferred Stockholders that, following the Proposed Public Offering and for so long as any Preferred Stockholder holds any New Preferred Stock, the Company will not, and will not permit CB Commercial Real Estate Group, Inc. ("CBC") to, voluntarily prepay any Indebtedness unless the Company shall have first paid all unpaid accrued dividends and any unpaid interest accrued thereon to the Preferred Stockholders in accordance with the New Certificate, provided, however, nothing -------- ------- contained herein shall preclude the Company or CBC from making any prepayments (a) required by the terms of any instrument relating to Indebtedness, (b) with respect to any Indebtedness incurred in connection with the acquisition by the Company of Westmark Realty Advisors L.L.C., (c) in connection with the refinancing of any Indebtedness and (d) from the proceeds of the Proposed Public Offering. For the purposes of this Section 3.1, (a) "Indebtedness" shall mean (i) the obligations of CBC and the Company pursuant to that certain Third Amended and Restated Senior Secured Credit Agreement to be effective upon consummation of the Proposed Public Offering, as such agreement may be amended from time to time, between CBC and The Sumitomo Bank, Limited and that certain Guaranty to be effective upon consummation of the Proposed Public Offering, as such guaranty may be amended from time to time from the Company to The Sumitomo Bank, Limited, (ii) the obligations of CBC pursuant to that certain Amended and Restated Senior Subordinated Credit Agreement to be effective upon consummation of the Proposed Public Offering, as such agreement may be amended from time to time, between CBC and Sumitomo Finance (Dublin) Limited and (iii) all obligations for borrowed money for a term in excess of one year; provided that the term Indebtedness shall not include trade accounts payable, accrued commissions and other similar accrued current liabilities in respect of such obligations, capitalized lease obligations, accounts payable and indebtedness payable within one year, accruals for taxes, the current portion of any long- term indebtedness required to be paid within one year and similar obligations. 3.2 Governing law. This Agreement shall be governed in all respects by ------------- the laws of the State of New York, as if entered into by and between New York residents exclusively for performance entirely within New York. 3.3 Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 3.4 Entire Agreement; Amendment; Waiver. This Agreement constitutes the ----------------------------------- full and entire understanding and agreement between the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the holders of at least a majority of the Registrable Securities and any such amendment, waiver, discharge or termination shall be binding on all the Holders. -12- 3.5 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be sent by facsimile transmission, mailed by United States first-class mail, postage prepaid, or delivered personally by hand or nationally recognized courier addressed (a) if to a Preferred Stockholder or Holder, as indicated on the signature page hereof, or at such other address as such Preferred Stockholder or Holder shall have furnished to the Company in writing, or (b) if to the Company, at 533 South Fremont Avenue, Los Angeles, CA 90071, Attention: Walter V. Stafford, with a copy to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to each holder in writing. All such notices and other written communications shall be effective (i) if sent by facsimile transmission, upon confirmation of receipt, (ii) if mailed, seven (7) days after mailing, and (iii) if delivered, upon delivery. 3.6 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any party hereunder, upon any breach or default of another party hereunder shall impair any such right, power or remedy nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement or any waiver on the part of any party of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. 3.7 Rights; Separability. Unless otherwise expressly provided herein, the -------------------- rights of each Preferred Stockholder and each Holder hereunder are several rights, not rights jointly held with any of the other Preferred Stockholder or Holders. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.8 Information Confidential. Each Preferred Stockholder and each Holder ------------------------ acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Preferred Stockholder or Holder is required to disclose such information by a governmental body. 3.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs -------------------- of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.10 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -13- 3.11 Effectiveness. This Agreement shall be of no further force and ------------- effect in the event the Proposed Public Offering does not occur on or before March 31, 1997. IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement effective as of the day and year first above written. CB COMMERCIAL HOLDINGS, INC. By:------------------------------- Name:----------------------------- Title:---------------------------- KAJIMA U.S.A. INC. By:------------------------------- Name:----------------------------- Title:---------------------------- Address for Notice: ---------------------------------- ---------------------------------- -14- FUKOKU MUTUAL LIFE INSURANCE COMPANY By:------------------------------- Name:----------------------------- Title:---------------------------- Address for Notice: ---------------------------------- ---------------------------------- KASEN DEVELOPMENT, INC. By:------------------------------- Name:----------------------------- Title:---------------------------- Address for Notice: ---------------------------------- ---------------------------------- -15- S.R.E.S.-FIFTH AVENUE, INC. By:------------------------------- Name:----------------------------- Title:---------------------------- Address for Notice: ---------------------------------- ---------------------------------- -16- EX-21.1 5 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF --------------- CB COMMERCIAL HOLDINGS, INC. ---------------------------- NAME JURISDICTION OF ---- INCORPORATION/FORMATION ----------------------- CB Commercial Brokerage, Inc. Arizona CB Commercial Partners, Inc. Delaware CB Commercial Real Estate Fund Management, Inc. California CB Commercial Real Estate Group, Inc. Delaware CB Commercial Real Estate Group of Hawaii, Inc. Delaware CB Commercial Real Estate Group of Iowa, Inc. Iowa CB Commercial Real Estate Management Services, Inc. California CB Commercial Realty Advisors, Inc. California CB Commercial Sutton & Towne, Inc. New York CB Commercial Warehouse Property Corp. Delaware Global Professional Assurance Company Vermont L.J. Melody & Company Texas L.J. Melody & Company of California Texas L.J. Melody Investments, Inc. Texas Sutter Fremont, Inc. California Sutter Fremont Property Services, Inc. Washington Sutter Fremont Real Estate Merchant Capital Corporation California Sutton & Towne N.J., Inc. New Jersey Westmark Real Estate Acquisition Partnership, L.P. Delaware Westmark Realty Advisors L.L.C. Delaware HoldPar A Delaware HoldPar B Delaware Sol L. Rabin, Inc. California Roger C. Schultz, Inc. California Bruce L. Ludwig, Inc. California Vincent F. Martin, Jr., Inc. California Stanton H. Zarrow, Inc. California EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP RE: CB COMMERCIAL EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 31, 1996 (except with respect to Notes 1, 2 and 13, for which the date is November 1, 1996) on the CB Commercial Holdings, Inc. and Subsidiaries financial statements and to all references to our firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Los Angeles, California November 1, 1996 EX-23.2 7 CONSENT OF ARTHUR ANDERSEN LLP RE: L.J. MELODY EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports on the consolidated financial statements of L.J. Melody & Company and the financial statements of L.J. Melody & Company of California, and to all references to our firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Houston, Texas November 1, 1996 EX-23.3 8 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.3 WESTMARK REALTY ADVISORS L.L.C. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California November 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----