-----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, GL1g4UI1UAi0QzTLSjgSE4/+FjdF8/zp0eRyj2AvbnO0qZBIJ9zgPdt6ySpVq5+t WayS+zPGitCx4xayOYeDDw== 0000898430-98-001039.txt : 19980326 0000898430-98-001039.hdr.sgml : 19980326 ACCESSION NUMBER: 0000898430-98-001039 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CB COMMERCIAL REAL ESTATE SERVICES GROUP 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: 10-K SEC ACT: SEC FILE NUMBER: 001-12231 FILM NUMBER: 98572425 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 COMMERCIAL HOLDINGS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CB ACQUISITION CORP DATE OF NAME CHANGE: 19890731 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES [X] EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES [_] EXCHANGE ACT OF 1934 For the Transition Period from __________________ to __________________ Commission File Number 001-12231 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. (Exact name of Registrant as Specified in its Charter) Delaware 52-1616016 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 533 South Fremont Avenue Los Angeles, California 90071-1712 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (213) 613-3123 Securities registered pursuant to Section 12(b) of the Act: Common Stock $.01 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Common Stock held by non- affiliates of the Registrant on February 28, 1998 was $977,551,313. Number of shares of Common Stock outstanding at February 28, 1998 was 18,898,296. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its May 19, 1998 Annual Meeting of Stockholders are incorporated by reference in Part III. PART I ITEM 1. BUSINESS COMPANY OVERVIEW CB Commercial Real Estate Services Group, Inc. ("CBRESG") was organized to acquire Coldwell Banker Commercial Group, Inc. and had no operations prior to the acquisition on April 19, 1989 (the "Acquisition"). In November 1996, CBRESG completed an initial public offering (the "Offering") of 4,347,000 shares of common stock, par value $.01 per share (the "Common Stock"). CBRESG is a holding company that conducts its operations solely through CB Commercial Real Estate Group, Inc. and its subsidiaries (collectively, the "Company"). The Company is the largest vertically-integrated commercial real estate services company in the United States with aggregate 1997 revenue of $730.2 million, approximately 130 principal offices in the U. S. and over 200 offices worldwide, including strategic alliance partner offices. The Company provides a full range of services to commercial real estate tenants, owners and investors including: (i) brokerage (facilitating sales and leases) ("Brokerage Services"); (ii) transaction management, advisory services and facilities management services to corporate real estate users ("Corporate Services"); (iii) property management ("Institutional Management Services"); and (iv) capital market activities, including mortgage banking, brokerage and servicing, investment management and advisory services, investment property transactions (acquisitions and sales on behalf of investors), real estate market research and valuation and appraisal services (collectively "Financial Services"). INDUSTRY TRENDS Over the last ten years, the commercial real estate industry has experienced various structural changes, and over the last three or four years, the industry has experienced 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. . HEALTHY 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 essentially recovered over the last several years, experiencing increased activity in many product types and geographical market areas. This has been particularly true in California, where the Company has a significant market presence. Relatively strong markets also are prevalent in a number of other major U.S. real estate markets where the Company has operations, including Arizona, Texas, the New England area and the Washington, D.C./Baltimore areas. National office and industrial building occupancy levels have generally been rising, rental rates have been increasing and, correspondingly, property values have been rising. . 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 (including pension funds, life insurance companies, banks and publicly-held REITs). 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. With respect to institutions other than REITs, this change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for the growth of multi-service, nationally or internationally-oriented real estate service providers. As most REITs are internally managed and to date generally have outsourced only their brokerage service needs, their demand for the Company's other real estate services has been less than that of other institutional investors. The Company believes that the REITs are a potential growth area if Wall Street puts a premium on growth in funds from operations ("FFO") and because of this influence, REITs elect to outsource various property management functions which can be performed more efficiently by broadly based management organizations like the Company. . 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 1 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. . CONTINUING CORPORATE OUTSOURCING TREND. Shareholder pressure for higher performance and return on equity within most public corporations around the globe has heightened corporate management's 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 certain 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. The Company's pending acquisition of REI Limited will provide access to European, South American and Asian companies interested in outsourcing and provides a global network of very high quality to provide service to companies throughout the world in the outsourcing process. Following the REI acquisition, which is scheduled to close in late April, 1998, the only major commercial real estate area in the world not directly served by the Company with an owned, or at least partially owned group of businesses, will be the United Kingdom. . 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 Commercial Mortgage-Backed Securities ("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 through its L. J. Melody & Company subsidiary have caused it to become one of the largest suppliers of commercial mortgages to the CMBS market (over $1 billion in aggregate originations in 1997 or 30% of the Company's $3.5 billion in new originations). In addition, the Company expects to service a majority of the mortgage loans that it originated and the profit margin potential for servicing an increasing volume of mortgage loans may be significant for the Company's mortgage banking business. Following the North Coast and Cauble acquisitions the Company services over $9 billion in loans. 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. ACQUISITIONS As part of its growth strategy, the Company is continually assessing acquisition opportunities and is currently involved in negotiating acquisitions in the United Kingdom, Canada, the United States, Australia and New Zealand, although no agreement has been reached on material terms in any of these negotiations and there can be no assurances that any such agreement will be reached or if reached will prove beneficial to the Company. Management believes that there are significant opportunities in the fragmented and consolidating worldwide real estate services industry to acquire additional companies to complement and expand the Company's existing operations. Since 1995, the Company has completed six strategic acquisitions and has contractually agreed to a seventh acquisition, REI Limited. In 1995, the Company acquired Westmark Realty Advisors L.L.C. ("Westmark"), an investment management and advisory business with approximately $4.5 billion of assets currently under management, and Langdon Rieder Corporation ("Langdon Rieder"), a nationally-known tenant representation firm. In 1996, the Company acquired L. J. Melody & Company ("L. J. Melody"), a nationally-known mortgage banking firm. In August 1997, the Company acquired Koll Real Estate Services ("Koll"), a real estate services company primarily providing property management services, corporate and facilities management services, and asset and portfolio management services. The acquisition was accounted for as a purchase and resulted in the issuance of Company equity valued at approximately $132.9 million and the assumption of debt and minority interest of approximately $57.4 million at the time of the transaction. In February 1998, the Company, through L. J. Melody, acquired Cauble and Company of Carolina for approximately $2.2 million, and substantially all of the assets of North Coast Mortgage Company for approximately $3.3 million, both regional mortgage banking firms. In addition, the Company has reached definitive agreements with the holders of more than 75% of the outstanding shares of REI Limited, the holding company for all Richard Ellis operations outside of the United Kingdom to purchase their shares. The Company expects to reach agreement with the remainder of the REI shareholders before the end of March, 1998. The purchase price for 100% of the shares of REI is (Pounds)57.25 million (the price was subject to downward adjustment if EBITDA and net debt thresholds were not attained but those thresholds were met). The entire purchase price is payable 2 in common stock of the Company but the REI shareholders may elect to have up to 50% of the purchase price paid in cash or notes. Each REI shareholder can choose at any time prior to March 20, 1998 between two methods (Method A and Method B) in determining the number of shares of stock of the Company to which he or she is entitled: Under Method A, the number of shares of common stock is calculated based upon the average price of the stock and the average U.S. Dollar/Pound Sterling exchange rate for the 10 trading days preceding December 9, 1997 (the date the REI transaction was announced). The average trading price was $33.76 and the average exchange rate was $1.674:(Pounds)1. The actual value that a shareholder receives under Method A will increase or decrease depending upon the difference between the December 9, 1997 averages and the averages when the transaction closes. However, in no event can the value of the common stock to be issued to REI shareholders be less than (Pounds)50 million or more than (Pounds)65 million. Under Method B, the number of shares of the Company's common stock to be issued to REI shareholders is calculated based on the average closing price of the stock and the average U.S. Dollar/Pound Sterling exchange rate for the 10 days preceding the closing. Under either method, a shareholder may elect to have up to 50% of the value of the stock paid in cash or 52 month bank-guaranteed notes. The notes bear interest at LIBOR less 150 basis points and may be redeemed at the option of the holder on each December 31st and June 30th beginning December 31, 1998. The transaction is expected to close at the end of April. The Company expects to continue its acquisitions program over the next several years and will focus on acquisitions in its mortgage banking business and opportunistic acquisitions in its domestic brokerage and property management businesses, as well as acquisitions which enhance its international capabilities. The Company is currently negotiating acquisitions in the United Kingdom, the United States, Canada, Australia and New Zealand but no agreement has been reached in any of the negotiations and there can be no assurances that any such agreement will be reached or if reached will prove beneficial to the Company. Based upon what the Company has offered, if all of these acquisitions were to close the cost to the Company would be approximately $150 million. The Company believes that the purchase price for any of these potential acquisitions which do close will be paid partly in common stock of the Company and partly in cash. Following the REI acquisition, the Company may not have adequate cash to complete these acquisitions. In that event, the Company anticipates raising additional capital, using one or more of the following alternatives: . Increasing its current bank line. . Raising public or private mid-term debt. . Selling equity (common stock). There can be no assurance that the Company will successfully conclude any of the current negotiations or if it does so that it can raise any additional capital through the above described alternatives or, if it can raise additional capital, that such capital will be adequate. 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 (which the Company intends to take as a single charge at the time of the acquisition to the maximum extent possible). Finally, acquisitions can present serious integration problems both in terms of personality and cultural differences (both of which caused material problems in integrating Westmark), and in terms of stress on accounting personnel and other infrastructure systems (which materially slowed the integration of Koll Real Estate Services). The Company expects material infrastructure issues in integrating REI which has fifty-six offices in twenty-seven countries and limited centralized accounting systems. Management's strategy is to pursue acquisitions that are expected to be accretive to income before interest expense and provision for amortization of goodwill and intangibles, if any, resulting from the acquisitions and to operating cash flows (excluding the costs of integration). 3 THE COMPANY'S BUSINESSES Brokerage Services 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, multi-family residential properties and unimproved land. In 1997, the Company generated revenue from commercial real estate brokerage services of approximately $423.5 million representing approximately 20,850 completed transactions. In 1997, brokerage facilitated over 3,000 sale transactions with an aggregate estimated total consideration of over $3.75 billion and approximately 17,700 lease transactions involving aggregate rents, under the terms of leases facilitated, of approximately $8.7 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 December 31, 1997, the Company employed approximately 2,000 brokerage professionals in offices located in most of the largest Metropolitan Statistical Areas ("MSAs") in the United States. The Company maintains a decentralized approach to brokerage services (other than investment properties which are a part of financial 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. While day-to- day operations are decentralized, accounting and financial functions are fully centralized. In order to increase market share in its domestic brokerage business, the Company has implemented 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. Through December 31, 1997, the Company had established fourteen such partnership-type arrangements in Des Moines, Iowa; Louisville, Kentucky; Buffalo and Rochester, New York; Pittsburgh, Pennsylvania; Charleston and Columbia, South Carolina; Memphis, Tennessee; Madison and Milwaukee, Wisconsin; Toledo, Ohio; El Paso, Texas; South Bend and Ft. Wayne, Indiana; and East Lansing and Grand Rapids, Michigan. 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. By the end of 1998 the Company expects to have 25 to 30 partnership-type arrangements and may not materially expand the program beyond that number. In 1997, the Company contributed its brokerage and property management business in the New England area to a partnership and Whittier Partners, a prominent New England real estate services firm, did likewise. The Company also contributed $4.775 million in cash because the assets it contributed were less valuable than the assets contributed by Whittier Partners. The Company and Whittier partners each own 50% of the partnership. 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 have typically received 50% of the Company's share of commissions before costs and expenses. In 1999 the Company anticipates changing its commission plan so that sales professionals who produce commissions below a specified level will have a 40% commission, and sales professionals who produce commissions above a specified level will achieve a 60% commission. Sales professionals who produce commissions between these two levels will continue to receive 50% of the commissions. Corporate Services The Company provides corporate services to major corporations around the world. Corporate services include assisting corporations in developing and executing multiple-market real estate strategies and facilities management services. The Company's 4 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 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 facilities management unit, specializes in the administration, management and maintenance of properties that are owned and occupied by large corporations and institutions, such as corporate headquarters, regional offices, administrative offices and manufacturing and distribution facilities, as well as tenant representation, capital asset disposition, strategic real estate consulting and other ancillary services for corporate clients. As of December 31, 1997, the Company had approximately 91 million square feet under facilities management. OPERATIONS. The Company's facilities management operations are 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 providing a full range of corporate services in a contractual relationship, the facilities management 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. Under a typical facilities management agreement, the Company is entitled to receive management fees and reimbursement for its costs (such as costs of wages of on-site employees, capital expenditures, field office rent, supplies and utilities) incurred that are directly attributable to management of the facility. Payments for reimbursed expenses are set against those expenses and not included in revenue. In most instances, office space and furniture for the on-site office are provided by the client. Under certain facilities management agreements, the Company may also be entitled to an additional incentive fee which is paid if the Company meets certain performance criteria established in advance between the client and the Company. The management fee in most cases is based upon a fixed annual amount per square foot of the facility managed. TERM. A typical corporate services agreement includes a stated term of at least one year and normally contains provisions for extension of the agreement. Agreements typically include a provision for cancellation by either party, upon notice, within a specified short time frame. Institutional Management Services The Company provides value-added property management services for income- producing properties owned primarily by institutional investors and, as of December 31, 1997, managed approximately 211 million square feet of commercial space. 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. OPERATIONS. The Company employs approximately 1,600 property management professionals. 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. 5 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 either a certain amount per square foot managed or a specified percentage of the monthly gross rental income collected from tenants occupying the property under management. Where rent is used as the basis for the fee, the fee 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 is 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. Financial 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 originated approximately $3.5 billion of mortgages in 1997. As part of these origination activities, the Company has special conduit arrangements with affiliates of Merrill Lynch & Co., Citicorp, NationsBank, Heller Financial and Deutche Morgan Grenfell which permit it to service the mortgage loans which it originates. Under these arrangements, the Company generally originates mortgages in its name, makes limited 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 may originate mortgages into other conduit programs where it does not have servicing rights. The Company originates and services loans for Federal Home Loan Mortgage Corp. (Freddie Mac) and is a major mortgage originator for insurance companies having originated mortgages in the names of the insurance companies valued at approximately $2 billion in 1997. The Company has correspondent arrangements with various life insurance companies and pension funds which entitle it to service the mortgage loans it originates. As of December 31, 1997, the Company serviced mortgage loan portfolios of approximately $ 7.6 billion and as a result of the North Coast and Cauble acquisitions currently services portfolios in excess of $9 billion. OPERATIONS. The Company employs approximately 55 mortgage banking professionals in 20 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. The Company's mortgage loan servicing primarily is handled by L. J. Melody in Houston, Texas. In February 1998, L. J. Melody acquired Cauble and Company of Carolina for approximately $2.2 million, and substantially all of the assets of North Coast Mortgage Company for approximately $3.3 million, both regional mortgage banking firms. These acquisitions give the Company a stronger presence in the Northwest (Washington and Oregon) and Southeast (North Carolina and South Carolina) regions of the United States with respect to its mortgage banking services. 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 addition, the Company can earn special incentive fees from various conduit programs. In 1997 the Company received approximately $1.3 million from such incentives. In situations where the Company services the mortgage loans which it originates, it also receives a servicing fee between .03% and .25%, calculated as a percentage of the outstanding mortgage loan balance. These correspondent 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. A majority of the Company's 1997 mortgage loan origination revenue was from agreements which entitled 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. 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 approximately 50% of the Company's loan origination fees. 6 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 1997, the Company completed approximately 1,240 investment property transactions with an aggregate value of over $9.4 billion, generating total revenues of approximately $150 million. 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. REI's Richard Ellis operations around the globe had significant investment sales in 1997. The Company believes that the combination of the two investment property programs will be highly attractive to buyers and sellers of investment properties. OPERATIONS. As of December 31, 1997, the Company employed approximately 300 investment properties professionals who exclusively handle acquisitions and sales of investment properties and are located in 90 offices in the United States. 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. These services provide the client with in-depth analyses of transaction specific data as well as real estate market data. COMPENSATION. Under the 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. Investment Management and Investment Products The investment advisory and investment activities of the Company are divided into two parts--Westmark and CBC Global Capital Markets. Westmark continues to focus on providing advisory services to the pension fund community while CBC Global Capital Markets focuses on the development of products to serve non- pension fund investors and co-investment opportunities. OPERATIONS. As of December 31, 1997, Westmark managed approximately $4.5 billion in tax-exempt capital invested in more than 252 office, industrial and retail properties located in more than 46 major U.S. markets with an aggregate of more than 48 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 employs approximately 135 professionals who provide services, including market research and forecasting, acquisition strategy and implementation, portfolio strategy and management, and development and dispositions. 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. Westmark has experienced significant growth in its separate accounts business and its commingled debt business simultaneously with a decline in its commingled equity business caused by adverse investor response to non-property specific commingled funds. The Company believes that in the future investors will react favorably to commingled equity funds which have liquidity and co-investment characteristics. CBC Global Capital Markets is focused on developing securitized investment products for clients and creating other investment strategies based on its market research. In 1996, CBC Global Capital Markets formed a relationship with Alliance Capital Management to manage investments in REIT securities for retail and institutional clients. This venture utilizes the Company's proprietary research tools and currently manages approximately $800 million in assets, of which $575 million was raised in 1997. 7 CBC Global Capital Markets is considering the development of investment programs for international real estate securities, securitized commercial mortgage debt and other specialized investment funds. 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. CBC Global Capital Markets' fees for managing investments will vary depending on product type. For the REIT investment business, CBC Global Capital Markets shares the total fees with Alliance Capital Management with the gross income to the Company ranging from 0.20% to 0.25% of assets under management. 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 and early termination provisions based upon a vote of the investors. Over the next several years several commingled funds formed in the 1980s will be liquidated. 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 valuation, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. At December 31, 1997, the Company's appraisal staff had more than 92 professionals with approximately 50% of the staff holding the MAI professional designation. The business is operated nationally through 25 regional offices and its clients are generally corporate and institutional portfolio owners and lenders. In 1997, the Company performed more than 3600 valuation and appraisal assignments. Real Estate Market Research Real estate market research services are provided by 13 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 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. The CB Commercial National Real Estate Index also compiles proprietary market research for nearly 60 major urban areas nationwide, reporting benchmark market price and rent data for office, light industrial, retail, and apartment properties, and tracking the property portfolios of 135 of the largest real estate investment trusts. TERMINATION OF INTERNATIONAL ALLIANCES In response to growing cross-border capital flows for investment in commercial real estate, and the multi-national strategies of the Company's U.S. corporate clients, the Company 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 20 real estate advisory firms operating in 15 countries in Europe as well as in Australia, New Zealand and elsewhere, C.Y. Leung & Company, a locally-owned firm operating in Hong Kong, China, Singapore and Malaysia, and, commencing in February 1997, Ikoma Corporation, a commercial real estate services firm in Japan, allowed the Company to provide global corporate service capabilities and significantly strengthen its client relationships in the United States. However, in 1997, as part of its evaluation of the Koll acquisition, the Company concluded that it could not deliver consistent, high quality services around the globe except through a commonly owned and commonly managed structure. The Company approached its alliance partners with a view to common ownership and management but could not reach agreement with them and gave notice terminating the alliance agreements effective April 15, 1998. The Company then began discussions with REI Limited which were finalized in early 1998. The alliance relationships were reciprocal referral arrangements 8 whereby the Company's clients who required services in a geographical region serviced by its alliance partners had to be referred by the Company to its alliance partner operating in that region. Conversely, the Company's alliance partners were obligated to refer their clients with commercial real estate needs in the United States to the Company. Revenues from the alliance agreements represent a small portion of total revenues. 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 100 professionals that operate the Company's data center, develops custom programs, implements special systems software, and provides 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 wide area network for real-time access to the Company's centralized databases, customized software applications and electronic communications systems. By special arrangement, some of the Company's clients have remote modem access to selected client-customized software applications, and 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. Year 2000 Computer Issues The Company's accounting (both for the Company and for its property and facilities management clients), information technology and embedded (elevator, HVAC, etc.) systems are all subject to potential problems relating to the inability of such systems to recognize the year 2000. The Company believes that its accounting systems will be year 2000 compliant by the end of 1998 but that its information technology and embedded systems may not be year 2000 compliant until sometime in 1999. There is no assurance that the Company can meet these schedules and if it does not, the result would be material and adverse. 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, thereby eroding margins. In 1996, however, rates 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. 9 EMPLOYEES As of December 31, 1997, the Company had approximately 6,700 employees. 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. ITEM 2. PROPERTIES The Company owns its headquarters building in downtown Los Angeles, California. In addition to the Company's headquarters, the Company owns three smaller office buildings in Phoenix, Arizona; San Diego and Carlsbad, California. The Company occupies the San Diego and Carlsbad properties. 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 2007. 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, although rental rates in some markets may adversly affect the Company's profits in those markets. ITEM 3. LEGAL PROCEEDINGS In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000 in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages and an appellate ruling is expected in late 1998 or early 1999. The Company has established reserves for this case, and management believes the reserves are adequate as of December 31, 1997. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. In addition, as a result of the thousands of transactions in which the Company participates and its employment of over 6,700 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 175 to 200 legal proceedings and a plaintiff in 50 to 75 legal proceedings. Management believes that any liability to the Company, net of insurance proceeds, that may result from proceedings to which it is currently a party will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's Common Stock commenced trading on the New York Stock Exchange on November 7, 1997 under the symbol "CBG." Prior to that, the Company's Common Stock traded on The Nasdaq Stock Market--National Market System ("NASDAQ -- NMS") under the symbol "CBCG" from November 26, 1996 through November 6, 1997. Prior to that period, there was no established public trading market for the Company's Common Stock. The following table sets forth, for the periods indicated, the high and low sales price per share of the Common Stock on the NYSE, and the high and low bid prices for the Common Stock on the NASDAQ -- NMS.
YEAR ENDED DECEMBER 31, 1996 HIGH LOW - ---------------------------- ------- ------- November 26, 1996 through December 31, 1996 $20 $18 YEAR ENDED DECEMBER 31, 1997 - ---------------------------- First Quarter 27 3/8 18 1/4 Second Quarter 30 3/4 20 3/4 Third Quarter 33 3/4 28 3/4 Fourth Quarter (through November 6, 1997) 39 1/2 32 1/4 Fourth Quarter (from November 7, 1997) 38 28 1/2
(b) As of February 28, 1998, the Company had 852 record holders of its Common Stock. (c) Since its incorporation in March 1989 the Company has not declared any cash dividends on its Common Stock. The Company's existing credit agreement restricts its ability to pay dividends on Common Stock but permits the payment of dividends on preferred stock. The preferred stock was repurchased by the Company in January 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --- Liquidity and Capital Resources" under Item 7 of this report. (d) In June 1997, the Company sold 35,000 shares of Common Stock to an executive officer of the Company under the Company's 1996 Equity Incentive Plan. The sale was made by private placement in reliance on the exemption from registration provisions provided for in Section 4(2) of the Securities Act of 1933, as amended. The recipient of such securities represented his intention to acquire the securities for investment only and not with a view to distribution thereof. An appropriate legend was affixed to the stock certificate issued in such transaction. The recipient had adequate access, through employment, to information about the Company. 11 ITEM 6. SELECTED FINANCIAL DATA CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL INFORMATION: (Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- ---------------- ---------------- --------------- --------------- STATEMENT OF OPERATIONS DATA: Revenue................................. $ 730,224 $ 583,068 $ 468,460 $ 428,988 $ 392,037 Costs and Expenses: Commissions, fees and other incentives.......................... 365,705 292,266 239,018 225,085 206,070 Operating, administrative and other.. 274,447 228,799 187,968 170,234 160,073 Merger related and other non-recurring charges............... 12,924 - - - - Depreciation and amortization........ 18,060 13,574 11,631 8,091 49,606 ----------- ----------- ----------- ----------- ----------- Operating income (loss)................. 59,088 48,429 29,843 25,578 (23,712) Interest income......................... 2,598 1,503 1,674 1,109 915 Interest expense........................ 15,780 24,123 23,267 17,362 14,240 ----------- ----------- ----------- ----------- ----------- Income (loss) before provision (benefit) for income tax............... 45,906 25,809 8,250 9,325 (37,037) Provision for income tax................ 20,558 11,160 841 152 112 Reduction of valuation allowances (1)... - (55,900) - - - ----------- ----------- ----------- ----------- ----------- Net provision (benefit) for income tax.. 20,558 (44,740) 841 152 112 ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary items 25,348 70,549 7,409 9,173 (37,149) Extraordinary items, net................ 951 - - - - ----------- ----------- ----------- ----------- ----------- Net income (loss)....................... $ 24,397 $ 70,549 $ 7,409 $ 9,173 $ (37,149) =========== =========== =========== =========== =========== Net income (loss) applicable to common stockholders (2)....................... $ 20,397 $ 69,549 $ 7,409 $ 9,173 $ (37,149) Basic earnings (loss) per share (2)..... $ 1.34 $ 5.05 $ 0.55 $ 0.69 $ (3.23) Number of shares used in computing basic earnings (loss) per share (2).......................... 15,237,914 13,783,882 13,499,862 13,264,405 11,504,644 Diluted earnings (loss) per share (2)... $ 1.28 $ 4.99 $ 0.55 $ 0.69 $ (3.23) Number of shares used in computing diluted earnings (loss) per share (2).......................... 15,996,929 14,126,636 13,540,541 13,305,118 11,504,644 OTHER DATA: EBITDA (3).............................. $ 90,072 $ 62,003 $ 41,474 $ 33,669 $ 25,894 Net cash provided by operating activities............................. $ 80,835 $ 65,694 $ 30,632 $ 31,418 $ 19,609 Net cash used in investing activities... $ (18,018) $ (10,906) $ (24,888) $ (3,865) $ (5,629) Net cash used in financing activities... $ (64,964) $ (28,505) $ (11,469) $ (4,923) $ (14,662) AS OF DECEMBER 31, ------------------------------------------------------------------------------------ BALANCE SHEET DATA: 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents............... $ 47,181 $ 49,328 $ 23,045 $ 28,770 $ 6,140 Total assets............................ 505,191 278,944 190,954 150,100 128,914 Total long-term debt.................... 146,104 148,529 250,142 233,571 239,853 Total liabilities....................... 339,748 280,364 345,642 314,648 303,774 Minority interest....................... 7,672 95 - - - Total stockholders' equity (deficit).... 157,771 (1,515) (154,688) (164,548) (174,860)
- ---------------- (1) See Note 9 of Notes to Consolidated Financial Statements. (2) See Per Share Information in Note 2 of Notes to Consolidated Financial Statements. (3) EBITDA effectively removes the impact of certain non-cash and non- recurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger related and other non- recurring charges, extraordinary items, and income taxes. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash (subject to the payment of interest and income taxes) 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. 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. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION CB Commercial Real Estate Services Group, Inc. (the "Company") is the largest commercial real estate services firm in the United States and a global leader in real estate services. Over the course of the last five years the Company, in recognition of a rapidly changing structural and economic environment, has changed from being almost exclusively a traditional real estate broker to being a highly diversified real estate services firm. Its outsourcing, transaction management, advisory services and facilities management business (referred to as "Corporate Services"), property management business ("Institutional Management Services") and its mortgage loan origination and servicing, appraisal, investment property, realty advisory and capital markets businesses (collectively referred to as "Financial Services") are either the largest or one of the largest such businesses in the country and in the aggregate accounted for more than $306.7 million in 1997 revenue. The Company's core brokerage business, commercial property sales and leasing ("Brokerage Services") accounted for approximately $423.5 million in revenue and is the largest or one of the largest such businesses in the country. As part of its proactive adjustment to structural and economic changes in the economy the Company has, since the beginning of 1995, completed a $86.9 million public offering of common stock and six strategic acquisitions with a seventh -- a major international acquisition -- in process. The Company is continually assessing acquisition opportunities as part of its growth strategy. Because of the substantial non-cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting and because of interest expense associated with acquisition financing, past acquisitions have and 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 (which the Company intends to reflect as a statement of operations charge or as part of the purchase price at the time of the acquisition as appropriate). Management's strategy is to pursue acquisitions that are expected to be accretive to income before interest expense and provision for amortization of goodwill and intangibles, if any, and to operating cash flows (excluding the costs of integration). Revenue from Brokerage Services and the investment properties component of Financial 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 continuing client base tend to minimize the impact of economic cycles on annual revenue and create what the Company believes is equivalent to a recurring stream of revenue. Between 55.0% and 60.0% of the costs and expenses associated with Brokerage Services and the investment properties component of Financial Services are directly correlated to revenue while approximately 35.0% of the costs and expenses of Corporate Services, Institutional Management Services and Financial Services, excluding investment properties, are directly correlated to revenue. A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand rather than general inflation. 13 RESULTS OF OPERATIONS The following table sets forth items derived from the Company's Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995, presented in dollars and as a percentage of revenue.
Year Ended December 31, ---------------------------------------------------------- 1997 1996 1995 ----------------- ----------------- ----------------- (Dollars in thousands) Revenue............................................ $730,224 100.0% $583,068 100.0% $468,460 100.0% Costs and expenses: Commissions, fees and other incentives............ 365,705 50.1 292,266 50.1 239,018 51.0 Operating, administrative and other............... 274,447 37.6 228,799 39.3 187,968 40.1 Merger related and other non-recurring charges......................................... 12,924 1.8 - - - - Depreciation and amortization..................... 18,060 2.4 13,574 2.3 11,631 2.5 -------- ----- -------- ----- -------- ----- Operating income................................... 59,088 8.1 48,429 8.3 29,843 6.4 Interest income.................................... 2,598 0.3 1,503 0.2 1,674 0.4 Interest expense................................... 15,780 2.2 24,123 4.1 23,267 5.0 -------- ----- -------- ----- -------- ----- Income before provision (benefit) for income tax... 45,906 6.2 25,809 4.4 8,250 1.8 Provision for income tax........................... 20,558 2.8 11,160 1.9 841 0.2 Reduction of valuation allowances.................. - - (55,900) (9.6) - - -------- ----- -------- ----- -------- ----- Net provision (benefit) for income tax............. 20,558 2.8 (44,740) (7.7) 841 0.2 -------- ----- -------- ----- -------- ----- Income (loss) before extraordinary items........... 25,348 3.4 70,549 12.1 7,409 1.6 Extraordinary items, net........................... 951 0.1 - - - - -------- ----- -------- ----- -------- ----- Net income......................................... $ 24,397 3.3% $ 70,549 12.1% $ 7,409 1.6% ======== ===== ======== ===== ======== ===== EBITDA............................................. $ 90,072 12.3% $ 62,003 10.6% $ 41,474 8.9% ======== ===== ======== ===== ======== =====
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 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. The Company reported CONSOLIDATED NET INCOME of $24.4 million ($1.28 diluted earnings per share) in 1997, on revenues of $730.2 million. Reflected in the consolidated net income are merger related and other non-recurring charges of $12.9 million, $2.1 million in amortization related to the write-off of Langdon Rieder acquisition goodwill and an extraordinary loss of $1.0 million net of a tax benefit of $0.7 million resulting from debt extinguishment. Excluding these charges and their related tax impact, the Company's consolidated net income would have been $33.6 million (or 4.6% of revenue) and diluted earnings would have been $1.83 per share. REVENUES on a consolidated basis were $730.2 million, an increase of $147.2 million or 25.2% for the year ended December 31, 1997, compared to the year ended December 31, 1996. The overall increase reflected a continued improvement in the commercial real estate markets across the country, the acquisition of Koll Real Estate Services ("Koll") at the end of August 1997 and a full year of revenue from L.J. Melody & Company ("L.J. Melody") which was acquired in July of 1996. This improvement reflected both the Company's position and increasing confidence in the national economy and, in particular, real estate assets and improving real estate market liquidity. COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis were $365.7 million, an increase of $73.4 million or 25.1% for the year ended December 31, 1997, compared to the year ended December 31, 1996. The increase in these costs is attributable 14 both to the increase in revenue since most of the Company's sales professionals are compensated based on revenue and to an increasing number of sales personnel becoming entitled to commissions at a rate above 50.0%. As a percentage of revenue, commissions fees and other incentives were 50.1% in 1996 and 1997. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis was $274.4 million, an increase of $45.6 million or 20.0% for the year ended December 31, 1997, compared to the year ended December 31, 1996. This is consistent with increased operating activity, and reflects a decrease in operating, administrative and other as a percentage of revenue from 39.3% to 37.6%. MERGER RELATED AND OTHER NON-RECURRING CHARGES were $12.9 million for the year ended December 31, 1997. These charges represent $8.8 million of accrued merger costs, $2.4 million of merger related incentive payments to certain Westmark sellers and $1.7 million related to an accelerated contingent note payment. CONSOLIDATED INTEREST INCOME was $2.6 million, an increase of $1.1 million or 72.9% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, which directly relates to increased cash balances. CONSOLIDATED INTEREST EXPENSE was $15.8 million, a decrease of $8.3 million or 34.6% for the year ended December 31, 1997, as compared to the year ended December 31, 1996. The decrease is the result of the payment of a portion of the senior debt with the net proceeds from the Company's initial public offering in late 1996 ("Offering"), a reduction in interest rates due to debt refinancing in late August 1997, and other pay downs during 1997. Interest expense for 1998 is expected to increase as a result of the repurchase in January of 1998 of all of the Company's preferred stock and the debt expected to be associated with acquisitions. NET PROVISION FOR INCOME TAX on a consolidated basis in 1997 was $20.6 million, compared to a $44.7 million benefit for 1996. The 1997 provision is the result of positive pre-tax income and the use of the full effective tax rate, whereas the benefit in 1996 resulted primarily from the recognition of a portion of the Company's net operating loss ("NOL") carryforwards and other deferred tax assets by reversing the related valuation allowance. See Note 9 to the Company's consolidated financial statements for discussion of the Company's deferred taxes and related valuation allowances. In early 1998 the Company repurchased its outstanding preferred stock and triggered a limitation on the annual amount of NOL it can use to offset future taxable income. This limitation does not affect the way taxes are reported for financial reporting purposes, but it will affect the actual amount of taxes paid. EXTRAORDINARY ITEMS of $1.0 million relate to the write-off of deferred loan costs due to extinguishment of certain senior and senior subordinated debt. The amount is net of a tax benefit of $0.7 million. There were no corresponding charges incurred in 1996. EBITDA was $90.1 million for the year ended December 31, 1997 as compared to $62.0 million for the year ended December 31, 1996. EBITDA effectively removes the impact of certain non-cash and non-recurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger related and other non-recurring charges, extraordinary items, and income taxes. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash (subject to the payment of interest and income taxes) 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. 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. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 CONSOLIDATED NET INCOME for the year ended December 31, 1996 was $70.5 million ($4.99 diluted earnings per share), which included the current year tax provision of $11.2 million offset by the cumulative year-to-date tax benefit resulting from reversal of valuation allowances of $55.9 million or a net benefit for income tax of $44.7 million. If the Company had not recorded tax benefits related to projected future taxable income for the year ended December 31, 1996, the Company's net income for such period would have been $24.2 million ($1.68 diluted earnings per share). REVENUE on a consolidated basis in 1996 was $583.1 million, an increase of $114.6 million or 24.5% from $468.5 million in 1995. The overall increase in revenue, compared to 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 years resulting from declining vacancy levels and the return of some bargaining power to landlords. 15 COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1996 were $292.3 million, an increase of $53.3 million or 22.3% from $239.0 million in 1995. The increase in these costs is largely 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 51.0% in 1995 to 50.1% in 1996. The decrease in commissions, fees and other incentives as a percentage of revenue is primarily due to the significant revenue growth in investment management and advisory, which does not incur this type of revenue-based expense. Excluding investment management and advisory, commissions, fees and other incentives were relatively flat as a percentage of revenues. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1996 was $228.8 million, an increase of $40.8 million or 21.7% from $188.0 million in 1995, and a decrease as a percentage of revenue from 40.1% for 1995 to 39.3% for 1996. CONSOLIDATED INTEREST INCOME in 1996 was $1.5 million, a decrease of $0.2 million or 10.2% from $1.7 million in 1995. CONSOLIDATED INTEREST EXPENSE in 1996 was $24.1 million, an increase of $0.8 million or 3.7% from $23.3 million in 1995 primarily resulting from debt incurred with respect to the Westmark acquisition in June 1995 and the L.J. Melody acquisition in July 1996, offset in part by reduced average borrowing levels on other Company indebtedness and paydown of a portion of the senior debt with the net proceeds from the Offering. NET PROVISION (BENEFIT) FOR INCOME TAX on a consolidated basis in 1996 was a benefit of $(44.7) million, compared to a $0.8 million provision in 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 was 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 was recorded as a tax benefit (a reduction in income tax provision). During the fourth quarter of 1996, the Company further reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. For the year ended December 31, 1996, a $11.2 million provision for income taxes was recorded without regard to the income tax benefit resulting from the reduction of the valuation allowance. Net income for the year ended December 31, 1996 was $70.5 million ($4.99 diluted earnings per share), which includes the current year provision of $11.2 million offset by the cumulative year-to-date tax benefit of $55.9 million or a net benefit for income tax of $44.7 million. If the Company had not recorded tax benefits related to projected future taxable income for the year ended December 31, 1996, the Company's net income for such period would have been $24.2 million ($1.68 diluted earnings per share). The $55.9 million recognized tax benefit has a material effect on the reported net income for the year ended December 31, 1996. This $55.9 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. EBITDA was $62.0 million for the year ended December 31, 1996 as compared to $41.5 million for the year ended December 31, 1995. 16 SEGMENT OPERATIONS The Company provides integrated real estate services. With the acquisition and integration of Koll, the Company restructured into four global business units to best serve clients, as well as to better reflect market opportunities, and to encourage better investment community understanding of Company prospects. The four units are Brokerage Services, Corporate Services, Institutional Management Services and Financial Services. Brokerage Services consists of brokerage (commercial property sales and leasing). Corporate Services consists of outsourcing, transaction management, advisory services and facilities management. Institutional Management Services consists of property management. Financial Services consists of investment property services (acquisitions and sales on behalf of investors), mortgage loan origination and servicing through L.J. Melody, investment management and advisory services through Westmark Realty Advisors L.L.C. ("Westmark"), capital markets activities, valuation and appraisal services and real estate market research. The following tables summarize the revenue, cost and expenses, and operating income by operating segment for the years ended December 31, 1997, 1996 and 1995.
Year Ended December 31, ---------------------------------------------------------- 1997 1996 1995 ----------------- ----------------- ------------------ (Dollars in thousands) BROKERAGE SERVICES Revenue.................................... $423,485 100.0% $345,906 100.0% $301,272 100.0% Costs and expenses: Commissions, fees and other incentives... 237,697 56.1 191,830 55.5 168,049 55.8 Operating, administrative and other...... 133,661 31.6 122,845 35.5 100,502 33.4 Depreciation and amortization............ 8,200 1.9 7,092 2.0 7,484 2.4 -------- ----- -------- ----- -------- ----- Operating income........................... $ 43,927 10.4% $ 24,139 7.0% $ 25,237 8.4% ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 52,127 12.3% $ 31,231 9.0% $ 32,721 10.9% ======== ===== ======== ===== ======== ===== CORPORATE SERVICES Revenue.................................... $ 37,608 100.0% $ 25,564 100.0% $ 21,750 100.0% Costs and expenses: Commissions, fees and other incentives... 18,429 49.0 14,286 55.9 12,208 56.1 Operating, administrative and other...... 16,693 44.4 10,700 41.9 8,120 37.3 Depreciation and amortization............ 898 2.4 243 0.9 268 1.3 -------- ----- -------- ----- -------- ----- Operating income (loss).................... $ 1,588 4.2% $ 335 1.3% $ 1,154 5.3% ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 2,486 6.6% $ 578 2.3% $ 1,422 6.5% ======== ===== ======== ===== ======== ===== INSTITUTIONAL MANAGEMENT SERVICES Revenue.................................... $ 67,442 100.0% $ 44,783 100.0% $ 41,067 100.0% Costs and expenses: Commissions, fees and other incentives... 22,230 33.0 17,416 38.9 15,630 38.1 Operating, administrative and other...... 38,625 57.3 21,518 48.0 23,203 56.5 Depreciation and amortization............ 2,040 3.0 700 1.6 506 1.2 -------- ----- -------- ----- -------- ----- Operating income (loss).................... $ 4,547 6.7% $ 5,149 11.5% $ 1,728 4.2% ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 6,587 9.8% $ 5,849 13.1% $ 2,234 5.4% ======== ===== ======== ===== ======== ===== FINANCIAL SERVICES Revenue.................................... $201,689 100.0% $166,815 100.0% 104,371 100.0% Costs and expenses: Commissions, fees and other incentives... 87,349 43.3 68,734 41.2 43,131 41.3 Operating, administrative and other...... 85,468 42.4 73,736 44.2 56,143 53.8 Depreciation and amortization............ 6,922 3.4 5,539 3.3 3,373 3.2 -------- ----- -------- ----- -------- ----- Operating income........................... $ 21,950 10.9% $ 18,806 11.3% $ 1,724 1.7% ======== ===== ======== ===== ======== ===== EBITDA..................................... $ 28,872 14.3% $ 24,345 14.6% $ 5,097 4.9% ======== ===== ======== ===== ======== ===== MERGER RELATED AND OTHER NON-RECURRING CHARGES $(12,924) $ - $ - ======== ======== ======== TOTAL OPERATING INCOME $ 59,088 $ 48,429 $ 29,843 ======== ======== ======== TOTAL EBITDA $ 90,072 $ 62,003 $ 41,474 ======== ======== ========
17 The following discussion of each of the Company's four operating segments should be read in conjunction with Note 12 to the Consolidated Financial Statements. Segment operating income excludes interest income, interest expense, merger related and other non-recurring charges, provision for income taxes and extraordinary items. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 BROKERAGE SERVICES Revenue increased by $77.6 million or 22.4% for the year ended December 31, 1997, compared to the year ended December 31, 1996, due to the continued improvement of the real estate market. The strong market resulted in higher property values, higher rental rates and increased activity, which translated to increases in both the total number and size of brokerage sales and lease transactions closed during 1997 as compared to 1996. Commissions, fees and other incentives increased by $45.9 million or 23.9% for the year ended December 31, 1997 compared to the year ended December 31, 1996, primarily due to increased revenues, which resulted in higher commission eligibility levels and, thus, higher commissions. The increase in commissions, fees and other incentives was greater than the increase in revenues as a result of a tiered commission program whereby after certain eligibility criteria is achieved, producers receive an additional premium paid annually. Operating, administrative, and other increased by $10.8 million or 8.8% for the year ended December 31, 1997 compared to the year ended December 31, 1996, but decreased as a percentage of revenue from 35.5% to 31.6%. The increase in the amount is primarily a result of additional personnel requirements and business promotional expenses, which contributed to the increase in revenue and incentive compensation based on increased operating results. Depreciation and amortization increased by $1.1 million or 15.6% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, primarily due to the write-off of Langdon Rieder acquisition goodwill of $2.1 million, partially offset by reduced depreciation due to an increase in fully depreciated assets. CORPORATE SERVICES Revenue increased by $12.0 million or 47.1% for the year ended December 31, 1997, compared to the year ended December 31, 1996, primarily due to the Koll acquisition and an increase in the total number and size of corporate services sales and lease transactions closed during 1997 compared to 1996. Commissions, fees and other incentives increased by $4.1 million or 29.0% for the year ended December 31, 1997 compared to the year ended December 31, 1996, but decreased as a percentage of revenue from 55.9% to 49.0% primarily because the base contract management fee revenues, which increased as a result of the Koll acquisition, do not have corresponding commission expenses. Operating, administrative, and other increased $6.0 million or 56.0% for the year ended December 31, 1997, compared to the year ended December 31, 1996, primarily related to the Koll acquisition and to additional personnel requirements and business promotional expenses which contributed to the increase in revenue. Depreciation and amortization increased by $0.7 million or 269.5% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, primarily related to the Koll acquisition. INSTITUTIONAL MANAGEMENT SERVICES Revenue increased by $22.7 million or 50.6% for the year ended December 31, 1997, compared to the year ended December 31, 1996. Commissions, fees and other incentives increased by $4.8 million or 27.6% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Operating, administrative, and other increased $17.1 million or 79.5% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Depreciation and amortization increased by $1.3 million or 191.4% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Each of these increases in Institutional Management Services were primarily related to the Koll acquisition. FINANCIAL SERVICES Revenue increased by $34.9 million or 20.9% for the year ended December 1997 compared to the year ended December 31, 1996. The increase in revenue is primarily due to an increase in the total number and size of investment properties and mortgage banking transactions closed during 1997 compared to 1996, a full year of mortgage banking revenue related to the L.J. Melody acquisition compared to six months for the same period last year and an increase in valuation and appraisal services revenue related to heightened real estate market liquidity, partially offset by a decrease in investment advisory services. Commissions, fees and other incentives increased by $18.6 million or 27.1% for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase is primarily a result of the revenue increase and the resulting higher commission eligibility levels in investment properties, mortgage banking and valuation and appraisal services, increased mortgage banking commissions related to the L.J. 18 Melody acquisition which includes a full year of activity compared to six months for same period last year, and mortgage banking base salary costs. Operating, administrative, and other increased by $11.7 million or 15.9% for the year ended December 31, 1997 compared to the year ended December 31, 1996, primarily as a result of business promotional expenses and additional personnel requirements which contributed to the increase in revenue, and the L.J. Melody and Koll acquisitions. Depreciation and amortization increased by $1.4 million or 25.0% for the year ended December 31, 1997 as compared to the year ended December 31, 1996, primarily related to the L.J. Melody and Koll acquisitions. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 BROKERAGE SERVICES Revenue increased by $44.6 million or 14.8% for the year ended December 31, 1996, compared to the year ended December 31, 1995 due to an increase in the total number and size of brokerage sales transactions closed during 1996, compared to 1995, and, in part, from an increase in total size of brokerage lease transactions closed during 1996. Commissions, fees and other incentives increased by $23.8 million or 14.2% for the year ended December 31, 1996 compared to the year ended December 31, 1995, primarily due to increased revenues, which resulted in higher commission eligibility levels and, thus, higher commissions, but decreased as a percentage of revenues from 55.8% to 55.5%. Operating, administrative, and other increased by $22.3 million or 22.2% for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase is primarily a result of additional personnel requirements and business promotional expenses, which contributed to the increase in revenue and incentive compensation based on increased operating results. Depreciation and amortization decreased by $0.4 million or 5.2% for the year ended December 31, 1996, as compared to the year ended December 31, 1995, primarily due to fully depreciated assets. CORPORATE SERVICES Revenue increased by $3.8 million or 17.5% for the year ended December 31, 1996, compared to the year ended December 31, 1995, primarily due to an increase in the total number and size of corporate services sales and lease transactions closed during 1996, compared to 1995. Commissions, fees and other incentives increased by $2.1 million or 17.0% for the year ended December 31, 1996 compared to the year ended December 31, 1995, primarily due to increased revenues, which resulted in higher commission eligibility levels and, thus, higher commissions. Operating, administrative, and other increased $2.6 million or 31.8% for the year ended December 31, 1996, compared to the year ended December 31, 1995, primarily related to additional personnel requirements and business promotional expenses which contributed to the increase in revenue. Depreciation and amortization was $0.2 million for the years ended December 31, 1996 and 1995. INSTITUTIONAL MANAGEMENT SERVICES Revenue increased by $3.7 million or 9.0% for the year ended December 31, 1996, compared to the year ended December 31, 1995. Commissions, fees and other incentives increased by $1.8 million or 11.4% for the year ended December 31, 1996 compared to the year ended December 31, 1995. Operating, administrative, and other decreased $1.7 million or 7.3% for the year ended December 31, 1996, compared to the year ended December 31, 1995. Depreciation and amortization increased by $0.2 million or 38.3% for the year ended December 31, 1996 as compared to the year ended December 31, 1995. FINANCIAL SERVICES Revenue increased by $62.4 million or 59.8% for the year ended December 1996, as compared to the year ended December 31, 1995. The increase in revenue is primarily due to an increase in the total number and size of investment properties sale transactions closed during 1996 compared to 1995, an increase in mortgage banking revenue related to the L.J. Melody acquisition, an increase in valuation and appraisal services revenue related to heightened real estate market liquidity, and an increase in investment advisory services as a result of the Westmark acquisition. Commissions, fees and other incentives increased by $25.6 million or 59.4% for the year ended December 31, 1996, compared to the year ended December 31, 1995. The increase is primarily a result of the revenue increase and the resulting higher commission eligibility levels in investment properties and valuation and appraisal services, increased mortgage banking commissions related to the L.J. Melody acquisition, and mortgage banking base salary costs related to newly hired producers. As newly hired producers start generating loan fees, commissions, fees and other incentives as a percentage of revenue should decline. Operating, administrative, and other increased by $17.6 million or 31.3% for the year ended December 31, 1996, compared to the year ended December 31, 1995, primarily as a result of the Westmark and L.J. Melody acquisitions. Depreciation and amortization increased by $2.2 million or 64.2% for the year ended December 31, 1996, as compared 19 to the year ended December 31, 1995, primarily as a result of a full year of Westmark expense in 1996 and the L.J. Melody acquisition in July 1996 as compared to the six months in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and non-acquisition related capital expenditures primarily with internally generated funds and borrowings under a revolving credit facility. The Company's EBITDA was $90.1 million and $62.0 million for the years ended December 31, 1997 and 1996, respectively. The improvement in EBITDA reflects the overall period to period revenue growth discussed in Results of Operations. EBITDA effectively removes the impact of certain non-cash and non-recurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger related and other non-recurring charges, extraordinary items and income taxes. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash (subject to the payment of interest and income taxes) 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. 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. Net cash provided by operating activities was $80.8 million in 1997 compared to $65.7 million in 1996. The increase primarily resulted from an increase in operating income before non-cash charges and benefits and changes in components of operating assets and liabilities. Net cash provided by operating activities was $65.7 million in 1996, compared to $30.6 million in 1995. The increase resulted primarily from an improvement in operating income, excluding the tax benefit from the reduction of valuation allowances. See "Results of Operations." Additionally, non-cash charges, consisting of depreciation, amortization and deferred compensation and interest, included in net income in 1996, were $3.0 million higher than 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 $16.0 million. Net cash used in investing activities was $18.0 million in 1997 compared to $10.9 million in 1996 as a result of additional supplemental purchase price payments to the Westmark and L.J. Melody sellers, an increase in purchases of property and equipment and an increase in short term investments (included in other current assets), offset by cash acquired from the Koll acquisition net of related acquisition costs. Net cash used in investing activities decreased to $10.9 million in 1996 compared to $24.9 million in 1995 as a result of the Westmark acquisition in June 1995 which had a higher cash payment associated with it than the L.J. Melody acquisition in July 1996. Net cash used in financing activities was $65.0 million in 1997 compared to $28.5 million in 1996. The increase primarily resulted from increases in repayments of the senior revolving credit line, senior term loans, and the senior subordinated term loans, offset by borrowings from the new revolving credit facility. Net cash used in financing activities was $28.5 million in 1996 compared to $11.5 million in 1995. The $17.0 million difference between periods resulted primarily from $95.9 million repayment of amounts outstanding under the Senior Secured Credit Agreement in 1996 as compared to $19.0 million repayment in 1995, $6.0 million repayment of amounts outstanding under the Senior Subordinated Credit Agreement as compared to no repayments in 1995, and a $10.0 million decrease in proceeds from the Senior Subordinated Credit Agreement, partially offset by $79.5 million proceeds from issuance of common stock in 1996. During the third quarter of 1997, the Company refinanced substantially all of its outstanding debt through a credit agreement with Bank of America, as agent for a group of banks, which provided a $300.0 million five-year revolving credit facility ("Revolving Credit Facility") which is included in senior term loans in the accompanying balance sheet. This balance consists of various borrowings pursuant to the Revolving Credit Facility. The credit facility also provided for the refinancing of substantially all the debt of Koll assumed pursuant to the merger and provides additional borrowing capacity for the Company for general corporate purposes (including acquisitions). The Revolving Credit Facility is subject to mandatory commitment reductions of $30.0 million, on December 31, 1999 and $60.0 million on December 31, 2000 and 2001. In the event that on any date the Company's loan obligations exceed the commitments in effect on such date after giving effect to the mandatory reductions, the Company shall, on such date, make mandatory repayment of the loans in a principal amount equal to such excess. Payment in full of all outstanding amounts under the credit facility will be no later than October 31, 2002. The Revolving Credit Facility currently bears interest at a rate of LIBOR plus 1.0%, and is payable upon the maturity of the various underlying revolving loans, which is currently between one and three months. 20 At December 31, 1997, the effective interest rate was 6.78%. The interest rate is subject to change if the Company's leverage increases or decreases. As of December 31, 1997, the Company had $120.0 million outstanding under the Revolving Credit Facility, and $31.1 million outstanding other long-term indebtedness, consisting primarily of acquisition debt. However, at the end of January 1998, the Company borrowed $78.0 million to repurchase its preferred stock and expects to use approximately $46.0 million to fund the acquisition of REI Limited ("REI"). See Note 13. Annual aggregate maturities of long-term debt as of December 31, 1997 are as follows (in thousands): 1998 - $4,949; 1999 - - $8,775; 2002 - $120,000; and $17,329; thereafter. The Company will have additional maturities of long-term debt in 1999, 2000 and 2001 to the extent the outstanding balance at the time on the Revolving Credit Facility exceeds $270,000, $210,000 and/or $150,000, respectively. In connection with the Westmark acquisition, the sellers were 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. In August 1997 the Company agreed to buy out the Westmark supplemental purchase price and a related incentive plan for $11.1 million and $2.4 million, respectively. The Company paid $4.0 million of the supplemental purchase price on August 15, 1997. The remaining payments were made on January 15, 1998 and February 14, 1998 for $5.0 million and $2.1 million, respectively. The supplemental purchase price has been recorded as additional goodwill and is being amortized over Westmark goodwill's remaining estimated useful life, initially 30 years. The related incentive plan buyout was paid on August 15, 1997 and is included in merger related and other non-recurring charges in the accompanying statement of operations. In October 1997 the Company paid the outstanding balance of the senior and contingent notes related to the L.J. Melody acquisition for $1.1 million and $3.0 million, respectively. Of this amount, $1.7 million was related to the acceleration of the contingent note and is included in merger related and other non-recurring charges in the accompanying statements of operations. Effective April 30, 1997, the Company amended the term of its inventoried property loan to extend the settlement date to March 2, 1999. All other terms of the agreement remain in effect. Effective October 1996, a dividend on the Company's preferred stock was reinstated and a conversion feature was added. The $0.25 per share quarterly dividend on the Company's preferred stock has accrued from October 1, 1996, and resulted in a cost of $1.0 million per quarter. In January 1998 the Company purchased all 4.0 million of its preferred stock. The total cost to purchase the preferred shares was $77.4 million, including $5.0 million of previously accrued dividends. This transaction will reduce income available to common stockholders in the first quarter of 1998 by $32.3 million, which represents the excess of the redemption price over book value which is treated as a dividend to preferred shareholders under generally accepted accounting principles. The Company has assessed and continues to assess the impact of the Year 2000 on its computer systems and is in the process of modifying the affected hardware and software. The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year, which may cause date sensitive systems to recognize the year 2000 as 1900 or not at all. Costs related to the maintenance or modification of these systems will be expensed as incurred. No charges were incurred for the Year 2000 project in 1997 but are estimated to be $3.3 million and $0.8 million in 1998 and 1999, respectively. The Company expects to have capital expenditures of approximately $12.0 million in 1998, exclusive of business acquisitions. The Company expects to use net cash provided by operating activities for the next several years primarily to fund capital expenditures primarily for computer related purchases, acquisitions, including earnout payments, and to make required principal payments under the Company's outstanding indebtedness. The Company believes that it can satisfy its non-acquisition obligations as well as working capital requirements from internally generated cash flow, borrowings under the revolving credit facility or any replacement credit facilities. Material future acquisitions that require cash will require new sources of capital such as an expansion of the existing credit line and raising money by issuing additional debt or equity. The Company anticipates that its existing sources of liquidity, including cash flow from operations, will be sufficient to meet the Company's anticipated non-acquisition cash requirements for the foreseeable future and in any event for at least the next twelve months. RECENT ACQUISITIONS On August 28, 1997 the Company purchased Koll Real Estate Services ("Koll") through a merger. Under the terms of the merger agreement, the Company exchanged 5,187,737 shares of its common stock and 407,087 stock options, as well as warrants to purchase an additional 599,967 shares at $30.00 per share, subject to adjustment, for all of the outstanding stock and stock options of Koll. The transaction, a tax-free reorganization accounted for as a purchase, resulted in the issuance of equity valued at approximately $132.9 million and the assumption of debt and minority interest of approximately $57.4 million as of August 28, 1997. 21 On December 9, 1997 the Company announced that it had reached an agreement with REI, which owns and operates the internationally known real estate services firm of Richard Ellis in all major commercial real estate locations in the world other than the United Kingdom, to purchase all of REI's outstanding stock. The net purchase price for REI is approximately (Pounds)57.2 million (approximately $94.5 million using the exchange rate at March 4, 1998) and will be payable entirely in shares of the Company's common stock, par value $0.01, but with each shareholder of REI having the right to elect to have up to 50% of the purchase price paid in cash or debt. The purchase is expected to be completed in the second quarter of 1998. For 1997 REI had revenues of approximately $119.0 million and pre-tax income of $7.9 million. Its principle operations are in the Netherlands, France, Spain, Brazil, Australia, Hong Kong (including Taiwan and the People's Republic of China) and Singapore. In February 1998 the Company, through L.J. Melody, acquired Cauble & Company of Carolina for approximately $2.2 million and substantially all of the assets of North Coast Mortgage Company, for approximately $3.3 million, both regional mortgage banking firms. RECENT LITIGATION The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. In August 1993, a former commissioned salesperson of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergin County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996 a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. The Company hired new counsel and in January 1997 filed motions for a new trial, reversal of the verdict and reduction of damages. On March 27, 1997 the trial court denied the Company's motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The Company has been advised by appellate counsel that it has a meritorious basis to pursue an appeal of the verdict, which the Company has done. The Company recorded an initial accrual in connection with this matter of $250,000 in 1994 and increased the accrual to $800,000 in 1995, which represented the Company's estimate of its loss exposure for this matter based on its assessment and analysis as of those dates. In 1996, further adjustments were made to the reserve to reflect the Company's estimate of ultimate loss, if any. The Company believes its reserves for this case at December 31, 1997 are adequate. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of pending lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. NET OPERATING LOSSES The Company had federal income tax NOLs of approximately $133.6 million as of December 31, 1997, corresponding to $46.8 million of the Company's $67.8 million in net deferred tax assets before valuation allowance, of which $29.9 has been 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. The ability of the Company to utilize NOLs will be limited in 1998 and subsequent years as a result of the Company's 1996 public offering, the 1997 Koll acquisition and the 1998 repurchase of preferred stock which cumulatively caused a more than 50.0% change of ownership within a three year period. As a result of the limitation, the Company will only be able to use approximately $26.0 million of its NOL in 1998 and each subsequent year. 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 taxable income. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and SFAS No. 128, Earnings per Share. These standards did not have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which are effective for annual financial statements ending December 31, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its 22 components in the financial statements. SFAS 131 requires the use of the "management approach" for segment reporting, which is based on the way that the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. The adoption of these statements is not expected to have a material impact on the Company's financial statements. SAFE HARBOR STATEMENT REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA Portions of the Annual Report, including Management's Discussion and Analysis, are forward-looking and involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggesting the forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: commercial real estate vacancy levels; property values; rental rates; any general economic recession domestically or internationally; and not successfully completing any capital expenditure or acquisition. REPORT OF MANAGEMENT The Company's management is responsible for the integrity of the financial data reported by the Company and its subsidiaries. Fulfilling this responsibility requires the preparation and presentation of consolidated financial statements in accordance with generally accepted accounting principles. Management uses internal accounting controls, corporate-wide policies and procedures and judgement so that such statements reflect fairly the consolidated financial position, results of operations and cash flows of the Company. 23 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 twelve quarters and the percentage of the Company's revenues represented by each line item reflected in each consolidated income statement. In the opinion of management, this information has been presented on the same basis as the consolidated financial statements included in Item 8, 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.
1997 1996 ------------------------------------------------ ------------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------- (Dollars in thousands) Results of Operations: Revenue...................... $260,682 $177,520 $157,958 $134,064 $192,205 $147,168 $130,954 $112,741 Costs and expenses: Commissions, fees and other incentives........... 127,752 87,825 82,521 67,607 96,801 74,196 66,262 55,007 Operating, administrative and other.................. 89,042 68,809 60,206 56,390 69,603 56,042 53,594 49,560 Merger related and other non-recurring charges...... - 12,924 - - - - - - Depreciation and amortization............... 5,788 6,098 3,053 3,121 3,825 3,431 3,038 3,280 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)...... 38,100 1,864 12,178 6,946 21,976 13,499 8,060 4,894 Interest income.............. 639 740 587 632 468 286 354 395 Interest expense............. 3,773 4,158 4,104 3,745 6,240 6,196 5,759 5,928 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 34,966 (1,554) 8,661 3,833 16,204 7,589 2,655 (639) Provision (benefit) for income tax.................. 15,772 (569) 3,795 1,560 6,550 4,220 438 (48) Reduction of valuation allowances.................. - - - - (15,500) (40,400) - - -------- -------- -------- -------- -------- -------- -------- -------- Net provision (benefit) for income tax.................. 15,772 (569) 3,795 1,560 (8,950) (36,180) 438 (48) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary items.......... 19,194 (985) 4,866 2,273 25,154 43,769 2,217 (591) Extraordinary items, net..... - 951 - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............ $ 19,194 $ (1,936) $ 4,866 $ 2,273 $ 25,154 $ 43,769 $ 2,217 $ (591) ======== ======== ======== ======== ======== ======== ======== ======== Other Financial Data: EBITDA....................... $ 43,888 $ 20,886 $ 15,231 $ 10,067 $ 25,801 $ 16,930 $ 11,098 $ 8,174 Net cash provided by (used in) operating activities.... $ 55,055 $ 22,328 $ 19,218 $(15,766) $ 41,524 $ 22,150 $ 13,865 $(11,845) Net cash provided by (used in) investing activities.... $ (7,702) $ 330 $ (803) $ (9,843) $ (1,389) $ (9,401) $ 1,768 $ (1,884) Net cash provided by (used in) financing activities.... $(43,795) $(29,314) $ (3,512) $ 11,657 $(15,710) $(15,297) $ (4,306) $ 6,808 1995 --------------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ---------- --------- --------- --------- (Dollars in thousands) Results of Operations: Revenue...................... $143,570 $116,603 $108,361 $ 99,926 Costs and expenses: Commissions, fees and other incentives........... 71,449 57,804 57,370 52,395 Operating, administrative and other.................. 53,129 47,803 44,206 42,830 Merger related and other non-recurring charges...... - - - - Depreciation and amortization............... 3,458 3,546 2,297 2,330 -------- -------- -------- -------- Operating income (loss)...... 15,534 7,450 4,488 2,371 Interest income.............. 446 345 393 490 Interest expense............. 6,323 6,428 5,313 5,203 -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 9,657 1,367 (432) (2,342) Provision (benefit) for income tax.................. 603 138 26 74 Reduction of valuation allowances.................. - - - - -------- -------- -------- -------- Net provision (benefit) for income tax.................. 603 138 26 74 -------- -------- -------- -------- Income (loss) before extraordinary items.......... 9,054 1,229 (458) (2,416) Extraordinary items, net..... - - - - -------- -------- -------- -------- Net income (loss)............ $ 9,054 $ 1,229 $ (458) $ (2,416) ======== ======== ======== ======== Other Financial Data: EBITDA....................... $ 18,992 $ 10,996 $ 6,785 $ 4,701 Net cash provided by (used in) operating activities.... $ 30,082 $ 8,143 $ 6,890 $(14,483) Net cash provided by (used in) investing activities.... $ (2,928) $ (595) $(18,887) $ (2,478) Net cash provided by (used in) financing activities.... $(16,002) $ (8,098) $ 15,391 $ (2,760) AS A PERCENTAGE OF REVENUES ----------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------- ------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ------- -------- ------- -------- ------- -------- ------- -------- Results of Operations: Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Commissions, fees and other incentives........... 49.0 49.5 52.2 50.4 50.4 50.4 50.6 48.8 Operating, administrative and other.................. 34.2 38.8 38.1 42.1 36.2 38.1 40.9 44.0 Merger related and other non-recurring charges...... - 7.3 - - - - - - Depreciation and amortization............... 2.2 3.4 1.9 2.3 2.0 2.3 2.3 2.9 -------- -------- -------- -------- -------- -------- ------- -------- Operating income (loss)...... 14.6 1.0 7.8 5.2 11.4 9.2 6.2 4.3 Interest income.............. 0.2 0.4 0.3 0.5 0.2 0.2 0.3 0.3 Interest expense............. 1.4 2.3 2.6 2.8 3.2 4.2 4.4 5.2 -------- -------- -------- -------- -------- -------- ------- -------- Income (loss) before provision (benefit) for income tax.................. 13.4 (0.9) 5.5 2.9 8.4 5.2 2.1 (0.6) Provision for income tax..... 6.1 (0.3) 2.4 1.2 3.4 2.9 0.3 0.0 Reduction of valuation allowances.................. - - - - (8.1) (27.5) - - -------- -------- -------- -------- -------- -------- ------- -------- Net provision (benefit) for income tax.................. 6.1 (0.3) 2.4 1.2 (4.7) (24.6) 0.3 0.0 -------- -------- -------- -------- -------- -------- ------- -------- Income (loss) before extraordinary items......... 7.4 (0.6) 3.1 1.7 13.1 29.7 1.8 (0.6) Extraordinary items, net..... - 0.5 - - - - - - -------- -------- -------- -------- -------- -------- ------- -------- Net income (loss) 7.4% (1.1)% 3.1% 1.7% 13.1% 29.7% 1.8% (0.6)% ======== ======== ======== ======== ======== ======== ======= ======== AS A PERCENTAGE OF REVENUES ------------------------------------------------ 1995 ------------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ------- -------- ------- -------- Results of Operations: Revenue...................... 100.0% 100.0% 100.0% 100.0% Costs and expenses: Commissions, fees and other incentives........... 49.8 49.6 52.9 52.4 Operating, administrative and other.................. 37.0 41.0 40.8 42.9 Merger related and other non-recurring charges...... - - - - Depreciation and amortization............... 2.4 3.0 2.1 2.3 -------- -------- -------- -------- Operating income (loss)...... 10.8 6.4 4.2 2.4 Interest income.............. 0.3 0.3 0.3 0.5 Interest expense............. 4.4 5.5 4.9 5.2 -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 6.7 1.2 (0.4) (2.3) Provision for income tax..... 0.4 0.1 0.0 0.1 Reduction of valuation allowances.................. - - - - -------- -------- -------- -------- Net provision (benefit) for income tax.................. 0.4 0.1 0.0 0.1 -------- -------- -------- -------- Income (loss) before extraordinary items......... 6.3 1.1 (0.4) (2.4) Extraordinary items, net..... - - - - -------- -------- -------- -------- Net income (loss) 6.3% 1.1% (0.4)% (2.4)% ======== ======== ======== ========
24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk consists of fluctuations on interest rates on debt obligations, changes in the value of certain investments and foreign currency fluctuations related to certain foreign investments. Following the REI acquisition, the Company will have significant currency expense related to its operations in approximately 30 countries. The Company currently manages its interest rate risk by maintaining a large portion of its debt in floating rate instruments. The market risk related to the Company's domestic investments, which primarily consist of investments in investment fund limited partnerships where the Company acts as the investment manager, is minimized under the arrangements whereby the Company's capital funding obligations for its investments are tied to the future operations of the funds. Although the Company had certain foreign investments at December 31, 1997, these investments and the related foreign currency risk, are not material to the Company's consolidated financial statements. As a result of its overall market risk exposure based on the current operations, as discussed above, the Company does not engage in activities using derivative instruments that would be considered material. The majority of the Company's interest rates on debt obligations are variable. Interest rates range between zero and 12.0% at December 31, 1997 which reflect fixed margins of 1.0% to 3.5% over LIBOR, short-term commercial paper borrowing rate and other indices as applicable. The table below represents annual aggregate maturities of long-term debt as of December 31, 1997 (in thousands):
Commercial Year of Fixed LIBOR Paper Borrowing Grand Maturity Rate Plus 1.0% Rate plus 3.5% Total - -------------------------- -------- --------- ---------------- --------- 1998 $ 4,949 $ - $ - $ 4,949 1999 1,305 - 7,470 8,775 2000 - - - - 2001 - - - - 2002 - 120,000 - 120,000 Thereafter 17,329 - - 17,329 ------- -------- --------------- -------- Total $23,583 $120,000 $7,470 $151,053 ======= ======== =============== ======== Average Interest Rate 10.72% 6.78% 9.08% 7.51% ======= ======== =============== ========
Estimated fair values for these liabilities are not presented because the Company believes that they are not materially different from book value, primarily because the majority of the Company's debt is based on variable rates. Due to such immateriality, the Company does not consider it practicable to incur the excessive costs to engage an investment banker to perform a fair value analysis of these liabilities. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants............................................... 27 Consolidated Balance Sheets as of December 31, 1997, and 1996.......................... 28 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995......................................................................... 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995......................................................................... 30 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995................................................ 32 Notes to Consolidated Financial Statements............................................. 33 SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS I-Condensed Financial Information of Registrant........................................ 51 II-Valuation and Qualifying Accounts................................................... 52 Exhibit 12-Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends... 53
All other schedules and exhibits 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. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of CB Commercial Real Estate Services Group, Inc.: We have audited the accompanying consolidated balance sheets of CB Commercial Real Estate Services Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997, and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedules referred to below 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 Real Estate Services Group, Inc. and subsidiaries as of December 31, 1997, and 1996, and the results of their operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits 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 Los Angeles, California February 14, 1998 27 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share data)
December 31, ----------------------- 1997 1996 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents................................................. $ 47,181 $ 49,328 Receivables, less allowance of $8,980 and $4,423 for doubtful accounts at December 31, 1997 and 1996, respectively.............................. 77,734 40,927 Deferred taxes............................................................ 2,890 16,257 Prepaid expenses.......................................................... 9,819 1,685 Other assets.............................................................. 12,789 5,755 --------- --------- Total current assets..................................................... 150,413 113,952 Property and equipment, net................................................ 50,309 40,835 Goodwill, net of accumulated amortization of $13,561 and $7,563 at December 31, 1997 and 1996................................................ 196,358 65,362 Other intangible assets, net of accumulated amortization of $261,519 and $253,061 at December 31, 1997 and 1996.................................... 43,026 10,521 Inventoried property....................................................... 7,355 7,355 Deferred taxes............................................................. 34,967 35,146 Other assets, net.......................................................... 22,763 5,773 --------- --------- Total assets............................................................. $ 505,191 $ 278,944 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Compensation and employee benefits........................................ $ 56,389 $ 38,747 Accounts payable and accrued expenses..................................... 61,345 28,020 Reserve for bonus and profit sharing...................................... 33,538 21,414 Current maturities of long-term debt...................................... 4,949 15,314 Current portion of capital lease obligations.............................. 1,655 2,510 --------- --------- Total current liabilities................................................ 157,876 106,005 --------- --------- Long-term debt, less current maturities: Senior term loans......................................................... 136,551 65,528 Senior subordinated term loans............................................ - 72,872 Inventoried property loan................................................. 7,470 7,470 Other long-term debt...................................................... 2,083 2,659 --------- --------- Total long-term debt..................................................... 146,104 148,529 --------- --------- Other long-term liabilities................................................ 35,768 25,830 --------- --------- Total liabilities........................................................ 339,748 280,364 --------- --------- Minority interest.......................................................... 7,672 95 Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $.01 par value........................................... 40 40 Common stock, $.01 par value.............................................. 188 133 Additional paid-in capital................................................ 333,981 198,026 Notes receivable from sale of stock....................................... (5,956) (5,109) Accumulated deficit....................................................... (170,482) (194,605) --------- --------- Total stockholders' equity (deficit)..................................... 157,771 (1,515) --------- --------- Total liabilities and stockholders' equity (deficit)..................... $ 505,191 $ 278,944 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 28 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Year Ended December 31, ---------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- Revenue............................................. $ 730,224 $ 583,068 $ 468,460 Costs and expenses: Commissions, fees and other incentives........... 365,705 292,266 239,018 Operating, administrative and other.............. 274,447 228,799 187,968 Merger related and other non-recurring charges... 12,924 - - Depreciation and amortization.................... 18,060 13,574 11,631 ----------- ----------- ----------- Operating income.................................... 59,088 48,429 29,843 Interest income..................................... 2,598 1,503 1,674 Interest expense.................................... 15,780 24,123 23,267 ----------- ----------- ----------- Income before provision (benefit) for income tax.... 45,906 25,809 8,250 Provision for income tax............................ 20,558 11,160 841 Reduction of valuation allowances................... - (55,900) - ----------- ----------- ----------- Net provision (benefit) for income tax.............. 20,558 (44,740) 841 ----------- ----------- ----------- Income before extraordinary items................... 25,348 70,549 7,409 Extraordinary items, net............................ 951 - - ----------- ----------- ----------- Net income.......................................... $ 24,397 $ 70,549 $ 7,409 =========== =========== =========== Net income applicable to common stockholders........ $ 20,397 $ 69,549 $ 7,409 =========== =========== =========== Basic earnings per share............................ $1.34 $5.05 $0.55 =========== =========== =========== Weighted average shares outstanding for basic earnings per share............................... 15,237,914 13,783,882 13,499,862 =========== =========== =========== Diluted earnings per share.......................... $1.28 $4.99 $0.55 =========== =========== =========== Weighted average shares outstanding for diluted earnings per share............................... 15,996,929 14,126,636 13,540,541 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 29 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income................................................. $ 24,397 $ 70,549 $ 7,409 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization excluding deferred financing costs........................................ 18,060 13,574 11,631 Amortization of deferred financing costs................. 983 2,840 1,392 Extraordinary items, net................................. 951 - - Equity interest in (earnings) loss of unconsolidated subsidiaries........................................... 113 (145) 180 Provision for litigation, doubtful accounts and other.... 2,421 9,543 346 Deferred interest........................................ - 6,927 7,738 Deferred compensation.................................... 6,121 2,159 1,762 Deferred taxes........................................... 17,122 (46,128) - (Increase) decrease in receivables......................... (6,073) (14,378) (1,778) (Increase) decrease in prepaid expenses and other assets... (10,634) 794 396 Increase in compensation and employee benefits payable..... 19,772 19,793 3,276 Increase (decrease) in other operating liabilities......... 7,602 166 (1,720) -------- -------- -------- Net cash provided by operating activities............. 80,835 65,694 30,632 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment........................ (9,927) (3,002) (2,143) Proceeds from collections on notes receivable.............. 2,236 2,726 215 Increase in intangibles and goodwill....................... (8,478) (1,321) - Acquisitions of businesses including net assets acquired, intangibles and goodwill....................... 3,216 (8,625) (22,376) Other investing activities, net............................ (5,065) (684) (584) -------- -------- -------- Net cash used in investing activities................. (18,018) (10,906) (24,888) -------- -------- -------- Cash flows from financing activities: Proceeds from senior revolving credit line................. 16,000 21,000 14,000 Repayment of senior revolving credit line.................. (16,000) (21,000) (14,000) Proceeds from senior term loans............................ 155,000 - - Repayment of senior term loans............................. (93,950) (95,865) (18,997) Repayment of other loans................................... (45,431) (492) (251) Proceeds from senior subordinated term loan................ - - 10,000 Repayment of senior subordinated term loan................. (74,872) (6,044) - Repayment of capital leases................................ (2,773) (2,945) (2,167) Proceeds from issuance of common stock..................... 2,430 79,540 - Other financing activities, net............................ (5,368) (2,699) (54) -------- -------- -------- Net cash used in financing activities................. (64,964) (28,505) (11,469) -------- -------- -------- Net increase (decrease) in cash and cash equivalents......... (2,147) 26,283 (5,725) Cash and cash equivalents, at beginning of period............ 49,328 23,045 28,770 -------- -------- -------- Cash and cash equivalents, at end of period.................. $ 47,181 $ 49,328 $ 23,045 ======== ======== ========
30 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (Dollars in thousands)
Year Ended December 31, ----------------------------- 1997 1996 1995 -------- ------- ------- Supplemental Data: Cash paid during the year for: Interest (none capitalized)................. $ 14,073 $25,899 $14,410 Federal and state income taxes.............. $ 2,736 $ 1,284 $ 497 Non-cash investing and financing activities: Portion of Westmark acquisition financed by notes payable................. $ - $ - $20,283 Portion of L.J. Melody acquisition financed by notes payable................. $ - $ 3,667 $ - Equipment acquired under capital leases..... $ 2,299 $ 1,701 $ 3,347 Acquisition of Koll......................... $132,873 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. 31 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
Notes receivable Common stock Additional from Foreign Preferred Common options paid-in sale of Accumulated currency stock stock outstanding capital stock deficit translation Total --------- ------ ------------- ----------- -------- ---------- ------------ ---------- 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 gain...... - - - - - - 123 123 --------- ------ ------------ -------- ------- --------- ----------- --------- Balance, December 31, 1995... 40 93 263 110,063 - (265,270) 123 (154,688) Net income.............. - - - - - 70,549 - 70,549 Common stock issued for deferred compensation and other incentives...... - 8 - 7,660 (5,109) - - 2,559 Common stock options exercised............. - - (4) 104 - - - 100 Preferred dividend accrual.............. - - - (1,000) - - - (1,000) Net proceeds from initial public offering.............. - 32 - 79,399 - - - 79,431 Benefit of permanent deferred tax asset.... - - - 1,541 - - - 1,541 Foreign currency translation loss...... - - - - - - (7) (7) --------- ------ ------------ -------- ------- --------- ----------- --------- Balance, December 31, 1996... 40 133 259 197,767 (5,109) (194,721) 116 (1,515) Net income.............. - - - - - 24,397 - 24,397 Common stock issued for deferred compensation and other incentives...... - - - 4,707 (897) - - 3,810 Collection on stock subscription notes.... - - - - 50 - - 50 Common stock issued for Koll acquisition.. - 52 - 132,821 - - - 132,873 Common stock options exercised............. - 3 (17) 2,444 - - - 2,430 Preferred dividend accrual............... - - - (4,000) - - - (4,000) Foreign currency translation loss...... - - - - - - (274) (274) --------- ------ ------------ -------- ------- --------- ----------- --------- Balance, December 31, 1997... $ 40 $ 188 $ 242 $333,739 $(5,956) $(170,324) $ (158) $ 157,771 ========= ====== ============ ======== ======= ========= =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 32 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ORGANIZATION AND ACQUISITIONS ORGANIZATION. CB Commercial Real Estate Services Group, Inc. (formerly CB Commercial Holdings, Inc.) ("CB Commercial") 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. On November 25, 1996, CB Commercial completed an initial public offering (the "Offering") of 4,347,000 shares of common stock, par value $.01 per share (the "Common Stock"). The net proceeds from the Offering of $79.5 million were used to repay a portion of CB Commercial's then outstanding senior secured indebtedness and senior subordinated indebtedness. CB Commercial is a holding company that conducts its operations primarily through CB Commercial Real Estate Group, Inc. and its subsidiaries (collectively the "Company"). NATURE OF OPERATIONS. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (commercial property sales and leasing) ("Brokerage Services"), (ii) outsourcing, transaction management, advisory services and facilities management (collectively, "Corporate Services"), (iii) property management ("Institutional Management Services"), and (iv) investment property services (acquisitions and sales on behalf of investors), mortgage loan origination and servicing, investment management and advisory services, valuation and appraisal services and real estate market research (collectively, "Financial 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. 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. ACQUISITIONS. Effective August 28, 1997 the Company purchased Koll Real Estate Services ("Koll") through a merger. Under the terms of the agreement, CB Commercial exchanged 5,187,737 shares of its common stock and 407,087 stock options, as well as warrants to purchase an additional 599,967 shares at $30.00 per share, subject to adjustment, for all of the outstanding stock and stock options of Koll. The transaction, a tax-free reorganization accounted for as a purchase, resulted in the issuance of equity valued at approximately $132.9 million and the assumption of debt and minority interest of approximately $57.4 million as of August 28, 1997. The initial purchase price in excess of the net identifiable assets acquired totaled $95.3 million including $20.0 million relating to incentive fees on investments fund partnerships which will be earned as assets within the funds are sold and is included, net of amortization, in goodwill and other intangible assets, respectively, on the accompanying balance sheet. Goodwill is being amortized on a straight line basis over 30 years. In the third quarter of 1997 CB Commercial recorded the effects of a charge for merger related costs of $11.2 million, which is included in total merger related costs of $12.9 million. These charges represent $8.8 million of accrued merger costs including costs of future lease obligations on redundant assets and severance costs and $2.4 million of merger related incentive payments to Westmark Realty Advisors L.L.C. ("Westmark") sellers. The merger did not include several other entities which use the Koll name, including, but not limited to, Koll Construction, Koll Real Estate Group (the development and investment company) and Koll International (resorts and recreational developments). 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 became a wholly- owned subsidiary of, and subsequently merged into, L.J. Melody & Company. L.J. Melody & Company ("L.J. Melody") is a commercial mortgage banking firm engaged in mortgage loan origination and loan servicing, headquartered in Houston, Texas. The purchase consideration for L.J. Melody was $15.0 million, including a $2.3 million contingent 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 senior notes to the sellers. The notes bore interest of 10.0% per annum, with maturities through July 2001. The $2.3 million note has been accounted for as compensation over the term of the note as the payment of this note was contingent upon the principal seller's continued employment with the Company. In October 1997 the Company paid the outstanding balance of the senior and contingent notes related to the L.J. Melody acquisition of $1.1 million and $3.0 million, respectively. Of this amount, $1.7 million was related to the acceleration of a contingent note and is included in merger related and other non-recurring charges in the accompanying statements of operations. 33 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 The L.J. Melody acquisition was accounted for as a purchase. The Company allocated approximately $3.7 million of the total purchase price to identifiable intangible assets, 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 resulting from the acquisition 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. 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 an investment management and 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 $1.0 million in costs related to the Westmark acquisition. Approximately $20.0 million ($18.9 million at December 31, 1997) of the $37.5 million is payable to the sellers ("Westmark Senior Notes") over periods ranging from one to five years. The sellers were also 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. As of December 31, 1996 approximately $2.8 million of the supplemental purchase price was earned and recorded as additional goodwill. In August 1997 the Company agreed to buy out the remaining Westmark supplemental purchase price for $11.1 million. The Company paid $4.0 million of the supplemental purchase price on August 15, 1997. The remaining payments were made on January 15, 1998 and February 14, 1998 for $5.0 million and $2.1 million, respectively. The supplemental purchase price is being amortized over Westmark goodwill's remaining estimated useful life, initially 30 years. 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"). In November 1996 the terms of the Westmark Senior Subordinated Loan were amended to provide for interest to be payable quarterly on a current basis at a rate of 11.0%, effective June 30, 1995, and to provide for quarterly amortization payments by CB Commercial Real Estate Group, Inc. of $500,000. Prior to the amendments, interest accrued on the Westmark Senior Subordinated Loan at the original interest rate of 20.0%. Interest in excess of 11.0% was forgiven upon the payment of the Westmark Senior Subordinated Loan in full with the proceeds of the Revolving Credit Facility in August 1997. (See Note 6) In August 1997 the Company also agreed to buy out an incentive plan related to the Westmark supplemental purchase price for $2.4 million, which was paid in August 1997. The buy out is included in merger related and other non-recurring charges in the accompanying statement of operations and in accounts payable and accrued expenses in the accompanying balance sheets as of December 31, 1997. The Westmark acquisition was accounted for as a purchase. The Company has allocated approximately $6.9 million of the initial 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 are being amortized over their estimated useful lives of 6, 5 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 30 years and will be amortized on a straight line basis over this period. 34 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 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, 1997 and 1996. The results of operations of the acquired companies are included in the consolidated results from the dates they were acquired. The following table presents summarized pro forma results of operations of the Company for the years ended December 31, 1997, 1996 and 1995, assuming the L.J. Melody and Westmark acquisitions had occurred on January 1, 1995 and the Koll Real Estate Services acquisition had occurred on January 1, 1996 (amounts in thousands except per share data):
Year Ended December 31, --------------------------------- (unaudited) 1997 1996 1995 -------- ----------- -------- Revenue........................................ $817,911 $701,301 $489,684 Net income..................................... 5,092 68,068 4,903 Net income applicable to common stockholders... 1,092 67,068 4,903 Earnings per share Basic........................................ 0.06 3.53 0.36 Diluted...................................... 0.06 3.52 0.36
The proforma results do not necessarily represent results which would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. Further, Koll historical results for the first eight months of 1997 include certain non- recurring adjustments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill at December 31, 1997 consisted of $176.1 million related to the 1995, 1996 and 1997 acquisitions which is being amortized over an estimated useful life of 30 years and $20.3 million related to the Company's original acquisition in 1989 which is being amortized over an estimated useful life of 40 years. Other intangible assets at December 31, 1997 included approximately $2.2 million of deferred financing costs and $40.8 million of intangibles stemming from the L.J. Melody, Westmark and Koll acquisitions. The Company periodically evaluates the recoverability of the carrying amount of goodwill and other intangible assets. In this assessment, the Company considers macro market conditions and trends in the Company's relative market position, its capital structure, lender relationships and the estimated undiscounted future cash flows associated with these assets. If any of the significant assumptions inherent in this assessment materially change due to market, economic and/or other factors, the recoverability is assessed based on the revised assumptions and resultant undiscounted cash flows. If such analysis indicates impairment, it would be recorded in the period such changes occur based on the fair value of the goodwill and other intangible assets. In the third quarter 35 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 1997, the Company wrote off the remaining Langdon Rieder goodwill of $2.1 million, which has been recorded to amortization expense in the accompanying statement of operations. 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 the earlier of date of occupancy or cash receipt unless significant future contingencies exist. 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. CERTAIN SIGNIFICANT ESTIMATES DEFERRED TAXES. The Company has net deferred tax assets of approximately $67.8 million at December 31, 1997, of which $29.9 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, as well as the current year events and trends, including the impact if any, of the acquisitions that were concluded during the year as well as 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 In 1997 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share ("EPS"). As a result, earnings per share for 1996 and 1995 were restated as indicated below. Basic earnings per share was computed by dividing net income, less preferred dividend requirements, by the weighted average number of common shares outstanding during each year. The computation of diluted earnings per share further assumes the dilutive effect of stock options and, during periods when preferred stock was convertible, the conversion of the preferred stocks when dilutive. In 1997 the preferred stock was antidilutive. The adoption of SFAS No. 128 resulted only in changing the previously reported fully diluted earnings per share for 1996 from $4.97 per share to $4.99 per share. 36 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 The following is a calculation of earnings per share for the years ended December 31 (in thousands, except share and per share data):
1997 1996 --------------------------------------- ---------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ------------ ---------- ----------- ------- ---------- ---------- BASIC EARNINGS PER SHARE Net income before extraordinary items... $ 25,348 $ 70,549 Preferred stock dividends (see Note 13). (4,000) (1,000) ---------- -------- Income before extraordinary items applicable to common shareholders...... 21,348 15,237,914 $ 1.40 69,549 13,783,882 $ 5.05 Extraordinary items, net................ (951) (0.06) - - ---------- ------ -------- -------- Income applicable to common shareholders........................... $ 20,397 $ 1.34 $ 69,549 $ 5.05 ========== ======= ======== ======== DILUTED EARNINGS PER SHARE Income before extraordinary items applicable to common shareholders...... $ 21,348 15,237,914 $ 70,549 13,783,882 Diluted effect of exercise of options outstanding............................ 759,015 61,443 Diluted effect of convertible preferred stock.................................. - 281,311 ---------- ---------- -------- ---------- Income before extraordinary items applicable to common shareholders...... 21,348 15,996,929 $ 1.34 70,549 14,126,636 $ 4.99 Extraordinary items, net................ (951) (0.06) - - ---------- ---------- ------- -------- -------- Income applicable to common shareholders........................... $ 20,397 $ 1.28 $ 70,549 $ 4.99 ========== ======= ======== ========
1995 ---------------------------------- Per-Share Income Shares Amount ------ ------ --------- BASIC EARNINGS PER SHARE Net income before extraordinary items............................ $ 7,409 Preferred stock dividends (see Note 13)........ - --------- Income before extraordinary items applicable to common shareholders......................... 7,409 13,499,862 $ 0.55 Extraordinary items, net....................... - - --------- ------- Income applicable to common shareholders....... $ 7,409 $ 0.55 ========= ======= DILUTED EARNINGS PER SHARE Income before extraordinary items applicable to common shareholders........................ $ 7,409 13,499,862 Diluted effect of exercise of options outstanding................................... 40,679 Diluted effect of convertible preferred stock.. - --------- ---------- Income before extraordinary items applicable to common shareholders............. $ 7,409 13,540,541 $ 0.55 Extraordinary items, net....................... - - --------- ------- Income applicable to common shareholders....... $ 7,409 $ 0.55 ========= =======
The following items were not included in the computation of diluted earnings per share because their effect was anti-dilutive for the years ended December 31:
1997 1996 1995 ----------------- ------------------ -------- Stock options Outstanding...................... 845,500 70,000 960,000 Price ranges..................... $ 31.00-$36.75 $ 20.00 $ 10.00 Expiration ranges................ 4/21/07-11/17/07 11/24/06-11/25/06 4/18/99 Stock warrants Outstanding...................... 599,967 - - Price ranges..................... $ 30.00 - - Expiration....................... 8/28/04 - - Convertible preferred shares Number of common shares at the applicable conversion ratio... 2,400,000 - -
NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and SFAS No. 128, Earnings per Share. These standards did not have a material impact on the Company's financial statements. 37 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 RECLASSIFICATIONS Certain reclassifications, which do not have an effect on net income, have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands):
December 31, --------------------- 1997 1996 --------- --------- Land........................................ $ 11,946 $ 11,946 Buildings and improvements.................. 29,312 23,977 Furniture and equipment..................... 46,066 36,672 Equipment under capital leases.............. 11,916 9,617 -------- -------- 99,240 82,212 Accumulated depreciation and amortization... (48,931) (41,377) -------- -------- Property and equipment, net........... $ 50,309 $ 40,835 ======== ========
The Company capitalizes expenditures that materially increase the life of the related assets and charges the cost of maintenance and repairs to expense. Upon sale or retirement, the capitalized costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in operating 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 respective 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, 1997 and 1996 are $3.0 million and $2.7 million, respectively, of investments in limited partnerships managed for a fee for institutional investors. The Company has a 1.0% general partnership 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 $7.9 million, $7.6 million and $6.4 million for the years ended December 31, 1997, 1996, and 1995, respectively. The limited partnerships' total assets were approximately $1.257 billion and $363.8 million and total liabilities were approximately $86.1 million and $72.6 million as of December 31, 1997, and 1996, respectively. The increased activity was primarily attributable to the additional investment fund partnerships related to the Koll acquisition. The Company's share of net income (loss) for the years ended December 31, 1997, 1996, and 1995 was not material. The Company contributed subscription notes payable to certain investee partnerships. The aggregate notes contributed to the investee partnerships totaled $5,079,000 as of December 31, 1997, of which $3,100,000 as of December 31, 1997 consist of nonrecourse notes that are netted with the investment balances. The remaining notes totaling $1,979,000 net of discounts of $351,000 at December 31, 1997 are recourse notes and are included in other long-term obligations. The notes accrue interest at the long-term applicable federal rate circulated by the Internal Revenue Service (6.31% at December 31, 1997). The notes mature upon the earlier of dates ranging from December 2005 to December 2006, or the termination of the respective investee partnerships. Principal and interest payments are to be made as distributions are received from the investee partnerships. The general partner capital contributions for certain partnerships are in the form of unsecured notes payable totaling approximately $0.8 million and $2.9 million at December 31, 1997, and 1996, respectively. (See Note 6) 38 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 Also included in other assets are investments in unconsolidated subsidiaries as of December 31, 1997 and 1996. Investments in and advances to (from) unconsolidated subsidiaries are as follows (in thousands):
December 31, --------------------------- Interest 1997 1996 --------- ------ ------ Koll Telecommunications L.L.C................ 30% $2,032 $ - WPI/Koll Asia Pacific Advisors, L.L.C........ 50 1,178 - CB Commercial Real Estate Group Canada Inc... 25 843 1,743 Koll Malaysia SDN BHD........................ 50 756 - Koll Amata Co., LTD.......................... 46 390 - Other........................................ * 1,391 232 ------ ------ $6,590 $1,975 ====== ======
* Various interests with varying ownership rates. Unaudited combined condensed financial information for the entities accounted for using the equity method is as follows (in thousands): Condensed Statement of Operations Information:
December 31, ---------------------------- 1997 1996 1995 -------- ------- ------- Net revenue............................ $ 36,091 $14,195 $11,710 Income from operations................. 8,915 2,313 1,214 Net income............................. 5,246 927 377 Condensed Balance Sheet Information: December 31, ------------------ 1997 1996 -------- ------- Current assets......................... $ 33,745 $11,322 Noncurrent assets...................... 142,770 2,298 Current liabilities.................... 20,915 5,943 Noncurrent liabilities................. 143,816 677
Equity interest in earnings (losses) of the unconsolidated subsidiaries of $(113,000), $145,000 and $180,000 for the years ended December 31, 1997, 1996 and 1995, respectively, have been included in "Operating, administrative and other" on the Consolidated Statements of Operations. Other assets also includes costs of $8.0 million, net of amortization, incurred by the Company to organize and structure investment funds in which the Company holds general partnership interests and for which the Company performs investment management and advisory services. Such costs are amortized using the straight-line method over the estimated period benefited of five years. Accumulated amortization totaled $673,000 at December 31, 1997. Other assets also includes certain long-term fees receivable of $1.5 million, net of allowances of $705,000 at December 31, 1997. In addition, included in other assets was a note receivable aggregating $2.2 million at December 31, 1996. During the third quarter of 1997, payment in full on this 9.5% note was received. 39 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 5. EMPLOYEE BENEFIT PLANS OPTION PLANS. A total of 1,000,000 shares of common stock have been reserved for issuance under the CB Commercial Real Estate Services Group, Inc. 1990 Stock Option Plan. Prior to the Company's November 1996 public offering, 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 at various dates through September 2001. In 1996, at the time of the Company's public offering, options for 40,000 shares were granted at a $20.00 exercise price. Options for 790,000 shares were outstanding as of December 31, 1997. A total of 600,000 shares of Common Stock have been reserved for issuance under the CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan. In 1991, 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 November 2006. During 1997 and 1996, options to purchase 2,287 and 467 shares, respectively, of Common Stock were exercised. In 1997, options to purchase 120,000 and 200,000 shares were granted to certain directors and executive officers at $31.00 and $21.25 per share, respectively, and vest over a five year period. As of December 31, 1997, options to purchase 383,853 shares of Common Stock were outstanding. A total of 90,750 shares of 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 as part of the July 1996 acquisition of L.J. Melody. Options for all 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 five percent per quarter. Options for 90,750 shares of Common Stock were outstanding as of December 31, 1997. In August 1997, in conjunction with the Koll acquisition, the Company approved the assumption of the options outstanding under the KMS (Koll) Holding Company Amended 1994 Stock Option Plan (now known as the CBC Substitute Option Plan ("CBCSP")), the Koll Acquisition Stock Option Plan ("KASOP") and the issuance of warrants. Under the CBCSP, 407,087 stock options were issued with exercise prices ranging from $12.89 to $18.04 in exchange for existing Koll options. These options were immediately exercisable. As of December 31, 1997, 52,776 options have been exercised. Under the KASOP, 550,000 stock options were issued to former senior executives of Koll who became employees or directors of the Company. Of the 550,000 stock options issued, 300,000 options have an exercise price of $22.75 and vest over three years beginning April 22, 2000 and 250,000 options were immediately exercisable at $36.75. As of December 31, 1997, 550,000 options were outstanding. A total of 700,000 shares of Common Stock have been reserved for issuance under the CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock Option Plan which was approved by shareholders. An option for 40,000 shares, at an exercise price of $23.75, was granted and vests quarterly, expiring in March 2007. Options for 475,500 shares, at an exercise price of $33.50 per share, were granted pursuant to the plan and vest over one to five year periods, expiring in November 2007. Options for 515,500 shares were outstanding as of December 31, 1997. As allowed under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock based compensation plans. Under this method the Company does not recognize compensation expense for options that were granted at the market price of the underlying stock on the date of grant. Had compensation expense been determined consistent with SFAS No. 123, the Company's net income and per share information would have been reduced to the following pro forma amounts (in thousands except per share data):
1997 1996 1995 ------- ------- ------ Net Income: As Reported $24,397 $70,549 $7,409 Pro Forma 21,940 69,932 7,406 Basic EPS: As Reported 1.34 5.05 0.55 Pro Forma 1.18 5.00 0.55 Diluted EPS: As Reported 1.28 4.99 0.55 Pro Forma 1.12 4.95 0.55
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 40 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free interest rates of 6.541%, 6.753% and 5.890% for the various plans. Expected volatility for each year is 36.67%. Dividend yield is excluded from the calculation since it is the present intention of the Company to retain all earnings for future acquisitions. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the status of the Company's option plans at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented in the table and narrative below:
1997 1996 1995 --------------------- -------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Stock Options and Warrants Shares Price Shares Price Shares Price - ------------------------------- ---------- -------- ---------- -------- ---------- -------- Outstanding beginning of the year 1,116,890 $10.32 996,607 $ 9.65 1,010,713 $ 9.61 Granted 1,792,587 25.98 180,750 13.87 20,000 10.00 Exercised (225,063) 10.78 (10,467) 9.57 (4,106) 8.01 Forfeited/Expired - - (50,000) 10.00 (30,000) 10.00 --------- ------ --------- ------ --------- ------ Outstanding end of year 2,684,414 $20.74 1,116,890 $10.32 996,607 $ 9.65 --------- ------ --------- ------ --------- ------ Exercisable at end of year 1,412,800 $16.08 809,383 $ 9.55 886,607 $ 9.60 Weighted average fair value of options and warrants granted $14.27 $ 5.36 $ 4.22
Significant option and warrant groups outstanding at December 31, 1997 and related weighted average price and life information is presented below:
Outstanding Options and Warrants Exercisable Options and Warrants ---------------------------------------- -------------------------------- Weighted Weighted Weighted Average Average Average Number Remaining Exercise Number Exercise Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price - --------------------------- ----------- ---------------- -------- ----------- -------- $00.31 - $10.00 874,603 4.19 $ 9.63 737,328 $ 9.56 $12.89 - $18.04 354,311 7.36 14.06 354,311 14.06 $20.00 - $36.75 1,415,500 9.54 29.15 315,161 33.43 --------- ------ --------- ------ 2,644,414 $20.67 1,406,800 $16.04 ========= ====== ========= ======
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 Common Stock have been reserved for issuance under the 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc. 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. The Company has sold 35,000 shares and 510,906 shares in 1997 and 1996, respectively. As of December 31, 1997, 545,906 shares were sold. The weighted average fair value of shares sold in 1997 was 41 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 $23.50. The purchase price for shares under this plan must be paid either in cash or by delivery of a full recourse promissory note. The related promissory notes are also included in stockholders' equity. 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 $28.8 million, $19.0 million and $10.2 million for the years ended December 31, 1997, 1996, and 1995, 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, $2.9 million, $1.9 million and $1.0 million for the years ended December 31, 1997, 1996, and 1995, respectively. (See Note 8) DEFERRED COMPENSATION PLAN (THE "DCP"). In 1994 the Company implemented the DCP. Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive 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 Common Stock of the Company which elections are recorded as additions to Stockholders' Equity. For the year ended December 31, 1997, approximately $4.7 million and $1.7 million were deferred in cash (including interest) and stock, respectively. The accumulated deferrals as of December 31, 1997, were approximately $6.7 million in cash (including interest) and $4.7 million in stock for a total of $11.4 million, all of which was charged to expense in the period of deferral. 42 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 6. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
December 31, ------------------- 1997 1996 -------- -------- Revolving Credit Facility, with variable interest rates based on LIBOR plus 1.0% (6.7786% weighted average at December 31, 1997)....................................................... $120,000 $ - Senior Term Loans, with variable interest rates based on LIBOR plus 2.5% (8.15625% weighted average at December 31, 1996) Senior Term Loan......................................................... - 37,415 Mortgage Term Loan....................................................... - 18,000 Westmark Senior Notes, with interest ranging from 9.0% to 12.0% through December 31, 2004 and at variable rates depending on the Company's credit facility rate thereafter, $2.309 million due June 30, 1998, $2.546 million due June 30, 2008, with the remaining balance due June 30, 2010........................................................ 18,861 19,771 L.J. Melody Senior Notes, with interest at 10.0%........................... - 2,625 Senior Subordinated Term Loan, with variable interest rates based on LIBOR plus 0.25%, (5.90625% at December 31, 1996)........................ - 65,872 Westmark Senior Subordinated Loan, with interest at 11.0%.................. - 9,000 Inventoried Property Loan, secured by inventoried property, with interest at short-term commercial paper borrowing rate plus 3.5% (9.1% and 9.0% at December 31, 1997 and 1996, respectively) due in full March 2, 1999.................................. 7,470 7,470 Koll Acquisition Obligations, with interest ranging from 0.0% to 9.0%...... 3,944 - Equipment Loan, secured by computer equipment with interest at the prime rate plus 0.5% (8.75% at December 31, 1996)........................ - 164 L.J. Melody Contingent Note, with interest at 10%.......................... - 667 Unsecured Notes Payable, with fixed interest at 10.0% and ranging from 6.0% to 13.0% at December 31, 1997 and 1996, respectively........... 778 2,859 -------- -------- Total............................................................... 151,053 163,843 Less current maturities............................................. 4,949 15,314 -------- -------- Total long-term maturities.......................................... $146,104 $148,529 ======== ========
Annual aggregate maturities of long-term debt as of December 31, 1997 are as follows (in thousands): 1998 - $4,949; 1999 -$8,775; 2002 - $120,000 and $17,329 thereafter. In August 1997 the Company refinanced substantially all of its outstanding debt through a credit agreement with Bank of America, as agent for a group of banks, which provided a $300.0 million five-year revolving credit facility ("Revolving Credit Facility") which is included in senior term loans in the accompanying balance sheet. The credit facility also provided for the refinancing of substantially all debt of Koll assumed pursuant to the merger and provides additional borrowing capacity for the Company for general corporate purposes (including acquisitions). The Company is subject to mandatory commitment reductions of $30 million, $60 million and $60 million on December 31 of the years 1999, 2000 and 2001, respectively. In the event that on any date the Company's loan commitment obligations exceed the combined commitments in effect on such date after giving effect to the mandatory reductions, the Company shall, on such date, make mandatory repayment of the loans in a principal amount equal to such excess. Payment in full of all outstanding amounts under the credit facility will be no later than October 31, 2002. As of December 31, 1997 the outstanding balance of $120.0 million consists of various borrowings pursuant to the Revolving Credit Facility. The Revolving Credit Facility bears interest at a rate of LIBOR plus 1.0%, and is payable upon the maturity of the various underlying revolving loans, which is currently between one and three months. 43 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 In November 1996 approximately $74.4 million was used from the Offering to repay a portion of the indebtedness under the Senior Secured Credit Agreement and $5.0 million was used to pay accrued and unpaid interest on the indebtedness outstanding under the Senior Subordinated Credit Agreement from the net proceeds of the Offering. Also, in connection with the Offering, the Senior Secured Credit Agreement was amended to provide for interest at the rate of LIBOR plus 2.5% payable quarterly on a current basis and the senior subordinated credit terms were amended to provide for interest payable on a current basis commencing January 1, 1997. The senior secured indebtedness and senior subordinated indebtedness were prepaid on August 28, 1997 with proceeds from the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are secured by substantially all of the personal and real property assets of the Company. Collectively these loans are guaranteed by CB Commercial and all the common stock of CB Commercial Real Estate Group, Inc. is pledged to secure the guarantee. The Revolving Credit Facility contains numerous restrictive covenants that, among other things, limit the Company's ability to incur or repay other indebtedness, make advances or loans to subsidiaries and other entities, make capital expenditures, incur liens, enter into mergers or effect other fundamental corporate transactions, sell its assets, or declare dividends. In addition, the Company is required to meet certain ratios relating to its adjusted net worth, level of indebtedness, fixed charges and interest coverage. The Company is in compliance with all covenants as of December 31, 1997. See Note 1 for indebtedness regarding the Westmark, Langdon Reider, L.J. Melody and Koll acquisitions. 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. In August 1993, a former commissioned salesperson of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergin County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996 a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. The Company hired new counsel and in January 1997 filed motions for a new trial, reversal of the verdict and reduction of damages. On March 27, 1997 the trial court denied the Company's motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The Company has been advised by appellate counsel that it has a meritorious basis to pursue an appeal of the verdict, which the Company has done. The Company recorded an initial accrual in connection with this matter of $250,000 in 1994 and increased the accrual to $800,000 in 1995 which represented the Company's estimate of its loss exposure for this matter based on its assessment and analysis as of those dates. In 1996, further adjustments were made to the reserve to reflect the Company's estimate of ultimate loss, if any. The Company believes its reserves for this case at December 31, 1997 are adequate. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of pending 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, 1997, are as follows (in thousands): 1998 - $26,647; 1999 - $22,939; 2000 - $19,214; 2001 - $15,157; 2002 - $11,240 and $24,527 thereafter. Future minimum lease commitments for noncancelable capital leases at December 31, 1997 are as follows (in thousands): 1998 - $1,655; 1999 - $1,260; and 2000 - $483. The interest portion of the lease payments totals $101,000. Capital lease payments due within one year are classified as current liabilities. Substantially all leases require the Company to pay maintenance costs, insurance and property taxes, and generally may be renewed for five year periods. Total rental expense under noncancelable operating leases was $24.3 million, $18.1 million and $22.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. 44 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 8. STOCKHOLDERS' EQUITY On November 25, 1996 the Company provided liquidity to its common stockholders by publicly registering its common stock and raised additional capital in the Offering. The Company issued 4,347,000 shares of common stock in the Offering at $20.00 per share. The proceeds from the Offering totalled $79.5 million, net of a $6.1 million underwriters' discount and $1.4 million in estimated offering expenses, all of which has been recorded to equity. The proceeds were used to repay $74.4 million and $5.0 million of the Company's senior secured and subordinated indebtedness, respectively. The Company recapitalized its various classes of stock in conjunction with the Offering. In August 1997, in conjunction with the Koll acquisition, the Company approved the issuance of 599,967 warrants. Of the outstanding warrants, 43,644 are attached to Common Stock obtainable under the CBCSP and 556,323 are attached to shares of outstanding Common Stock. Each warrant is exercisable into one share of Common Stock at an exercise price of $30.00 (subject to adjustment) commencing on August 28, 2000 and expiring on August 27, 2004. As of December 31, 1997, 599,967 warrants issued were outstanding. Effective October 1, 1996 the preferred stock accrued dividends at the rate of $1.00 per share per annum. Accrued dividends as of December 31, 1997 were $5.0 million and are included in other long-term liabilities in the accompanying balance sheet. On January 27, 1998 the Company repurchased all 4,000,000 shares of its preferred stock for $77.4 million, including $5.0 million in previously accrued dividends. In 1997 the Company issued 5,187,737 shares of Common Stock in the Koll Acquisition, 35,000 shares to certain key employees in connection with the 1996 Equity Incentive Plan, 82,740 shares with a stated value of approximately $1.9 million to the Cap Plan for the year ended December 31, 1996 and 225,063 shares in connection with stock option plans. 9. INCOME TAXES The regular federal income tax return loss carryforward is $133.6 million as of December 31, 1997, expiring in the years 2005 through 2008 as follows: $4.7 million--2005; $76.2 million--2006; $38.0 million--2007; and $14.7 million-- 2008. The unexpired loss carryforward for federal alternative minimum tax purposes is $129.6 million as of December 31, 1997 primarily due to depreciation differences. Use of the federal alternative minimum 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 current federal tax includes alternative minimum tax paid. The payment of alternative minimum tax creates credit carryforwards which total $2.2 million as of December 31, 1997. Such credit carryforwards do not expire. Loss carryforwards for state income tax purposes expire in various states beginning in 1995, 1996, 1997 and thereafter. The ability of the Company to utilize NOLs will be limited in 1998 and subsequent years as a result of the Company's 1996 public offering, the 1997 Koll acquisition and the 1998 repurchase of preferred stock which cumulatively caused a more than 50.0% change of ownership within a three year period. As a result of the limitation, the Company will only be able to use approximately $26.0 million of its NOL in 1998 and each subsequent year. 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 taxable income. 45 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 The tax provision for the years ended December 31, 1997, 1996 and 1995 excluding the tax impact on extraordinary items of $0.7 million, consisted of the following (in thousands):
Year Ended December 31, --------------------------------- 1997 1996 1995 -------- --------- --------- Federal: Current............................. $ 1,243 $ 730 $ 503 Deferred tax........................ 17,436 9,522 1,231 Reduction of valuation allowances... - (55,900) (1,231) ------- -------- ------- 18,679 (45,648) 503 State: Current............................. 2,193 658 338 Deferred tax........................ (314) 250 209 Reduction of valuation allowances... - - (209) ------- -------- ------- 1,879 908 338 ------- -------- ------- $20,558 $(44,740) $ 841 ======= ======== =======
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 from operations:
Year Ended December 31, -------------------------- 1997 1996 1995 ------- ------- ------ Federal statutory tax rate.................... 35% 35% 34% Permanent differences, including goodwill, meals and entertainment..................... 7 5 14 State taxes, net of federal benefit........... 2 4 3 Utilization of previously unrecognized net operating losses............................ - (41) Reduction of valuation allowances and other... 1 (217) - ---- ----- ---- Effective tax rate............................ 45% (173)% 10% ==== ===== ====
46 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 Beginning in 1992, the Company implemented SFAS 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. Cumulative tax effects of temporary differences are shown below as of December 31, 1997 and 1996 (in thousands):
Year Ended December 31, ------------------------- 1997 1996 ----------- ----------- Asset (Liability) - ------------------------------------------------------------------------- Property and equipment................................................ $ 1,272 $ 1,952 Reserves for bad debts, building write down, legal expenses...................................................... 14,849 6,386 Intangible amortization............................................... (10,170) 1,060 Bonus, unexercised restricted stock, deferred compensation........................................................ 6,820 2,907 Partnership income.................................................... 4,643 584 Debt modification..................................................... 135 1,871 Net operating loss and alternative minimum tax credit carryforwards... 49,003 65,257 Unconsolidated affiliates............................................. (173) (218) Acquisitions.......................................................... (1,248) (1,435) All other, net........................................................ 2,627 (582) -------- -------- Net deferred tax asset before valuation allowances.................... 67,758 77,782 Valuation allowances.................................................. (29,901) (26,379) -------- -------- Net deferred tax asset.............................................. $ 37,857 $ 51,403 ======== ========
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 had experienced continuing profitability due to a variety of reasons, including the strength of the commercial real estate markets. In addition, the Company had operated Westmark for one full year since acquiring Westmark in June 1995, and as a result had 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 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). During the fourth quarter of 1996 the Company further reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million for 1996. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. 10. FIDUCIARY FUNDS The consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $186.8 million and $133.7 million at December 31, 1997 and 1996, 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 amounting to $1.4 million and $2.2 million at December 31, 1997 and 1996, respectively, due to the cost involved in developing the information as such notes are not publicly traded. 47 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 LONG-TERM DEBT. The Revolving Credit Facility and the Westmark Senior Notes, including their respective maturities, are discussed in Note 6. Estimated fair values for these liabilities are not presented because the Company believes that they are not materially different from book value, primarily because the majority of the Company's debt is based on variable rates. Due to such immateriality, the Company does not consider it practicable to incur the excessive 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. 48 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 12. INDUSTRY SEGMENTS The Company operates in four business segments--Brokerage Services, Corporate Services, Institutional Management Services and Financial Services. Brokerage Services consists of brokerage (commercial property sales and leasing). Corporate Services consists of transaction management, advisory services and facilities management. Institutional Management Services consists of property management and outsourcing. Financial Services consists of investment property services (acquisitions and sales on behalf of investors), mortgage banking (mortgage loan origination and servicing), investment management and advisory services, valuation and appraisal services and real estate market research.
Year Ended December 31, ------------------------------- 1997 1996 1995 --------- -------- -------- (Dollars in thousands) Revenue Brokerage Services............................. $423,485 $345,906 $301,272 Corporate Services............................. 37,608 25,564 21,750 Institutional Management Services.............. 67,442 44,783 41,067 Financial Services............................. 201,689 166,815 104,371 -------- -------- -------- $730,224 $583,068 $468,460 ======== ======== ======== Operating income Brokerage Services............................. $ 43,927 $ 24,139 $ 25,237 Corporate Services............................. 1,588 335 1,154 Institutional Management Services.............. 4,547 5,149 1,728 Financial Services............................. 21,950 18,806 1,724 Merger related and other non-recurring costs... (12,924) - - -------- -------- -------- 59,088 48,429 29,843 Interest income................................... 2,598 1,503 1,674 Interest expense.................................. 15,780 24,123 23,267 -------- -------- -------- Income before provision for income taxes.......... $ 45,906 $ 25,809 $ 8,250 ======== ======== ======== Depreciation and amortization Brokerage Services............................. $ 8,200 $ 7,092 $ 7,484 Corporate Services............................. 898 243 268 Institutional Management Services.............. 2,040 700 506 Financial Services............................. 6,922 5,539 3,373 -------- -------- -------- $ 18,060 $ 13,574 $ 11,631 ======== ======== ======== Capital expenditures (purchases) Brokerage Services............................. $ 6,678 $ 2,372 $ 1,729 Corporate Services............................. 537 87 63 Institutional Management Services.............. 1,492 209 118 Financial Services............................. 1,220 334 233 -------- -------- -------- $ 9,927 $ 3,002 $ 2,143 ======== ======== ======== As of December 31, -------------------- 1997 1996 -------- -------- Identifiable assets Brokerage Services............................. $ 64,363 $ 56,274 Corporate Services............................. 72,189 2,290 Institutional Management Services.............. 131,285 5,273 Financial Services............................. 122,757 94,364 Corporate...................................... 114,597 120,743 -------- -------- $505,191 $278,944 ======== ========
49 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) DECEMBER 31, 1997 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. The Company does not have significant foreign operations at December 31, 1997. 13. SUBSEQUENT EVENT On December 9, 1997 the Company announced that it had reached an agreement with REI, which owns and operates the internationally known real estate services firm of Richard Ellis in all major commercial real estate locations in the world other than the United Kingdom, to purchase all of REI's outstanding stock. The net purchase price for REI is approximately (Pounds)57.2 million (approximately $94.5 million using the exchange rate at March 4, 1998) and will be payable entirely in shares of the Company's common stock, par value $0.01, but with each shareholder of REI having the right to elect to have up to 50% of the purchase price paid in cash or debt. The purchase is expected to be completed in the second quarter of 1998. Its principle operations are in the Netherlands, France, Spain, Brazil, Australia, Hong Kong (including Taiwan and the People's Republic of China) and Singapore. Since the acquisition will be a taxable transaction, the Company will be able to amortize a significant portion of the purchase price for tax purposes over 15 years. On January 27, 1998, the Company purchased all 4.0 million of its existing convertible preferred shares which could have been converted into approximately 2.56 million common shares, based on the Company's prevailing stock price on that date. The preferred shares carried a dividend requirement of $.25 per share per quarter. The total cost to purchase the preferred shares was $77.4 million, including $5.0 million of previously accrued dividends. The shares were originally issued in conjunction with the Company's acquisition by management in 1989. In February 1998 the Company, through L.J. Melody, acquired Cauble & Company of Carolina for approximately $2.2 million and substantially all of the assets of North Coast Mortgage Company, for approximately $3.3 million, both regional mortgage banking firms. 50 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Dollars in thousands)
BALANCE SHEET December 31, - ------------- --------------------- 1997 1996 -------- -------- Advances to CB Commercial Real Estate Group, Inc...... $263,438 $124,274 Investment in CB Commercial Real Estate Group, Inc. and subsidiaries................................ 62,124 62,124 -------- -------- Total assets......................................... $325,562 $186,398 ======== ======== Accounts Payable and Accrued Liabilities.............. $ 200 $ - Dividends Payable..................................... 5,000 1,000 Stockholders' Equity.................................. 320,362 185,398 -------- -------- Total Liabilities and Stockholders' Equity........... $325,562 $186,398 ======== ========
INCOME STATEMENT Year Ended December 31, - ---------------- ------------------------------- 1997 1996 1995 -------- -------- ------- Expenses - other............................................. $ - $ - $ 39 Interest expense............................................. 200 - - Provision for income tax..................................... - 735 51 -------- -------- ------- Net income (loss)........................................... $ (200) $ (735) $ (90) ======== ======== =======
STATEMENT OF CASH FLOWS Year Ended December 31, - ----------------------- ------------------------------- 1997 1996 1995 -------- -------- ------- Net income (loss)............................................ (200) (735) $ (90) Adjustments to reconcile net income (loss) to net cash used in operating activities....................... - - - Advances to CB Commercial........................... 200 735 90 -------- -------- ------- 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 Real Estate Group, Inc. 51 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Reserve for Allowance Employee for Bad Legal Loans Debts Reserve ------------ ---------- -------- 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 Charges to expense........................ 600 1,257 7,686 Write-offs................................ (425) (1,234) (1,820) ------ ------- ------- Balance, December 31, 1996................... $1,710 $ 4,423 $ 9,321 Koll balance at the date of acquisition... - 4,401 - Charges to expense........................ - 1,226 1,195 Write-offs................................ (893) (1,070) (709) ------ ------- ------- Balance, December 31, 1997................... $ 817 $ 8,980 $ 9,807 ====== ======= =======
52 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES EXHIBIT 12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995 1994 1993 ------- ------- ------- ------- --------- Pre-tax income (loss) from continuing operations................................... $45,906 $25,809 $ 8,250 $ 9,325 $(37,037) Fixed Charges............................ 22,884 30,629 29,172 23,283 20,570 ------- ------- ------- ------- -------- Total earnings (loss) before fixed charges.... $68,790 $56,438 $37,422 $32,608 $(16,467) ======= ======= ======= ======= ======== Fixed Charges Portion of rent expense representative of the interest factor (1)............. $ 7,104 $ 6,506 $ 5,905 $ 5,921 $ 6,330 Interest expense......................... 15,780 24,123 23,267 17,362 14,240 Preferred stock dividends (2)............ 6,557 1,639 - - - ------- ------- ------- ------- -------- Total fixed charges and preferred dividends.............................. $29,441 $32,268 $29,172 $23,283 $ 20,570 ======= ======= ======= ======= ======== Ratio of earnings to fixed charges and preferred dividends (3)...................... 2.34 1.75 1.28 1.40 - ======= ======= ======= ======= ========
(1) Represents one-third of operating lease costs which approximates the portion that relates to the interest portion. (2) Preferred stock dividend requirements have been reflected at their pre-tax amounts. (3) The Company's earnings were not sufficient to cover its fixed charges requirements by $37.0 million for December 31, 1993. In computing the ratio of earnings to fixed charges; (a) earnings have been based on income from continuing operations before income taxes, extraordinary items and fixed charges (exclusive of interest capitalized) and (b) fixed charges consist of interest and amortization of debt discount and expense (including amounts capitalized) and the estimated interest portion of rents. 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company expects to file with the Securities and Exchange Commission its definitve proxy statement concerning its 1998 Annual Meeting of Stockholders (the "1998 Annual Meeting Proxy Statement") no later than 120 days after December 31, 1997. The information required by this item is set forth in the 1998 Annual Meeting Proxy Statement under the headings "Nomination and Election of Directors---Directors and Nominees for Directors," "Nomination and Election of Directors---Management" and "Nomination and Election of Directors---Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the 1998 Annual Meeting Proxy Statement under the headings "Nomination and Election of Directors--- Directors Fees" and "Nomination and Election of Directors---Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the 1998 Annual Meeting Proxy Statement under the heading "Nomination and Election of Directors--- Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the 1998 Annual Meeting Proxy Statement under the heading "Nomination and Election of Directors--- Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements See Index to Consolidated Financial Statements set forth on page 26. 2. Financial Statement Schedules See Index to Consolidated Financial Statements set forth on page 26. 3. Exhibits EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 2.1* Agreement and Plan of Reorganization dated as of May 13, 1997 by and among CB Commercial Real Estate Services Group, Inc. (the "Company"), CBC Acquisition Corporation, Koll Real Estate Services, FS Equity 54 Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individual signatories thereto, filed as Annex 1 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 3.1* Fourth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1996 3.2* Fourth Amended and Restated Bylaws of the Company, filed as Exhibit 3(ii) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333-28731) 4.1* Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration Statement (File No. 333-12757) 4.2* Form of the Company's Restricted Stock Agreement between the Company and the Company's Officer or Employee, filed as Exhibit 4.8 to the Company's Form S-1 Registration Statement (File No. 33- 29410). 4.3* First Amendment to the Company's Restricted Stock Agreement, filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. 4.4* Form of Warrant Agreement between the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individuals, with attached Form of Warrant Certificate, filed as Annex 2 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.1(i)*+ CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Form S-1 Registration Statement (File No. 33-29410) 10.1(ii)*+ First Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 10.1(iii)*+ Second Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.1(iv)*+ Third Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv) to the Company's 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 Company's 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 Company's Annual Report on Form 10-K for the year ended December 31, 1992 10.2(iii)*+ Second Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.8(iii) to the Company's 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 Company's 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 Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 55 10.4*+ Form of Nonstatutory Stock Option Agreement, filed as Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 10.5(i)*+ CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan, filed as Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 1, 1992 10.5(ii)*+ 1997 Amendment to the 1991 Service Providers Stock Option Plan, filed as Annex 7 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.6+ CB Commercial Real Estate Services Group, Inc. Amended and Restated Deferred Compensation Plan 10.7*+ Amended and Restated 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc., filed as Annex 8 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.8*+ CB Commercial Real Estate Services Group, Inc. L.J. Melody Acquisition Stock Option Plan, filed as Exhibit 10.10 to the Company's Form 10-K for the yeard ended December 31, 1996 10.9*+ Form of Indemnification Agreement between the Company, CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 10.10*+ Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (File No. 333-12757) 10.11*+ CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock Option Plan, filed as Annex 5 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.12*+ CB Commercial Real Estate Services Group, Inc. 1998 Employee Stock Purchase Plan, filed as Annex 6 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.13+ CB Commercial Real Estate Services Group, Inc. Koll Acquisition Stock Option Plan 10.14(i)+ CB Commercial Real Estate Services Group, Inc. / KMS Holding Corporation Amended 1994 Nonqualified Performance Stock Option Plan 10.14(ii)+ Form of Nonstatutory Stock Option Agreement evidencing substitute options granted by the Company upon assumption of options issued under the KMS Holding Corporation Amended 1994 Stock Option Plan 10.15+ Consulting Agreement dated July 16, 1997 between CB Commercial Real Estate Group, Inc. and Donald M. Koll 10.16*+ Employment Agreement dated May 23, 1997 between the Company and James J. Didion, filed as Exhibit 10(iii)(17) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333- 28731) 10.17* Registration Rights Agreement by and among the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company, Raymond E. Wirta and William S. Rothe, Jr. dated as of May 14, 1997, filed as Exhibit 10(i)(3) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 56 10.18*+ Noncompetition and Confidentiality Agreement by and among the Company, CBC Acquisition Corporation, Koll Real Estate Services, Donald M. Koll and The Koll Holding Company dated May 14, 1997, filed as Exhibit 10(i)(4) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.19*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and William S. Rothe dated as of May 14, 1997, filed as Exhibit 10(i)(5) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.20*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and Raymond E. Wirta dated as of May 14, 1997, filed as Exhibit 10(i)(6) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.21*+ Employment Agreement by and between the Company and William Rothe dated as of May 14, 1997, filed as Exhibit 10(iii)(1) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.22(i)* Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF - Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997 10.22(ii) Amendment No. 1 dated as of January 21, 1998, to the Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF -Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions 10.23+ Form of amendment to the Company's 1990 Stock Option Plan, the 1991 Service Providers Stock Option Plan, the L.J. Melody Acquisition Stock Option Plan, and the Koll Acquisition Stock Option Plan 10.24(i)* 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 Company's Current Report on Form 8-K dated June 30, 1995 10.24(ii) Form of SPP Purchase Agreement by and among Westmark Real Estate Acquisition Partnership, L.P., CB Commercial Real Estate Group, Inc. and certain individuals, dated as of August 15, 1997 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (filed as a Schedule Supporting the Consolidated Financial Statements - See Index to Consolidated Financial Statements) 21 Subsidiaries of the Company 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (filed only with the SEC) ________________________ * Incorporated by reference + Management contract or compensatory plan required by Item 601 of Regulation S-K 57 (b) Reports on Form 8-K 1. The Registrant filed a Current Report on Form 8-K dated November 3, 1997 announcing (i) developments in it facilities management operation and a joint venture in New England, (ii) that its common stock will be traded on the New York Stock Exchange beginning November 7, 1997, and (iii) results of operations for the quarter and nine-month period ended September 30, 1997. 2. The Registrant filed a Current Report on Form 8-K dated December 9, 1997 announcing that it entered into an agreement as to the terms of a merger with REI Ltd., the holding company for all Richard Ellis operations outside of the United Kingdom. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. (Registrant) By /s/ JAMES J. DIDION ---------------------------------------- James J. Didion Chairman of the Board and Chief Executive Officer Date: March 24, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ JAMES J. DIDION Chief Executive Officer and Director March 24, 1998 - ------------------------------ James J. Didion /s/ JOHN C. HAECKEL Senior Executive Vice President, Chief March 24, 1998 - ------------------------------ Financial Officer and Treasurer John C. Haeckel /s/ RONALD J. PLATISHA Executive Vice President March 24, 1998 - ------------------------------- Principal Accounting Officer Ronald J. Platisha /s/ STANTON D. ANDERSON Director March 24, 1998 - ------------------------------- Stanton D. Anderson /s/ GARY J. BEBAN Director March 24, 1998 - ------------------------------- Gary J. Beban Director March ___, 1998 _______________________________ Richard C. Blum /s/ RICHARD C. CLOTFELTER Director March 24, 1998 - ------------------------------- Richard C. Clotfelter
59 /s/ DANIEL A. D'ANIELLO Director March 24, 1998 - ------------------------------- Daniel A. D'Aniello /s/ BRADFORD M. FREEMAN Director March 24, 1998 - ------------------------------- Bradford M. Freeman Director March ___, 1998 _______________________________ Hiroaki Hoshino /s/ GEORGE J. KALLIS Director March 24, 1998 - ------------------------------- George J. Kallis /s/ RICARDO KOENIGSBERGER Director March 24, 1998 - ------------------------------- Ricardo Koenigsberger /s/ TAKAYUKI KOHRI Director March 24, 1998 - ------------------------------- Takayuki Kohri /s/ DONALD M. KOLL Director March 24, 1998 - --------------------------------- Donald M. Koll /s/ PAUL C. LEACH Director March 24, 1998 - ---------------------------------- Paul C. Leach /s/ FREDERIC V. MALEK Director March 24, 1998 - ---------------------------------- Frederic V. Malek /s/ LAWRENCE J. MELODY Director March 24, 1998 - ---------------------------------- Lawrence J. Melody /s/ PETER V. UEBERROTH Director March 24, 1998 - ---------------------------------- Peter V. Ueberroth /s/ RAY ELIZABETH UTTENHOVE Director March 24, 1998 - ---------------------------------- Ray Elizabeth Uttenhove Director March ___, 1998 __________________________________ Gary L. Wilson /s/ RAYMOND E. WIRTA Director March 24, 1998 - ----------------------------------- Raymond E. Wirta
60 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 2.1* Agreement and Plan of Reorganization dated as of May 13, 1997 by and among CB Commercial Real Estate Services Group, Inc. (the "Company"), CBC Acquisition Corporation, Koll Real Estate Services, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individual signatories thereto, filed as Annex 1 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 3.1* Fourth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1996 3.2* Fourth Amended and Restated Bylaws of the Company, filed as Exhibit 3(ii) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333-28731) 4.1* Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration Statement (File No. 333- 12757) 4.2* Form of the Company's Restricted Stock Agreement between the Company and the Company's Officer or Employee, filed as Exhibit 4.8 to the Company's Form S-1 Registration Statement (File No. 33-29410). 4.3* First Amendment to the Company's Restricted Stock Agreement, filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. 4.4* Form of Warrant Agreement between the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individuals, with attached Form of Warrant Certificate, filed as Annex 2 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.1(i)* CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Form S-1 Registration Statement (File No. 33-29410) 10.1(ii)* First Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 10.1(iii)* Second Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.1(iv)* Third Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv) to the Company's 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 Company's 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 Company's Annual Report on Form 10-K for the year ended December 31, 1992 10.2(iii)* Second Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.8(iii) to the Company's 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 Company's 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 Company's 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 Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 10.5(i)* CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan, filed as Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 1, 1992 10.5(ii)* 1997 Amendment to the 1991 Service Providers Stock Option Plan, filed as Annex 7 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.6 CB Commercial Real Estate Services Group, Inc. Amended and Restated Deferred Compensation Plan 10.7* Amended and Restated 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc., filed as Annex 8 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.8* CB Commercial Real Estate Services Group, Inc. L.J. Melody Acquisition Stock Option Plan, filed as Exhibit 10.10 to the Company's Form 10-K for the yeard ended December 31, 1996 10.9* Form of Indemnification Agreement between the Company, CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the Company's Annual Report on Form 10- K for the year ended December 31, 1992 10.10* Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (File No. 333-12757) 10.11* CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock Option Plan, filed as Annex 5 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.12* CB Commercial Real Estate Services Group, Inc. 1998 Employee Stock Purchase Plan, filed as Annex 6 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.13 CB Commercial Real Estate Services Group, Inc. Koll Acquisition Stock Option Plan 10.14(i) CB Commercial Real Estate Services Group, Inc. / KMS Holding Corporation Amended 1994 Nonqualified Performance Stock Option Plan 10.14(ii) Form of Nonstatutory Stock Option Agreement evidencing substitute options granted by the Company upon assumption of options issued under the KMS Holding Corporation Amended 1994 Stock Option Plan 10.15 Consulting Agreement dated July 16, 1997 between CB Commercial Real Estate Group, Inc. and Donald M. Koll 10.16* Employment Agreement dated May 23, 1997 between the Company and James J. Didion, filed as Exhibit 10(iii)(17) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333-28731) 10.17* Registration Rights Agreement by and among the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company, Raymond E. Wirta and William S. Rothe, Jr. dated as of May 14, 1997, filed as Exhibit 10(i)(3) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.18* Noncompetition and Confidentiality Agreement by and among the Company, CBC Acquisition Corporation, Koll Real Estate Services, Donald M. Koll and The Koll Holding Company dated May 14, 1997, filed as Exhibit 10(i)(4) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.19* Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and William S. Rothe dated as of May 14, 1997, filed as Exhibit 10(i)(5) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.20* Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and Raymond E. Wirta dated as of May 14, 1997, filed as Exhibit 10(i)(6) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.21* Employment Agreement by and between the Company and William Rothe dated as of May 14, 1997, filed as Exhibit 10(iii)(1) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.22(i)* Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF - Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997 10.22(ii) Amendment No. 1 dated as of January 21, 1998, to the Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF - Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions 10.23 Form of amendment to the Company's 1990 Stock Option Plan, the 1991 Service Providers Stock Option Plan, the L.J. Melody Acquisition Stock Option Plan, and the Koll Acquisition Stock Option Plan 10.24(i)* 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 Company's Current Report on Form 8-K dated June 30, 1995 10.24(ii) Form of SPP Purchase Agreement by and among Westmark Real Estate Acquisition Partnership, L.P., CB Commercial Real Estate Group, Inc. and certain individuals, dated as of August 15, 1997 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (filed as a Schedule Supporting the Consolidated Financial Statements - See Index to Consolidated Financial Statements) 21 Subsidiaries of the Company 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (filed only with the SEC) _________________________ * Incorporated by reference EX-10.6 2 AMENDED & RESTATED DEFERRED COMPENSATION PLAN EXHIBIT 10.6 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- DEFERRED COMPENSATION PLAN -------------------------- (AS AMENDED AND RESTATED) December 1997 TABLE OF CONTENTS -----------------
PAGE ---- 1. PURPOSE............................................................. 1 ------- 2. DEFINITIONS......................................................... 1 ----------- 3. ELECTION TO DEFER................................................... 3 ----------------- 4. DEFERRED COMPENSATION ACCOUNTS...................................... 4 ------------------------------ 5. INVESTMENT OPTIONS.................................................. 5 ------------------ 6. VESTING OF ACCOUNTS................................................. 5 ------------------- 7. PAYMENT OF ACCOUNTS................................................. 6 ------------------- 8. PLAN ADMINISTRATION................................................. 7 ------------------- 9. NO FUNDING OBLIGATION............................................... 7 --------------------- 10. NONALIENATION OF BENEFITS........................................... 8 ------------------------- 11. NO LIMITATION OF EMPLOYER RIGHTS.................................... 8 -------------------------------- 12. APPLICABLE LAW...................................................... 8 --------------
EXHIBIT A PARTICIPATING EMPLOYERS CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- DEFERRED COMPENSATION PLAN -------------------------- (AS AMENDED AND RESTATED) 1. PURPOSE ------- The purpose of the CB Commercial Real Estate Services Group, Inc. Deferred Compensation Plan (the "Plan") is to allow a select group of management or highly compensated employees of CB Commercial Real Estate Services Group, Inc. and its affiliates that adopt this Plan to defer receipt of Compensation. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, as described in section 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 2. DEFINITIONS ----------- Whenever referred to in this Plan, the following terms shall have the meanings set forth below except where the context indicates otherwise. Capitalized terms used in this Plan that are not defined in this Section 2 are defined elsewhere in the Plan. 2.1 "Account" means a Participant's Deferred Compensation Account. ------- 2.2 "Beneficiary" means the person or persons who are the ----------- Participant's beneficiaries pursuant to the Employer's group term life insurance programs unless otherwise designated by the Participant on a form prescribed by the Committee. 2.3 "CAP Plan" means the CB Commercial Real Estate Services Group, -------- Inc. Capital Accumulation Plan, as amended from time to time. 2.4 "CBC Stock Fund Unit" shall have the meaning set forth in Section --------- ---- ---- 5.2. 2.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- 2.6 "Committee" means the Chief Executive Officer of CB Commercial --------- Real Estate Services Group, Inc., or a committee consisting of two or more employees of the Employer selected by the Chief Executive Officer. 2.7 "Compensation" has the same meaning as it has under the CAP Plan ------------ without regard to deferrals under this Plan, the limitations of Code section 401(a)(17), income earned from the exercise of stock options, stock appreciation or other rights, car allowances, reimbursements for moving or other expenses or the imputed value of life insurance. -1- 2.8 "Deferral Date" means January 1, or July 1, as the case may be, ------------- of the year in or for which deferrals are to commence. 2.9 "Employee" means a salaried employee of an Employer whose -------- Compensation for the Plan Year preceding any Deferral Date equals or exceeds $100,000, any commissioned employee of an Employer or a key management employee selected by the Committee. For purposes of this section, car allowances and stock option income paid to any Employee shall be included in Compensation solely for purposes of determining whether the Employee's Compensation equals $100,000. 2.10 "Employer" means CB Commercial Real Estate Services Group, Inc. -------- ("CB Commercial") and any entity affiliated with CB Commercial Real Estate Services Group, Inc. that, with the consent of the Committee, adopts this Plan. A list of participating Employers is attached as Exhibit A. 2.11 "Participant" means any Employee who has made an election to ----------- defer Compensation under Section 3.1 or for whom the Plan maintains an Account. 2.12 "Payment Year" means the year selected by the Employee under ------------ Section 3.4. 2.13 "Plan Year" means the calendar year. --------- 2.14 "Stock" means the Common Stock, par value $0.01 per share, of CB ----- Commercial Real Estate Services Group, Inc. In the event of any change in the outstanding shares of Stock that occurs by reason of a stock dividend or split, recapitalization, merger, consolidation, combination, exchange of shares, or other similar corporate change, the aggregate number of shares of Stock (or CBC Stock Fund Units) credited to any Participant's Account shall be adjusted appropriately by the Committee, whose determination shall be final and conclusive; provided, however, that fractional shares shall be rounded to the nearest whole share. 2.15 "Termination of Employment" means any voluntary or involuntary ------------------------- termination of employment, except on account of death or Total and Permanent Disability, but does not include a transfer among the entities which make up the Employer, a transfer to an entity affiliated with CB Commercial Real Estate Services Group, Inc. unless such transfer is otherwise determined to be a Termination of Employment by the Committee in its sole discretion or a change of status from employee to independent contractor. 2.16 "Total and Permanent Disability" has the same meaning given to ------------------------------ such term or comparable term under the Company's long term disability plan as in effect from time to time. 2.17 "Valuation Date" means the last day of each year, or such other -------------- dates as may be selected by the Committee. -2- 3. ELECTION TO DEFER ----------------- 3.1 An Employee may elect to defer receipt of his or her Compensation for any Plan Year by completing the deferral election form prescribed by the Committee, specifying a percentage or percentages of Compensation to be deferred, which shall not exceed one hundred percent, and, at the Employee's option, the maximum dollar amount of any deferral. The deferral election form must be filed with the Committee by no later than fifteen days before the Deferral Date for the applicable Plan Year (December 31, 1997 in the case of the 1998 Plan Year). Alternatively, an Employee may elect to defer receipt of his or her Compensation earned during the last six months of any Plan year by filing with the Committee the deferral election form no later than June 15 of such Plan Year. Unless otherwise determined in writing by the Committee, an Employee who has an outstanding loan from an Employer or is a commissioned salesperson on transitional draw shall not be eligible to make a deferral election or his then current election will become ineffective upon achievement of either status. 3.2 An election to defer shall be effective on the date the Employee delivers a completed deferral election form to the Committee; provided, however, that if an Employee subsequently delivers a properly completed deferral election form to the Committee no later than fifteen days before the Deferral Date (or December 31, 1997 in the case of the 1998 Plan Year), the latest dated deferral election form shall take effect. The election of any Employee who is a commissioned salesperson of an Employer shall not become effective for any Plan Year until such Employee's Compensation for the Plan Year (including for this purpose only car allowances and stock option income) exceeds $100,000 and shall only be effective with respect to that portion of the Employee's Compensation earned thereafter. After the fifteenth day before the Deferral Date for the applicable Plan Year (or December 31 in the case of the 1998 Plan Year) or for the last half of the applicable Plan Year, the elections made on the deferral election form for that Plan Year shall be irrevocable; provided, however, that a Participant may elect, with fifteen days' written notice, to revoke completely his or her deferrals for the remainder of the Plan Year as of the first day of any succeeding calendar month. Any Participant who so revokes his or her election to defer shall not be eligible to make an election pursuant to Section 3.1 for the Plan Year succeeding the Plan Year during which the Participant revoked his or her election but may resume deferrals in the next successive Plan Year. 3.3 A separate election to defer must be made for each successive Plan Year no later than fifteen days prior to the Deferral Date for that Plan Year or Deferral Date for the last half of the Plan Year. 3.4 The Employee shall elect, when completing the deferral election form, to defer receipt of all of the Compensation deferred for that Plan Year and all prior Plan Years until one of the following "Payment Years": (a) The calendar year specified by the Employee, which shall be at least the third year after the year in which the election is made; or -3- (b) The calendar year following the Employee's Termination of Employment. The Employee shall elect, when completing his or her deferral election form, to receive his or her Account in a single lump sum payment or in a specified number of annual installment payments not to exceed ten. If the Employee fails to elect a form of distribution, his or her Account will be distributed in five annual installments following Termination of Employment. 3.5 A Participant may, so long as such Participant is employed by the Employer, elect to change the Payment Year selected under Section 3.4 subject to the following: (i) if the Participant specifies a calendar year, the year selected must be at least the third year after the year in which the Committee receives the Participant's election under this Section 3.5; (ii) if the Participant changes the Payment Year to the calendar year following Termination of Employment, the Participant's election under this Section 3.5 must be received by the Committee by the end of the calendar year before the year in which the Participant's Termination of Employment occurs; and (iii) notwithstanding any elections that the Participant may make, the Committee shall have the absolute right in its sole and absolute discretion to have the CBC Stock Fund Units or dollar amounts credited to a Participant's Account paid in not more than five annual installments commencing one year after the Payment Year selected by the Participant. 3.6 A Participant may, so long as such Participant remains employed by the Employer, change his or her election from a single lump sum payment to annual installments over a period not to exceed ten years or from annual installments to a single lump sum payment. 4. DEFERRED COMPENSATION ACCOUNTS ------------------------------ 4.1 Compensation deferred pursuant to Section 3 shall be credited to an Account in the name of the Participant established for this purpose on the Employer's books or the books of the Employer who has assumed the obligation to make payments hereunder to the Participant in accordance with Section 9. Compensation shall be credited to the Account as of the first day of the month after the month in which it otherwise would have been paid, except that amounts that would have been payable in December shall be credited to the Account as of December 31. 4.2 The balance credited to each Participant's Account shall be allocated to one or both of the following investment option(s) offered under the Plan: (a) CBC Stock Fund; and (b) Interest Index Fund. The measure of the investment return for any Participant's Account shall be equal to the proportionate gain (or loss) of the two investment options as described in Section 5. -4- 5. INVESTMENT OPTIONS ------------------ 5.1 Each Participant may direct the Committee on the investment mix for the balance credited to his or her Account. Such direction shall be in writing and shall be made on the form prescribed by the Committee no later than 15 days prior to the last day of any calendar year (December 31 in the case of an election in 1996). Any portion of the Participant's Account allocated to the CBC Stock Fund may not be subsequently allocated to the Interest Index Fund. 5.2 If any portion of a Participant's Account is allocated to the CBC Stock Fund during the Plan Year, the Participant's Account shall be credited with units ("CBC Stock Fund Units") equal to the number of shares of Stock which could be purchased based on the average closing price of the Stock for the last five trading days of the month in which the deferred amount would otherwise have been paid to Participant; provided that in the case of a deferral of Compensation consisting of a bonus payable in the first 90 days of a year, shares of Stock shall be credited based on the average closing price of the Stock for the last five trading days of February of such year. In the event dividends are paid or payable during the Plan Year on Stock underlying CBC Stock Fund Units credited to a Participant's Account, the Participant's Account shall be credited with the number of whole shares equal to the number of shares which could be purchased with such dividends based on the average closing price of the Stock for the five trading days preceding the date the dividend is paid. 5.3 Any portion of a Participant's Account allocated to the Interest Index Fund shall be accumulated and credited with interest at the rate payable by CB Commercial Real Estate Services Group, Inc. on its senior secured debt, determined as of the first day of any calendar quarter and compounded monthly on the last day of each month based on the Participant's balance in the Interest Index Fund as of the first day of that month. 5.4 So long as a Participant remains employed by the Employer, such Participant may elect to have all or any portion of the value of the Interest Index Fund credited to such Participant's Account transferred to the CBC Stock Fund. Such election shall be effective on the Deferral Date following the date on which the Participant makes such election under this Section 5.4. To be effective, such election must be received by the Committee by December 16 of such year (December 31 in the case of an election in 1997). A Participant who elects to transfer all or any portion of the Interest Index Fund credited to such Participant's Account to the CBC Stock Fund shall be credited with the number of CBC Stock Fund Units determined by dividing the dollar amount being transferred by the average closing price of the Stock for the last five trading days of the year in which the election is made. 6. VESTING OF ACCOUNTS ------------------- 6.1 Amounts credited to a Participant's Account shall be vested and nonforfeitable (except to the extent of investment losses) at all times. -5- 7. PAYMENT OF ACCOUNTS ------------------- 7.1 Amounts credited to a Participant's Account shall be distributed as described in Sections 3.4 and 3.5, subject to the terms and conditions of this Section 7. 7.2 If a Participant has elected to receive his or her Account in a single lump sum payment, such Account shall be valued as of the last day of the Plan Year immediately preceding the Payment Year and a single lump sum payment of cash and/or whole shares of Stock (determined in accordance with Section 7.4) shall be made during the first quarter of the Payment Year. The Account shall not be credited with any additional investment return under Sections 5.2 and 5.3 after the last day of the Plan Year preceding the Payment Year except that the value of any CBC Stock Fund Units distributed in accordance with Sectioin 7.4 reflect appreciation or depreciation in the Stock at the time of distribution. 7.3 If a Participant has elected to receive his or her Account in installments, the installments of such Account shall be distributed during the first quarter of the Payment Year and each subsequent year in which installments are payable. Each installment payment shall be calculated based on the value of the Interest Index Fund credited, and the number of CBC Stock Fund Units allocated, to the Account on the last day of the Plan Year immediately preceding the year in which such installment is payable and distributed in cash and/or in whole shares of Stock. When a Participant's Account is payable in installments, it will continue to be credited with dividends, in the case of the CBC Stock Fund, or interest, in the case of the Interest Index Fund until the applicable Payment Year with respect to any installment payment. The amount of the installment payment to be distributed in any year shall be determined by multiplying the value of the Account on the last day of the preceding year by a fraction, the numerator of which is one and the denominator of which is the total number of installments remaining to be paid (including the installment for which the calculation is being made). 7.4 The portion of a Participant's Account consisting of CBC Stock Fund Units shall be distributed in whole shares of Stock equal to the number of CBC Stock Fund Units credited to the Participant's Account. The Interest Index Fund credited to a Participant's Account shall be distributed in cash. 7.5 If a Participant dies before all of the amounts credited to his or her Account have been distributed, the Participant's Beneficiary shall receive the amounts in the Participant's Account in accordance with such Participant's election then in effect; provided, however, that the Committee may, in its sole discretion, distribute the balance credited to the Participant's Account to the Participant's Beneficiary in such other manner as the Committee shall determine. 7.6 If a Participant suffers Total and Permanent Disability before all of the amounts credited to his or her Account have been distributed, the Participant shall receive the amounts in his or her Account in accordance with such Participant's election then in effect; provided, however, that the Committee may, in its sole discretion, distribute the balance credited -6- to the Participant's Account to the Participant in such other manner as the Committee shall determine. 7.7 Prior to the date on which payments are distributable under the Plan, distributions of amounts credited to the Participant's Account shall be permitted only on account of an unforeseeable emergency, and only if the distribution is necessary in light of immediate and heavy financial needs of the Participant. The amount of any hardship distribution shall not exceed the amount required to meet the need as determined by the Committee. The Participant shall submit a written request to the Committee which shall have sole discretion to establish rules and standards for making hardship distributions, to determine whether to make a hardship distribution from a Participant's Account and to determine the amount of such distribution, if any. The Committee's decision shall be final and binding on all interested parties. 8. PLAN ADMINISTRATION ------------------- 8.1 This Plan shall be adopted by each Employer and shall be administered by the Committee. 8.2 This Plan may be amended in any way or may be terminated, in whole or in part, at any time, in the discretion of the Committee or the Board of Directors of CB Commercial Real Estate Services Group, Inc. Upon termination of the Plan, the Committee or the Board of Directors may, in its sole discretion, elect to distribute all Accounts immediately or in accordance with each Participant's deferral election(s) and the provisions of the Plan as they existed at the time of the Plan's termination. 8.3 The Committee shall have the sole authority, in its discretion, to adopt, amend and rescind such rules and regulations as it deems advisable for the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and deferral election forms, and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be binding on all persons. The Committee may delegate its responsibilities as it sees fit. 9. NO FUNDING OBLIGATION --------------------- No Employer is under any obligation to secure any amount credited to a Participant's Account by any specific assets of any Employer or any other assets in which any Employer has an interest. Neither the Participant nor his or her estate shall have any rights against any Employer with respect to any portion of the Account except as a general unsecured creditor. No Participant has an interest in his or her Account except to the extent the Participant actually receives a distribution of cash or Stock. The obligation to make payments to any Participant hereunder shall be that of the Employer that employed such Participant during the period or periods that such Participant deferred receipt of Compensation unless any other Employer agrees to assume such obligation and -7- such Participant was informed of such assumption at the time of his or her election to defer, in which case only the Employer that agreed to assume such obligation shall have such obligation. 10. NONALIENATION OF BENEFITS ------------------------- No benefit under this Plan may be sold, assigned, transferred, conveyed, hypothecated, encumbered, anticipated, or otherwise disposed of, and any attempt to do so shall be void. No such benefit, prior to receipt thereof by a Participant, shall be in any manner subject to the debts, contracts, liabilities, engagements, or torts of such Participant. 11. NO LIMITATION OF EMPLOYER RIGHTS -------------------------------- Nothing in this Plan shall be construed to limit in any way the right of any Employer to terminate an Employee's employment at any time for any reason; nor shall it be evidence of any agreement or understanding, express or implied, that any Employer (a) will employ an Employee in any particular position, (b) will ensure participation in any incentive programs, or (c) will grant any awards under such programs. 12. APPLICABLE LAW -------------- This Plan shall be construed and its provisions enforced and administered in accordance with ERISA and, to the extent not preempted, the laws of the State of Delaware. IN WITNESS WHEREOF, CB Commercial Real Estate Services Group, Inc. has ------------------ caused this Deferred Compensation Plan (as amended and restated) to be duly executed by the undersigned this 12th day of December, 1997. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. By: /s/ James J. Didion ------------------- James J. Didion Chief Executive Officer -8- EXHIBIT A --------- Participating Employers in the CB Commercial Real Estate Services Group, Inc. Deferred Compensation Plan -------------------------- CB Commercial Real Estate Services Group, Inc. CB Commercial Real Estate Group, Inc. Westmark Realty Advisors L.L.C. L.J. Melody & Company CB Commercial Real Estate Group of Hawaii, Inc. EX-10.13 3 KOLL ACQUISITION STOCK OPTION PLAN EXHIBIT 10.13 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. KOLL ACQUISITION STOCK OPTION PLAN SECTION 1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN 1.1 Establishment. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC., a -------------- Delaware corporation (the "Company"), hereby establishes the KOLL ACQUISITION STOCK OPTION PLAN (the "Plan"). 1.2 Purpose. The Koll Acquisition Stock Option Plan is established in -------- connection with the merger (the "Merger") of Koll Real Estate Services, a Delaware corporation ("Koll"), into a wholly owned subsidiary of the Company as a result of which Koll will become a wholly owned subsidiary of the Company for the purpose of granting options thereunder to certain key employees of such firm as an inducement to enter into or remain in the service of the Company and its subsidiaries and as an incentive for extraordinary efforts during such service. 1.3 Effective Date. The Plan shall become effective upon its adoption --------------- by the Board of Directors of the Company and the consummation of the Merger. SECTION 2. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have ------------ their respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means the Compensation Committee of the Board. (d) "Disability" means the inability to engage in any Substantial Gainful Activity by reason of any medically determinable physical or mental impairment which, in the sole and final judgment of the Committee, can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than twelve months. (e) "Employee" means a regular employee (including officers and directors who are also employees) or independent contractor (including any independent contractor operating in the form of a corporation, partnership, limited liability company or otherwise and any director) of Koll or any of its subsidiaries, or any branch or division thereof. 1 (f) "Fair Market Value" of the Stock on any date means, in the event that the Stock is listed on an established national or regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, or is publicly traded in an established securities market, the closing price of the Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on such date, or, if there is no such closing price, the mean between the highest bid and lowest asked prices or between the high and low prices on such date or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale shall have been made; or the value determined by using such other method as the Committee may determine. (g) "Option" means the right to purchase Stock at a stated price for a specified period of time. (h) "Participant" means any Employee granted an option under the Plan. (i) "Stock" means the Common Stock of the Company, par value $.01 per share. (j) "Substantial Gainful Activity" means the performance of significant duties over a reasonable period of time in work for remuneration or profit (or in work or a type generally performed for remuneration or profit). 2.2 Gender and Number. Except when otherwise indicated by the context, ------------------ words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. SECTION 3. ELIGIBILITY AND PARTICIPATION Options may be granted under the Plan to any Employee. SECTION 4. ADMINISTRATION 4.1 Compensation Committee. The Committee shall be responsible for the ----------------------- administration of the Plan. The Committee, by majority action thereof, is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interest of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, all in the Committee's sole and absolute discretion, but only to the extent not contrary to the express provisions of the Plan. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final and binding and conclusive for all purposes and upon all persons whomsoever. 2 4.2 No Liability. No member of the Committee shall be liable for and ------------- the Company shall indemnify and hold each such member harmless with respect to any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. SECTION 5. STOCK SUBJECT TO PLAN 5.1 Number. The total number of shares subject to Options may not ------- exceed 550,000 shares. The number of shares of Stock subject to Options under the Plan and the Option prices are subject to adjustment upon occurrence of any of the events indicated in Section 5.3. The shares to be delivered under the Plan may consist, in whole or in part, of authorized but unissued Stock or treasury Stock not reserved for any other purpose. 5.2 Lapsed Options. To the extent any Option granted under the Plan --------------- terminates, expires or lapses for any reason, any shares subject to such Option again shall be available for the grant of an Option. 5.3 Adjustment in Capitalization. In the event of any change in the ----------------------------- outstanding shares of Stock that occurs by reason of a stock dividend or split, recapitalization, merger, consolidation, combination, exchange of shares, or other similar corporate change, the aggregate number of shares of Stock subject to each outstanding Option, and its stated Option price, shall be adjusted appropriately by the Committee, whose determination shall be final and conclusive; provided, however that fractional shares shall be rounded to the nearest whole share. In such event, the Committee also shall have complete discretion to make adjustments in the number and type of shares subject to Stock grants then outstanding under the Plan pursuant to the terms of such grants or otherwise as it deems appropriate. SECTION 6. DURATION OF PLAN 6.1 Duration of Plan. The Plan shall remain in effect, subject to the ----------------- Board's right to earlier terminate the Plan pursuant to Section 11 hereof, until all Stock subject to it shall have been purchased, acquired or lapsed pursuant to the provisions hereof. Notwithstanding the foregoing, no Option may be granted under the Plan on or after the tenth (10th) anniversary of the Plan's effective date. SECTION 7. STOCK OPTIONS 7.1 Grant of Options. Options may be granted to Participants at any ----------------- time and from time to time as shall be determined by the Committee or the Board. The Committee or the Board, as applicable, shall have complete discretion in determining the number, type and price of Options granted to each Participant; provided, however, the aggregate Fair Market Value (determined at the time the Option is granted) of the Stock with respect to which an incentive stock option under Section 422A of the Code becomes exercisable for the first time by a Participant during any calendar year shall not exceed $100,000, nor shall any incentive stock option under Section 422A 3 of the Code be granted to any person who owns, directly or indirectly, Stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. Nothing in this Section 7 of the Plan shall be deemed to prevent the grant of nonstatutory stock options in amounts which exceed the maximum established by Section 422A of the Code with respect to incentive stock options. 7.2 Option Agreement. Each Option shall be evidenced by an Option ----------------- Agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of shares of Stock to which the Option pertains, and such other provisions as the Chief Executive Officer or Committee shall determine. 7.3 Option Price. No Option granted pursuant to the Plan which is ------------- intended to be an incentive stock option under Section 422A of the Code shall have an Option price that is less than the Fair Market Value of the Stock on the date the Option is granted. 7.4 Duration of Options. Each Option shall expire at such time as the -------------------- Committee shall determine at the time it is granted, provided, however, that no Option shall be exercisable later than ten years from the date of its grant. 7.5 Exercise of Options. Options granted under the Plan shall be -------------------- exercisable at such time and be subject to such restrictions and conditions as the Committee or the Board, as applicable, shall in each instance approve, which need not be the same for all Participants. Each Option which is intended to qualify as an incentive stock option pursuant to Section 422A of the Code shall comply with the applicable provisions of the Code pertaining to such Options. 7.6 Payment. The purchase price of Stock upon exercise of any Option -------- shall be paid in full either (i) in cash or (ii) with the consent of the Committee, through the tender to the Company of shares of Stock valued at Fair Market Value on the date of exercise, or (iii) by a combination of (i) and (ii). If shares of Stock are surrendered by an officer of the Company who is subject to Section 16(b) of the Securities Exchange Act of 1934 as payment of the Option Price and the Stock surrendered was acquired pursuant to an option to acquire Stock and such acquisition was not an exempt transaction under Section 16 of the Securities Exchange Act of 1934, then six (6) months must have elapsed since the date of grant of such option. The payment in full of the Option price shall be deemed to have been made with the written notice of exercise provided the notice of exercise directs that the stock certificate or certificates for the shares of Stock for which the Option is exercised be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the Option and, at the time such stock certificate or certificates are delivered, the broker tenders to the Company cash (or cash equivalents acceptable to the Company) equal to the Option price for the shares of Stock purchased plus the amount (if any) of Federal and/or other taxes which the Company, in its discretion, requires to be withheld with respect to the exercise of the Option. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment or deemed payment in full of the Option price therefor and any applicable withholding taxes, the individual exercising the Option shall be 4 entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of such shares. A separate stock certificate or certificates shall be issued for any shares purchased pursuant to the exercise of an Option which is an incentive stock option, which certificate or certificates shall not include any shares which were purchased pursuant to the exercise of an Option which is not an incentive stock option. An individual holding or exercising an Option shall have none of the rights of a stockholder until the shares of Stock covered thereby are fully paid and issued, and except as provided in Section 5.3 above, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 7.7 Restriction on Stock Transferability. The Committee shall impose ------------------------------------- such restrictions on any shares of Stock acquired pursuant to the exercise of an Option under the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange upon which such shares of Stock are then listed, under any blue sky or state securities laws applicable to such shares, and under any Stockholders' Agreement then in effect. 7.8 Termination Due to Death or Disability. In the event a Participant --------------------------------------- ceases to be an Employee by reason of death or Disability, any outstanding Options then exercisable may be exercised at any time prior to the expiration date of the Options or within twelve (12) months after such date of termination of employment, whichever period is the shorter. 7.9 Termination other then for Death or Disability. If a Participant ----------------------------------------------- ceases to be an Employee for any reason other than death or Disability, the rights which he or she may have under any then outstanding Option granted pursuant to the Plan shall terminate in accordance with the terms of the Option agreement. Except with respect to grants of incentive stock options, a Participant who is a common law employee of the Company shall not cease to be an Employee if he or she becomes an independent contractor with respect to the Company and an independent contractor with respect to the Company shall not cease to be an Employee if he or she immediately becomes a common law employee of the Company. 7.10 Nontransferability of Options. No Option granted under the Plan may ------------------------------ be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or by such Participant's conservator of the estate or the equivalent. SECTION 8. RIGHTS OF EMPLOYEES 8.1 Termination. Nothing in the Plan shall interfere with or limit in ------------ any way the right of the Company or its subsidiaries to terminate any Participant's employment as a common law employee or engagement as an independent contractor at any time, with or without cause, nor confer upon any Participant any right to continue in the employ of the Company or its subsidiaries. 5 8.2 Participation. No employee shall have a right to be selected as a -------------- Participant or, having been so selected, to be selected again as a Participant. SECTION 9. AMENDMENT, MODIFICATION AND TERMINATION OF PLAN Unless sooner terminated as provided herein, the Plan will automatically terminate on April 21, 2007. The Board at any time may terminate, and from time to time may amend or modify, the Plan. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant. SECTION 10. TAX WITHHOLDING The Company shall have the right to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local withholding tax requirements on any Option under the Plan and, notwithstanding any other provision to the contrary, no Option shall be subject to exercise until withholding satisfactory to the Company has been made. SECTION 11. MISCELLANEOUS 11.1 Requirements of Law. The granting of Options and the issuance of -------------------- shares of Stock upon exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 11.2 Use of Proceeds. The proceeds received by the Company from the ---------------- sale of Stock pursuant to Options granted under the Plan shall constitute general funds of the Company. 11.3 Gender and Number. Except as otherwise indicated by the context, ------------------ words in the masculine gender when used in this Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. 11.4 Headings. The headings herein are for convenience only and shall --------- not be used in interpreting the Plan. 11.5 Governing Law. The validity, interpretation and effect of this -------------- Plan, and all agreements hereunder, shall be governed by and construed in accordance with and governed by the laws of the State of Delaware, other than the choice of law rules thereof. 6 IN WITNESS WHEREOF, CB Commercial Real Estate Services Group, Inc. has caused this Plan to be adopted this 22nd day of April, 1997. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. By: /s/ James J. Didion ------------------------ James J. Didion Chief Executive Officer 7 EX-10.14(I) 4 1994 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN EXHIBIT 10.14(i) CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC./ KMS HOLDING CORPORATION AMENDED 1994 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN Section 1. Description of Plan. This is the Amended 1994 ------------------- Nonqualified Performance Stock Option Plan, dated November 23, 1994, as amended May 26, 1995 (the "Plan"), of KMS Holding Corporation, a Delaware corporation (the "Company"). Under the Plan, officers, certain directors, key employees and consultants of the Company or any of the directly or indirectly owned subsidiaries of the Company (individually, a "Subsidiary," and collectively, the "Subsidiaries"), to be selected as set forth below, may be granted options ("Options") to purchase shares of the Common Stock, $.01 par value per share, of the Company (the "Common Stock"). It is intended that Options under the Plan will not qualify for treatment as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and will thus be designated "Nonqualified Stock Options." Section 2. Purpose of Plan. The purpose of the Plan and of --------------- granting Options to specified persons is to further the growth, development and financial success of the Company and its Subsidiaries by providing additional incentives to certain officers, certain directors, key employees and consultants. By assisting such persons in acquiring shares of the Common Stock, the Company can ensure that such persons will themselves benefit directly from the Company's and the Subsidiaries' growth, development and financial success. Section 3. Eligibility. The persons who shall be eligible to ----------- receive grants of Options under the Plan shall be directors who are designated as "independent" members of the Company's Board of Directors (the "Board") and the officers and key employees and consultants of the Company and the Subsidiaries, including those directors of the Company and the Subsidiaries who are also officers, key employees and/or consultants. A person who holds an Option is herein referred to as a "Participant," and more than one Option may be granted to any Participant. Notwithstanding the foregoing, the Board may at any time or from time to time designate one or more directors as ineligible for selection as a Participant under the Plan for any period or periods of time. The designation by the Board of a director as ineligible for selection as a Participant under the Plan shall not affect Options previously granted to such director under the Plan. Section 4. Administration. -------------- (a) The Plan shall be administered by the Board or, at the Board's option, by a compensation committee established by the Board (the Board and such committee, collectively, the "Committee"). (b) The Committee is authorized and empowered to administer the Plan and, subject to the Plan (i) to select the Participants, to specify the number of shares of Common Stock with respect to which Options are granted to each Participant, to specify the terms of the Options, and in general to grant Options; (ii) to determine the dates upon which Options shall be granted and the terms and conditions thereof in a manner consistent with the Plan, which terms and conditions need not be identical as to the various Options granted; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Committee; (vi) to determine the rights and obligations of Participants under the Plan; (vii) to specify the Option Price (as defined in Section 6); (viii) to accelerate the time during which an Option may be exercised in accordance with the provisions of Section 15 hereof, and to otherwise accelerate the time during which an Option may be exercised, in each case notwithstanding the provisions in the Option Agreement (as defined in Section 12) stating the time during which it may be exercised; and (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan. The good faith interpretation and construction by the Committee of any provision of the Plan or of any Option granted under it shall be final, conclusive and binding. No member of the Committee shall be liable for any action or determination made with respect to the Plan or any Option granted hereunder. Section 5. Shares Subject to the Plan. The number of shares of -------------------------- Common Stock which may be purchased pursuant to the exercise of Options granted under the Plan shall not exceed 515,000 subject to adjustment as provided in Section 11 hereof. Upon the expiration or termination, in whole or in part, for any reason of an outstanding Option or any portion thereof which shall not have vested or shall not have been exercised in full or in the event that any shares of Common Stock acquired pursuant to the Plan are reacquired by the Company, (a) any shares of Common Stock then remaining unissued which shall have been reserved for issuance upon such exercise or (b) the shares reacquired, as the case may be, shall again become available for the granting of additional Options under the Plan. Section 6. Option Price. The purchase price per share (the ------------ "Option Price") of the shares of Common Stock underlying each Option shall be determined by the Committee, and shall be subject to adjustment as provided herein. Section 7. Restrictions on Grants; Vesting of Options. ------------------------------------------ Notwithstanding any other provisions set forth herein or in any Option Agreement, no Options may be granted under the Plan subsequent to 10 years from the date hereof. The vesting of all Options may be based on the Company's attaining of performance criteria as specified at the time of the granting thereof and may also be based on the passage of time. The Committee shall determine the performance criteria, the performance measurement period and the vesting schedule applicable to each Option or group of Options in a schedule, a copy of which shall be filed with the records of the Committee and attached to each Option Agreement to which the same applies. The performance criteria, the performance 2 measurement period and the vesting schedule need not be identical for all Options granted hereunder. Following the conclusion of each applicable performance measurement period, the Committee shall determine the extent, if at all, that each Option subject thereto shall have vested based upon the applicable performance criteria and vesting schedule. To the extent each such Option shall not have vested, and does not also vest based on the passage of time, it shall, to that extent, automatically terminate and cease to be exercisable to such extent notwithstanding the stated term during which it may be exercised. The Committee shall promptly notify each affected Participant of such determination. The Committee may periodically review the performance criteria applicable to any Option or Options and, in its sole good faith judgment, may adjust the same to reflect unanticipated major events, such as catastrophic occurrences, mergers, acquisitions and the like. Section 8. Exercise of Options. Once vested, an Option may be exercised ------------------- by the Participant by giving written notice to the Company specifying the number of full shares to be purchased and accompanied by payment of the full purchase price therefor in cash, by check or in such other form of lawful consideration as the Committee may approve from time to time, including, without limitation and in the sole discretion of the Committee, the assignment and transfer by the Participant to the Company of outstanding shares of Common Stock theretofore held by the Participant in a manner intended to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if applicable. Once vested, an Option may only be exercised by the Participant or in the event of death of the Participant, by the person or persons (including the deceased Participant's estate) to whom the deceased Participant's rights under such Option shall have passed by will or the laws of descent and distribution or the terms of the Participant's inter vivos trust. Notwithstanding the foregoing in the immediately preceding sentence, in the event of disability (within the meaning of Section 22(e)(3) of the Code) of a Participant, a designee, or if the Participant has no designee, the legal representative, of such Participant may exercise the Option on behalf of such Participant (provided such Option would have been exercisable by such Participant) until the right to exercise such Option expires, as set forth in such Participant's particular Option Agreement. Section 9. Issuance of Common Stock. The Company's obligation to issue ------------------------ shares of its Common Stock upon exercise of an Option is expressly conditioned upon the compliance by the Company with any registration or other qualification obligations with respect to such shares under any state and/or federal law or rulings and regulations of any government regulatory body and/or the making of such investment representations or other representations and undertakings by the Participant (or the Participant's legal representative, heir or legatee, as the case may be) in order to comply with the requirements of any exemption from any such registration or other qualification obligations with respect to such shares which the Company in its sole discretion shall deem necessary or advisable. Such required representations and undertakings may include representations and agreements that such Participant (or the Participant's legal representative, heir or legatee): (a) is purchasing 3 such shares for investment and not with any present intention of selling or otherwise disposing of such shares; and (b) agrees to have a legend placed upon the face and reverse of any certificates evidencing such shares (or, if applicable, an appropriate data entry made in the ownership records of the Company) setting forth (i) any representations and undertakings which such Participant has given to the Company or a reference thereto, and (ii) that, prior to effecting any sale or other disposition of any such shares, the Participant must furnish to the Company an opinion of counsel, satisfactory to the Company and its counsel, to the effect that such sale or disposition will not violate the applicable requirements of state and federal laws and regulatory agencies; provided, however, that any such legend or data entry shall be removed when no longer applicable. Inability of the Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. Any shares of Common Stock issued by the Company upon exercise of an Option granted hereunder shall be subject to a right of first refusal of the Company with respect to all shares proposed to be transferred by Participant, as described in Section 12 hereof and as more fully described in each particular Option Agreement. Section 10. Nontransferability. An Option may not be sold, pledged, ------------------ assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or inter vivos to a trust for the benefit of the Participant or the Participant and the Participant's spouse. Any permitted transferee shall be required prior to any transfer of an Option or shares of Common Stock acquired pursuant to the exercise of an Option to execute a written undertaking to be bound by the provisions of the applicable Option Agreement. Section 11. Adjustments To Capitalization. Subject to Section 14(b) ----------------------------- hereof, if the outstanding shares of the Common Stock of the Company are changed into, or exchanged for, a different number or kind of shares or securities of the Company through reorganization, recapitalization or reclassification, or if the number of outstanding shares is changed through a stock split, stock dividend, stock consolidation or like capital adjustment, or if the Company makes a distribution in partial liquidation or any other comparable extraordinary distribution with respect to its Common Stock, an appropriate adjustment shall be made by the Committee in the number, kind or exercise price of shares as to which Options may be granted. A corresponding adjustment shall likewise be made in the number, kind or exercise price of shares with respect to which unexercised Options have theretofore been granted. Any such adjustment in an outstanding Option, however, shall be made without change in the total price applicable to the unexercised portion of the Option but with a corresponding adjustment in the price for each share covered by the Option. In making such adjustments, or in determining that no such adjustments are necessary, the Committee may rely upon the advice of counsel and accountants to the Company, and the good faith 4 determination of the Committee shall be final, conclusive and binding. No fractional shares of stock shall be issued under the Plan on account of any such adjustment. Section 12. Option Agreement. Each Option granted under the Plan ---------------- shall be evidenced by a written nonqualified performance stock option agreement (an "Option Agreement") executed by the Company and the Participant which (a) shall contain each of the provisions and agreements herein specifically required to be contained therein; (b) shall contain provisions which give the Company a right to first refusal to purchase any Common Stock issued pursuant to the exercise of Options granted under the Plan which a Participant proposes to sell; and (c) may contain such other terms and conditions as the Committee deems desirable and which are not inconsistent with the Plan. Section 13. Rights as a Stockholder. A Participant shall have no ----------------------- rights as a stockholder with respect to any shares covered by an Option until the date (the "Exercise Date") an entry evidencing such ownership is made in the stock transfer books of the Company. Except as otherwise provided in Section 11 hereof, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. Section 14. Termination of Options. ---------------------- (a) Each Option granted under the Plan shall set forth a termination date thereof, which shall be not later than ten (10) years from the date such Option is granted subject to earlier termination as set forth in Section 7, Section 14(b) or Section 15 hereof, or as otherwise set forth in each particular Option Agreement. The termination of employment of, or of a consulting relationship with, a Participant for any reason shall not accelerate or otherwise affect the number of shares with respect to which an Option may be exercised; provided, however, that the Option may only be exercised with respect to that number of shares which could have been purchased under the Option had the Option been exercised by the Participant on the date of such termination. (b) Subject to Section 15 hereof, upon the dissolution, liquidation or sale of all or substantially all of the business, properties and assets of the Company, or upon any reorganization, merger or consolidation in which the Company does not survive, or upon any reorganization, merger or consolidation in which the Company does survive and the Company's stockholders have the opportunity to receive cash, securities of another corporation and/or other property in exchange for their capital stock of the Company, the Plan and each outstanding Option shall terminate; provided that in such event each Participant who is not tendered an option by the surviving corporation in accordance with all of the terms of the immediately succeeding sentence, or does not accept any such substituted option which is so tendered, shall have the right until 10 days before the effective date of such dissolution, liquidation, reorganization, merger or consolidation to exercise, in whole or in 5 part, any unexpired Option or Options issued to the Participant, to the extent that said Option is then vested and exercisable pursuant to the provisions of said Option or Options and of Section 7 of the Plan. In its sole and absolute discretion, the surviving corporation in any reorganization, merger or consolidation may, but shall not be so obligated to, tender to any Participant an option or options to purchase shares of the surviving corporation, and such new option or options shall contain such terms and provisions as shall be required to substantially preserve the rights and benefits of any Option then outstanding under the Plan and, if accepted by such Participant, such new option shall replace the Option under the Plan. Section 15. Acceleration of Options. Notwithstanding the provisions ----------------------- of Section 7 or Section 14 hereof, or any provision of the contrary contained in a particular Option Agreement, the Committee, in its sole discretion, at any time, or from time to time, may elect to accelerate the vesting of all or any portion of any Option then outstanding. The decision by the Committee to accelerate an Option or to decline to accelerate an Option shall be final, conclusive and binding. In the event of the acceleration of the exercisability of Options as the result of a decision by the Committee pursuant to this Section 15, each outstanding Option so accelerated shall be exercisable for a period from and after the date of such acceleration and upon such other terms and conditions as the Committee may determine in its sole discretion provided that such terms and conditions (other than terms and conditions relating solely to the acceleration of exercisability and the related termination of an Option) may not adversely affect the rights of any Participant without the consent of the Participant so adversely affected. Any outstanding Option which has not been exercised by the holder at the end of such period shall terminate automatically and become null and void. Section 16. Withholding of Taxes. The Company, or a Subsidiary, as -------------------- the case may be, may deduct and withhold from the wages, salary, bonus and other income paid by the Company or such Subsidiary to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of any Option, or the sale of Common Stock issued to the Participant upon the exercise of an Option, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such Subsidiary's) concurrent or next payment of wages, salary, bonus or other income to the Participant or by payment to the Company (or such Subsidiary) by the Participant of the required withholding tax, as the Committee may determine; provided, however, that, in the sole discretion of the Committee, the Participant may pay such tax by reducing the number of shares of Common Stock issued upon exercise of an Option (for which purpose such shares shall be valued at fair market value as determined in good faith by the Committee, which determination shall be final, conclusive and binding). Section 17. Effectiveness and Termination of the Plan. The Plan ----------------------------------------- shall be effective on the date on which it is adopted by the Board. The Plan shall terminate at the earliest of the time when all shares of Common Stock which may be issued hereunder have 6 been so issued or such other time as set forth in Section 14(b) hereof; provided, however, that the Board may in its sole discretion terminate the Plan at any other time. Subject to Section 14(b) hereof, no such termination shall in any way affect any Option then outstanding. Section 18. Time of Granting Options. The date of grant of an ------------------------ Option shall, for all purposes, be the date on which the Committee makes the determination granting such Option. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant. Section 19. Amendment of Plan. The Committee may make such ----------------- amendments to the Plan and, with the consent of each Participant affected, in the terms and conditions of granted Options as it shall deem advisable, including, without limitation, accelerating the time at which an Option may be exercised. No amendment shall in any way adversely affect any Option then outstanding, without the consent of the Participant so adversely affected. Section 20. Transfers and Leave of Absence. For purposes of the ------------------------------ Plan, (a) a transfer of a Participant's employment or consulting relationship, without an intervening period, between the Company and a Subsidiary shall not be deemed a termination of employment or a termination of consulting relationship and (b) a Participant who is granted in writing a leave of absence shall be deemed to have remained in the employ of, or in a consulting relationship with, the Company (or a Subsidiary, whichever is applicable) during such leave of absence. Section 21. No Obligation to Exercise Option. The granting of an -------------------------------- Option shall impose no obligation on the Participant to exercise such Option. Section 22. Indemnification. In addition to such other rights of --------------- indemnification as they may have as directors, the members of the Board or Committee shall be indemnified by the Company to the fullest extent permitted by law against the reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in satisfaction of a judgement in any such action, suit or proceeding. Section 23. Governing Law. The Plan and any Option granted pursuant ------------- to the Plan shall be construed under and governed by the laws of the State of Delaware without regard to conflict of law provisions thereof. 7 Section 24. Not an Employment or Other Agreement. Nothing contained in ------------------------------------ the Plan or in any Option Agreement shall confer, intend to confer or imply any rights of employment or any rights to any other relationship or rights to continued employment by, or rights to a continued relationship with, the Company or any Subsidiary in favor of any Participant or limit the ability of the Company or any Subsidiary to terminate with or without cause, in its sole and absolute discretion, the employment of, or relationship with, any Participant, subject to the terms of any written employment or other agreement to which a Participant is a party. 8 EX-10.14(II) 5 FORM OF NONSTATUTORY STOCK OPTION PLAN EXHIBIT 10.14(ii) ============================================== CB Commercial Real Estate Services Group, Inc. NONQUALIFIED STOCK OPTION AGREEMENT ============================================== THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is entered into as of August 28, 1997 by and between CB Commercial Real Estate Services Group, Inc., a Delaware corporation (the "Company"), and _______ ("Optionee") pursuant to the CB Commercial Real Estate Services Group, Inc./KMS Holding Corporation Amended 1994 Nonqualified Performance Stock Option Plan (the "Plan"). RECITALS A. Optionee was an employee, independent director or consultant of Koll Real Estate Services or of a direct or indirect subsidiary of Koll Real Estate Services who was granted a stock option by Koll Real Estate Services or its predecessor (collectively "KRES"). B. Koll Real Estate Services is being acquired by the Company and will thereby become a wholly owned indirect subsidiary of the Company and pursuant to the terms of the Agreement and Plan of Reorganization dated as of May 14, 1997, the Company, Koll Real Estate Services, and other persons named therein, the Company has agreed to issue this stock option to Optionee in substitution for the stock option previously granted to Optionee by KRES. AGREEMENT NOW, THEREFORE, in consideration of the covenants hereinafter set forth, the parties agree as follows: 1. OPTION; NUMBER OF SHARES. The Company hereby grants to Optionee the right ------------------------ (the "Option") to purchase ______ shares (the "Shares") of the Common Stock, $.01 par value per share, of the Company (the "Common Stock") at a purchase price of $____ per share (the "Option Price"), to be paid in accordance with Section 4 hereof. The Option and the right to purchase all or any portion of the Shares is subject to the terms and conditions stated in this Agreement and in the Plan. It is intended that the Option will not qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. TERM OF AGREEMENT. The Option, and Optionee's right to exercise the ----------------- Option, shall terminate when the first of the following occurs: a. termination pursuant to Section 14(b) or Section 15 of the Plan; 1 b. ______; or c. 90 days after the date of termination of Optionee's employment or other relationship with the Company and all of its direct or indirect subsidiaries (the "Subsidiaries") unless such termination results from Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code) or Optionee dies within 90 days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, in which case this Agreement and the Option shall terminate 180 days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries. 3. DEATH OF OPTIONEE; NO ASSIGNMENT. The rights of Optionee under this -------------------------------- Agreement may not be assigned or transferred except by will, by the laws of descent or distribution or inter vivos to a trust for the benefit of Optionee or Optionee and Optionee's spouse and may be exercised during the lifetime of Optionee only by such Optionee; provided, however, that in the event of disability (within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of Optionee, or if Optionee has not designated anyone, his or her legal representative, may exercise the Option on behalf of Optionee (provided the Option would have been exercisable by Optionee) until the right to exercise the Option expires pursuant to Section 2 hereof. Any attempt to sell, pledge, assign, hypothecate, transfer or otherwise dispose of the Option in contravention of this Agreement or the Plan shall be void and shall have no effect. If Optionee should die while Optionee is engaged in an employment or other relationship with the Company and/or any Subsidiary, Optionee's legal representative, Optionee's legatee, the successor trustee of Optionee's inter vivos trust or the person who acquired the right to exercise the Option by reason of the death of Optionee (individually, a "Successor") shall succeed to Optionee's rights under this Agreement. After the death of Optionee, only a Successor may exercise the Option. 4. EXERCISE OF OPTION. Until termination of the Option in accordance with ------------------ Section 2 hereof, the Option may be exercised by Optionee (or such other person specified in Section 3 hereof), upon delivery of the following to the Company at its principal executive offices: a. a written notice of exercise which identifies this Agreement and states the number of Shares (which may not be less than 100, or all of the Shares if less than 100 Shares then remain covered by the Option) then being purchased; b. a check, cash or any combination thereof in the amount of the Option Price (or payment of the Option Price in such other form of lawful consideration as the Committee may approve from time to time under the provisions of Section 8 of the Plan, including without limitation and in the sole discretion of the Committee, i. the assignment and transfer by Optionee to the Company of outstanding shares of Common Stock theretofore held by Optionee; and ii. the surrender of that number of Options necessary (based on the amount that the aggregate fair market value of the Shares covered by the Options being surrendered exceeds the aggregate Option Price with respect to such Shares) to pay the Option Price with respect to those Options being exercised, each in a manner intended to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if applicable). Such shares of Common Stock delivered or Shares covered by Options surrendered in payment of the Option Price shall be valued at fair market value as determined by the Committee in good faith, which determination shall be final, conclusive and binding; 2 c. a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by Optionee in connection with the exercise, in whole or in part, of the Option (unless the Committee has determined to allow the Optionee to, and the Optionee elects to, pay such tax by reducing the number of shares of Common Stock issued upon exercise of the Option (for which purpose such shares shall be valued at fair market value as determined in good faith by the Committee, which determination shall be final, conclusive and binding) or unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other income paid to Optionee by the Company or any Subsidiary, provided such arrangement satisfy the requirements of applicable tax laws); and d. a written representation and undertaking, if requested by the Company pursuant to Section 5.b. hereof, in such form and substance as the Company may require, setting forth the investment intent of Optionee, or a Successor, as the case may be, and such other agreements, representations and undertakings as described in the Plan. 5. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. ------------------------------------------ a. Optionee represents and warrants that the Option is being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. b. Optionee acknowledges that the Company may issue Shares upon the exercise of the Option without registering such Common Stock under the Act on the basis of certain exemptions from such registration requirement. Accordingly, Optionee agrees that Optionee's exercise of the Option may be expressly conditioned upon Optionee's delivery to the Company of such representations and undertakings as the Company may reasonably require in order to secure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing of such Shares. Optionee acknowledges that, because Shares receive upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Act or an exemption from such registration is available. c. Optionee acknowledges receipt of this Agreement granting the Option, and the Plan, and understands that all rights and liabilities connected with the Option are set forth herein and in the Plan. 6. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a stockholder ------------------------ of any shares of Common Stock covered by the Option until the date (the "Exercise Date") an entry evidencing such ownership is made in the stock transfer books of the Company. Except as may be provided under Section 11 of the Plan, the Company will make no adjustment for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 7. LIMITATION OF COMPANY'S LIABILITY FOR NONISSUANCE. Inability of the ------------------------------------------------- Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares of its Common Stock hereunder and under the Plan shall relieve the Company of any liability in respect of the 3 nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. 8. THIS AGREEMENT SUBJECT TO PLAN. This Agreement is made under the ------------------------------ provisions of the Plan and shall be interpreted in a manner consistent with it. To the extent any provision in this Agreement is inconsistent with the Plan, the provisions of the Plan shall control. A copy of the Plan is available to Optionee at the Company's principal executive offices upon request and without charge. The good faith interpretation of the Committee of any provision of the Plan, the Option or this Agreement, and any determination with respect thereto or hereto by the Committee, shall be final, conclusive and binding on all parties. 9. RESTRICTIVE LEGENDS. Optionee hereby acknowledges that federal securities ------------------- laws and the securities laws of the state in which Optionee resides may require the placement of certain restrictive legends upon the Shares issued upon exercise of the Option, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may reasonably deem necessary; provided, however, that any such legend shall be removed when no longer applicable. 10. NOTICES. All notices, requests and other communications hereunder shall be ------- in writing and, if given by telegram, telecopy or telex, shall be deemed to have been validly served, given or delivered when sent, if given by personal delivery, shall be deemed to have been validly served, given or delivered upon actual delivery and, if mailed, shall be deemed to have been validly served, given or delivered three business days after deposit in the United States mails, as registered or certified mail, with proper postage prepaid and addressed to the party or parties to be notified, at the following addresses (or such other address(es) as a party may designate for itself by like notice): If To The Company: CB Commercial Real Estate Services Group, Inc. 533 S. Fremont Avenue Los Angeles, California 90071-1798 Attention: Secretary If To Optionee: 11. NOT AN EMPLOYMENT OR OTHER AGREEMENT. Nothing contained in this Agreement ------------------------------------ shall confer, intend to confer or imply any rights to an employment or other relationship or rights to a continued employment or other relationship with the Company and/or any Subsidiary in favor of Optionee or limit the ability of the Company and/or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment or other relationship with Optionee, subject to the terms of any written employment or other agreement to which Option is a party. 12. GOVERNING LAW. This Agreement shall be construed under and governed by the ------------- laws of the State of Delaware without regard to the conflict of law provisions thereof. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original and both of which together shall be deemed one Agreement. 4 IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the date first above written. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. By: ____________________________________________ Walter V. Stafford Senior Executive Vice President OPTIONEE: ________________________________ 5 EX-10.15 6 CONSULTING AGREEMENT EXHIBIT 10.15 [LETTERHEAD OF CB COMMERCIAL] May 20, 1997 Mr. Donald M. Koll KOLL The REAL ESTATE SERVICES COMPANY 4343 Von Karman Avenue Newport Beach, California 92660 Dear Don: This letter will confirm your engagement as a consultant to CB Commercial Real Estate Group, Inc. ("CBC") for a one year period commencing with the Effective Date of our Merger with Koll Real Estate Services. We ask that you spend not to exceed 20 hours a month doing the following: . Consulting with our senior executives with respect to commercial real estate matters including economic trends. . Acting as a goodwill agent of CB Commercial at the many real estate related conferences and groups of which you are such an important part. For your services CBC will pay you $12,500 per month and reimburse you for all expenses which you reasonably incur on our behalf including travel expenses incurred at our request. Your engagement may be terminated by either party on 30 days advance written notice and neither party shall have any liability to the other party as a result of such termination. You have been granted a stock option by CB Commercial Real Estate Services Group, Inc. for 250,000 shares of its common stock at a price of $36.75. Your option is fully vested but will terminate one year after this Letter Agreement is terminated. You will be an independent contractor and as such you will determine when and how you provide services as well as the projects which you are to work on. You will have no authority to bind CB Commercial or its affiliates. If the foregoing is acceptable please sign and return to me the extra copy of this letter which I have enclosed. Yours very truly, /s/ James J. Didion James J. Didion c. Nancy Morris/CB Commercial Walter Stafford/CB Commercial AGREED AND ACCEPTED THIS 16 DAY OF JULY, 1997 /s/ Donald M. Koll _____________________ EX-10.22(II) 7 CREDIT AGREEMENT EXHIBIT 10.22(ii) AMENDMENT NO. 1 TO CREDIT AGREEMENT _________________________________ AMENDMENT NO. 1 (this "Amendment") dated as of January 21, 1998, to --------- the Credit Agreement dated as of August 28, 1997 (the "Credit Agreement"), by ---------------- and among CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC., a Delaware corporation (the "Company"), the BANKS (as such term is defined in the Credit Agreement), ------- THE SUMITOMO BANK, LIMITED, as senior managing agent for the Banks (the "Senior ------ Managing Agent"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as - -------------- Issuing Bank and as Agent, and WELLS FARGO BANK, N.A., BHF-BANK AKTIENGESELLSCHAFT, CREDIT LYONNAIS LOS ANGELES BRANCH, DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH, and KEY BANK NATIONAL ASSOCIATION, as Co- Agents (collectively, the "Co-Agents"; individually, a "Co-Agent"). --------- -------- RECITALS -------- A. The Company has proposed to repurchase all of its outstanding shares of Convertible Preferred Stock for a purchase price (including payment of accrued dividends thereon) not to exceed $82,000,000 in the aggregate (the "Stock Repurchase"), which shares are currently held by four institutions. - ----------------- B. The Company has requested that the Credit Agreement be amended to permit, among other things, the amount of the Combined Commitments, in an aggregate amount not to exceed $82,000,000, to be used for the Company's general corporate purposes, including the repurchase of the Convertible Preferred Stock of the Company and payment of accrued dividends thereon, and each of the Agent, the Issuing Bank and the Banks is willing to agree to such amendments subject to the terms and conditions hereinafter set forth. C. Section 11.01 of the Credit Agreement provides that the Credit Agreement may be amended after the Closing Date with the written consent of the Company, and, in certain circumstances, the Required Banks. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. RELATION TO THE CREDIT AGREEMENT; DEFINITIONS. 1.1 Relation to Credit Agreement. This Amendment constitutes an ---------------------------- integral part of the Credit Agreement. 1.2 Capitalized Terms. For all purposes of this Amendment, ----------------- capitalized terms used herein without definition shall have the meanings specified in the Credit Agreement, as said agreement shall be in effect on the Effective Date after giving effect to this Amendment. SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT. 2.1 Amendment to Section 1.01 of the Credit Agreement. (a) Section ------------------------------------------------- 1.01 of the Credit Agreement is amended to add the following definitions, in alphabetical order: "Amendment" means Amendment No. 1 to Credit Agreement dated as of --------- January 21, 1998 by and among the Company, the Banks, the Issuing Bank, the Senior Managing Agent, the Co-Agents and the Agent. "Stock Repurchase" has the meaning specified in the Amendment. ---------------- (b) Section 1.01 of the Credit Agreement is amended by deleting each of the definitions of "Agreement," "EBITDA," "Indebtedness," "Interest Period," "Inventory Property Loan" and "Restricted Payment" in its entirety and replacing it with the following: "Agreement" means this Credit Agreement, as amended from time to --------- time. "EBITDA" means for any period for which the amount thereof is to ------ be determined, the consolidated net income of such Person for such -2- period plus the aggregate amounts deducted in determining such ---- consolidated net income in respect of (i) consolidated interest expense of such Person for such period, (ii) income and other taxes measured by income or profits of such Person for such period, and (iii) depreciation and amortization for such period, in each case in accordance with GAAP; provided, however, that consolidated net income -------- ------- shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains and without giving effect to any income contributed by the Inventory Property Loan. "Indebtedness" of any Person means, without duplication, (a) all ------------ indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into or commissions or bonuses payable in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Contingent Obligations (excluding any portion of recorded liabilities for legal judgments which are collateralized by cash secured letters of credit); provided, that, with respect to clauses -------- (a), (d), (e) and (f) above, the term "Indebtedness" shall exclude the obligations evidenced by the Inventory Property Loan in an aggregate amount not to exceed $7,400,000. For all purposes of this Agreement, the Indebtedness of any Person shall include all obligations of such Person of the character described in -3- clauses (a) through (h) above to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP, and the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture or limited liability company in which such Person is a general partner or a joint venturer or a member. "Interest Period" means, as to any Offshore Rate Loan, the period --------------- commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date seven (7) days or one (1), two (2), three (3) or six (6) months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided, that, the Company may only select a -------- seven (7)-day Interest Period up to six (6) times per calendar year; provided, further that: -------- ------- (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) other than with respect to a seven (7) day Interest Period, any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond the Revolving Termination Date. -4- "Inventory Property Loan" means the obligations as evidenced by ----------------------- each of the Second Amended and Restated Promissory Note One dated as of December 30, 1994, as amended, and the Second Amended and Restated Promissory Note Two dated as of December 30, 1994, as amended, each between CB Commercial Warehouse Property Corp., a Delaware corporation and General Electric Capital Corporation, a New York corporation, now held by GELCO Corporation, a Minnesota corporation. "Restricted Payment" means, (a) any dividend or other ------------------ distribution, direct or indirect, in respect of any shares of the Capital Stock of the Company or any of its Subsidiaries, other than dividends or other distributions payable solely in shares of its Capital Stock, or warrants, rights, or options therefor, and dividends or other distributions by any of its Subsidiaries to the Company or another Subsidiary; and (b) any purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company or any of its Subsidiaries, now or hereafter outstanding (except for the Stock Repurchase or any purchase, redemption, retirement or other acquisition of any shares of Capital Stock of any Subsidiary by the Company), or of any warrants, rights or options evidencing a right to purchase or acquire any such shares (except in exchange for other shares of Capital Stock or warrants, rights or options evidencing a right to purchase or acquire any such shares). 2.2 Amendment to Section 7.12 of the Credit Agreement. Section 7.12 of ------------------------------------------------- the Credit Agreement is amended by deleting it in its entirety and replacing it with the following. 7.12 Use of Proceeds. The Company shall use the proceeds of the --------------- Loans (i) to refinance a portion of outstanding indebtedness of the Company to The Sumitomo Bank, Limited and certain other creditors in an aggregate amount up to $165,000,000; (ii) to prepay a portion of outstanding Indebtedness of Koll in an aggregate amount up to $55,000,000 in connection with the Merger; (iii) to pay expenses and costs associated with the Loans and the Merger; and (iv) to provide for general corporate purposes including funding working capital needs, funding the Stock Repurchase (in an aggregate amount not exceeding $82,000,000), issuing letters of credit, and financing future acquisitions -5- not in contravention of any Requirement of Law or of any Loan Document. 2.3 Amendment to Section 8.11 of the Credit Agreement. Section 8.11 of the ------------------------------------------------- Credit Agreement is amended by deleting it in its entirety and replacing it with the following: 8.11 Maintenance of Consolidated Net Worth. The Company shall not ------------------------------------- permit Consolidated Net Worth at any time to be less than the sum of (i) seventy-five percent (75%) of Consolidated Net Worth as of December 31, 1997, determined on a pro forma basis to give effect to the Stock Repurchase (provided, that in no event shall such Consolidated Net Worth be -------- less than $57,000,000) plus (ii) seventy percent (70%) of Consolidated Net ---- Income for each completed fiscal quarter beginning with the fiscal quarter ended March 31, 1998, for which Consolidated Net Income is a positive number (Consolidated Net Income for any such fiscal quarter where Consolidated Net Income is a loss having no effect on the calculation of the amount referred to in this clause (ii)), plus (iii) seventy percent ---- (70%) of any new equity issuances of the Company and its Subsidiaries after December 31, 1997. SECTION 3. REPRESENTATION AND WARRANTIES OF THE COMPANY. 3.1 Representations and Warranties. To induce each of the Agent, the ------------------------------ Issuing Bank and the Banks to execute and deliver this Amendment (which representations shall survive the execution and deliver of this Amendment), the Company represents and warrants to each of the Agent, the Issuing Bank and the Banks that: (a) Authority. This Amendment has been duly authorized, executed and ---------- delivered by it and this Amendment constitutes the legal, valid and binding obligation, contract and agreement of the Company enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) Validity of Amendment. The Loan Documents, as amended by this ---------------------- Amendment, constitute the legal, valid and binding obligations, contracts and agreements of the Company enforceable against it in accordance with their respective terms, except -6- as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) Authorization; No Violation. The execution, delivery and ---------------------------- performance by the Company of this Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, or (B) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 2.1(c); (d) No Default or Event of Default. As of the date hereof and after ------------------------------- giving effect to this Amendment, no Default or Event of Default has occurred which is continuing; and (e) All Other Representations and Warranties. All the ---------------------------------------- representations and warranties contained in Section VI of the Credit Agreement are true and correct in all materials respects with the same force and effect as if made by the Company on and as of the date hereof (except as to the extent that any such representations or warranties relate to a specific prior date or period). SECTION 4. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. 4.1 Effective Date. This Amendment shall not become effective until, and -------------- shall become effective when, each and every one of the following conditions shall have been satisfied or waived by the Agent, the Issuing Bank and the Required Banks (the "Effective Date"); provided, however, that the provisions of -------------- -------- ------- Section 2.1 of this Amendment, to the extent such provisions add or change definitions of terms used in the Credit Agreement as amended by this Amendment (other than with respect to the definition of "Restricted Payment"), shall become effective as of the date on which each of the following conditions (other than clause (c)) shall have been satisfied or waived by the Agent, the Issuing Bank and the Required Banks. -7- (a) Execution of Counterparts. Counterparts of this Amendment shall ------------------------- have been executed and delivered by each of the Company, the Guarantors, the Agent, the Issuing Bank and the Banks. (b) Representations True; No Event of Default. The Company shall ----------------------------------------- have delivered to the Agent an Officer's Certificate, dated the Effective Date, certifying that the representations and warranties of the Company contained herein shall be true on and as of the Effective Date (except as to the extent that any such representations or warranties relate to a specific prior date or period) and that there exists no Event of Default or Default, assuming for this purpose that this Amendment had been effective from and after the date hereof. (c) Consummation of Stock Repurchase. Concurrently with or --------------------------------- immediately after the consummation of the transactions hereunder and in any event not later than March 30, 1998, the Stock Repurchase shall have been consummated in accordance with all applicable statutes, laws, rules and regulations. (d) No Material Adverse Change. There shall have been no material --------------------------- adverse change in the business, earnings, prospects, properties or condition (financial or otherwise) of the Company or any of its Subsidiaries since December 31, 1997. (e) Fees and Disbursements of Special Counsel for the Agent. The -------------------------------------------------------- Agent's special counsel, Paul, Hastings, Janofsky & Walker LLP ("Special ------- Counsel"), shall have received payment of the invoice rendered for its fees and - ------- disbursements posted through the date of such invoice (with the understanding that a supplemental statement for fees and disbursements subsequently posted is to be rendered at a later date) in connection with the consummation of the transactions contemplated hereunder. (f) Amendment Fee. The Company shall pay to the Agent for the account ------------- of each Bank , which (i) indicates its approval to this Amendment by executing a copy of the letter from the Agent to each Bank dated January 16, 1998 and returning such letter by telecopy to the Agent by no later than 5:00 p.m. (Los Angeles time) on January 21, 1998 and (ii) executes a counterpart of this Amendment, an amendment fee equal to one-eighth of one percent (1/8%) of such Bank's Commitment, and such amendment fee shall be due and payable on the Effective Date whether or not the Stock Repurchase has been or will be consummated. (g) Consents. The Company shall have delivered to the Agent an --------- Officer's Certificate, dated the Effective Date, certifying that any necessary consents, -8- waivers, approvals, authorizations, registrations, filings and notifications in connection with the authorization, execution and delivery of this Amendment have been obtained or made and are in full force and effect. (h) Proceedings, Instruments, etc. All proceedings and actions taken ------------------------------ on or prior to the Effective Date in connection with the transactions contemplated by this Amendment and all instruments incident thereto shall be in form and substance satisfactory to the Agent and its Special Counsel, and the Agent and its Special Counsel shall have received copies of all documents that it or they may request in connection with such proceedings, actions and transactions (including, without limitation, copies of court documents, certifications, and evidence of the correctness of the representations and warranties contained herein and certifications and evidence of the compliance with the terms and the fulfillment of the conditions of this Amendment) in the form and substance satisfactory to the Agent and its Special Counsel. SECTION 5. PAYMENT OF AGENT'S COUNSEL FEES AND EXPENSES. 5.1 The Company agrees to pay upon demand, the reasonable fees and expenses of Paul, Hastings, Janofsky & Walker, LLP, counsel to the Agent, in connection with the negotiation, preparation, approval, execution and delivery of this Amendment. SECTION 6. CONSENT OF GUARANTORS. 6.1 Each Guarantor, as a guarantor under the Credit Agreement, hereby consents to the terms of this Amendment and hereby confirms and agrees that its Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects. SECTION 7. CONSENT OF AGENT AND BANKS. 7.1 Pursuant to Section 11.01 of the Credit Agreement, each of the Agent, the Issuing Bank and the Banks hereby consents to the Stock Repurchase by the Company. SECTION 8. MISCELLANEOUS. 8.1 Cross-References. References in this Amendment to any Section are, ----------------- unless otherwise specified, to such Section of this Amendment. -9- 8.2 Instrument Pursuant to Existing Credit Agreement; ------------------------------------------------- Limited Amendment. This Amendment is executed pursuant to Section ------------------ 11.01 of the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered, and applied in accordance with all of the terms and provisions of the Credit Agreement, including Section 11.01 thereof. Except as expressly amended, any conditions of the Credit Agreement shall remain unamended and unwaived. The amendments set forth herein shall be limited precisely as provided for herein to the provisions expressly amended herein and shall not be deemed to be a waiver of, amendment of, consent to or modification of any other term or provision of any other document or of any transaction or further action on the part of the Company or the Guarantors which would require the consent of any Bank, the Issuing Bank or the Agent under the Credit Agreement. 8.3. Successors and Assigns. This Amendment shall be binding upon and ----------------------- inure to the benefit of the parties hereto and their respective successors and assigns. 8.4 Counterparts. This Amendment may be executed simultaneously in two or ------------- more counterparts, each of which shall be deemed to be an original but all of which shall constitute together but one and the same instrument. 8.5 Governing Law. This Amendment and the notes shall be governed by and -------------- construed in accordance with the laws of the State of California. -10- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. By: /s/ John C. Haeckel ------------------------------------ Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Janet Hammond ------------------------------------- Name: Janet Hammond Title: Vice President Agency Specialist -11- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Issuing Bank By: /s/ Gina M. West -------------------------------------------- Name: Gina M. West Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: /s/ Gina M. West -------------------------------------------- Name: Gina M. West Title: Vice President THE SUMITOMO BANK, LIMITED By: /s/ Goro Hirai -------------------------------------------- Name: Goro Hirai Title: Joint General Manger WELLS FARGO BANK, N.A. By: /s/ Clare T. Gurbach -------------------------------------------- Name: Clare T. Gurbach Title: Vice President -12- BHF-BANK AKTIENGESELLSCHAFT By: /s/ Dan Dobrjanskyj -------------------------------------------- Name: Dan Dobrjanskyj Title: Assistant Vice President By: /s/ Anthony Heyman -------------------------------------------- Name: Anthony Heyman Title: Assistant Treasurer CREDIT LYONNAIS LOS ANGELES BRANCH By: /s/ Diane M. Scott -------------------------------------------- Name: Diane M. Scott Title: Vice President and Manager DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: /s/ Christopher E. Sarisky -------------------------------------------- Name: Christopher E. Sarisky Title: Assistant Treasurer By: /s/ John W. Sweeney -------------------------------------------- Name: John W. Sweeney Title: Assistant Vice President KEY BANK NATIONAL ASSOCIATION By: /s/ Richard J. Ameny. Jr. -------------------------------------------- Name: Richard J. Ameny. Jr. Title: Assistant Vice President -13- THE BANK OF NOVA SCOTIA By: /s/ M. Van Otterloo -------------------------------------------- Name: M. Van Otterloo Title: Senior Relationship Manager LASALLE NATIONAL BANK By: /s/ John Berghorst -------------------------------------------- Name: John Berghorst Title: Vice President THE MITSUBISHI TRUST AND BANKING CORPORATION By: /s/ Yasushi Satomi -------------------------------------------- Name: Yasushi Satomi Title: Senior Vice President THE SAKURA BANK, LIMITED By: /s/ Fernando Buesa -------------------------------------------- Name: Fernando Buesa Title: Vice President By: /s/ Ofusa Sato -------------------------------------------- Name: Ofusa Sato Title: Senior Vice President and Assistant General Manager -14- THE BANK OF NEW YORK By: /s/ Jonathan Rollins -------------------------------------------- Name: Jonathan Rollins Title: Assistant Vice President MELLON BANK, N.A. By: /s/ L.C. Ivey -------------------------------------------- Name: L.C. Ivey Title: Vice President THE FUJI BANK, LIMITED, LOS ANGELES AGENCY By: /s/ Masahito Fukuda -------------------------------------------- Name: Masahito Fukuda Title: Joint General Manager NATEXIS BANQUE-BFCE By: Not a signatory -------------------------------------------- Name: Title: -15- BANK OF MONTREAL By: /s/ B.A. Blucher -------------------------------------------- Name: B.A. Blucher Title: Senior Vice President -16- The foregoing Amendment is consented to and accepted: CB COMMERCIAL REAL ESTATE GROUP, INC., a Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer KOLL MANAGEMENT SERVICES, INC., a Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer WESTMARK REALTY ADVISORS LLC, a Delaware limited liability company By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Vice President and Assistant Treasurer -17- L.J. MELODY & COMPANY, a Texas corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Treasurer CB COMMERCIAL/KOLL CORPORATE FACILITIES MANAGEMENT, INC., a Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Assistant Treasurer KOLL INVESTMENT MANAGEMENT, INC., a California corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Vice President and Assistant Treasurer KOLL BREN REALTY ADVISORS, INC., Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer -18- CBS INVESTMENT REALTY, INC., an Arizona corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer KOLL PARTNERSHIPS I, INC., a Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer KOLL PARTNERSHIPS II, INC., a Delaware corporation By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer -19- KOLL/CC&F MANAGEMENT SERVICES, a California general partnership By: KOLL MANAGEMENT SERVICES, INC., General Partner By: /s/ John C. Haeckel --------------------------------------------- Name: John C. Haeckel Title: Senior Executive Vice President, Chief Financial Officer and Treasurer -20- EX-10.23 8 STOCK OPTION PLAN EXHIBIT 10.23 AMENDMENT TO CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. 1990 STOCK OPTION PLAN (THE "1990 PLAN"), 1991 SERVICE PROVIDERS STOCK OPTION PLAN (THE "1991 PLAN"), L.J. MELODY ACQUISITION STOCK OPTION PLAN (THE "MELODY PLAN"), KOLL ACQUISITION STOCK OPTION PLAN (THE "KOLL PLAN") ADOPTED BY THE BOARD OF DIRECTORS NOVEMBER 18, 1997 Section 5.3 of each of the 1990 Plan, the 1991 Plan, the Melody Plan and the Koll Plan is amended to read in its entirety as follows: "5.3. EFFECT OF CHANGES IN CAPITALIZATION ----------------------------------- "(a) CHANGES IN STOCK. If the outstanding shares of Stock are increased or ----------------- decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease affecting such outstanding shares generally that is effected without receipt of consideration by the Company, occurring after the effective date of the Plan, the number and kinds of shares for the purchase of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Committee. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate ownership interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. If there is a distribution payable in the capital stock of a Subsidiary ("Spin-off Shares"), to the extent consistent with Treasury Regulation Section 1.425- 1(a)(6) or the corresponding provision of any subsequent regulation, each outstanding Option shall thereafter additionally pertain to the number of Spin- off Shares which would have been received if the Optionee had been the holder on the distribution date of the number of shares that are subject to the Option at the time of such distribution, and the aggregate Option Price of the Option shall be allocated between the Spin-off Shares and the Stock in proportion to the relative fair market values of a Spin-off Share and a share of Stock immediately after the distribution of Spin-off Shares. -1- "(b) REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING COMPANY. If the ------------------------------------------------------------- Company shall be the surviving company in any reorganization, merger, or consolidation of the Company with one or more other companies which is approved by the Board of Directors, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. "(c) REORGANIZATION IN WHICH THE COMPANY IS NOT THE SURVIVING COMPANY; SALE ---------------------------------------------------------------------- OF ASSETS OR STOCK. Upon any of the following events, which event was opposed - ------------------- by the Board of Directors; i) the dissolution or liquidation of the Company; ii) a merger, consolidation or reorganization of the Company with one or more other companies in which the Company is not the surviving company; iii) a sale of substantially all of the assets of the Company to another company; or iv) any transaction (including, without limitation, a merger or reorganization in which the Company is the surviving company) following the adoption of this amendment to the Plan which results in any person or entity owning twenty-five percent (25%) or more of the combined voting power of all classes of stock of the Company, the Plan and all Options outstanding hereunder shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan and/or the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor company, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Committee in its sole discretion shall determine and designate, to exercise such Option in whole or in part, whether or not such Option was otherwise exercisable at the time such termination occurs and without regard to any installment limitation on exercise imposed pursuant to the Plan or Option Agreement. The Committee shall send written notice of an event that will result in such a termination to all individuals who hold Options not later than the time at which the Company gives notice thereof to its stockholders. "(d) ADJUSTMENTS. Adjustments under this Section 5.3 ------------ -2- related to stock or securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. "(e) NO LIMITATIONS ON THE COMPANY. The grant of an Option pursuant to the ------------------------------ Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets." -3- EX-10.24(II) 9 FORM OF SPP PURCHASE AGREEMENT EXHIBIT 10.24(ii) SPP PURCHASE AGREEMENT BY AND AMONG WESTMARK REAL ESTATE ACQUISITION PARTNERSHIP, L.P., CB COMMERCIAL REAL ESTATE GROUP, INC. AND ______________________________ August 15, 1997 SPP PURCHASE AGREEMENT THIS SPP PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the 15th day of August, 1997 by and among WESTMARK REAL ESTATE ACQUISITION PARTNERSHIP, L.P., a limited partnership organized under the laws of Delaware ("Purchaser"), CB COMMERCIAL REAL ESTATE GROUP, INC., a Delaware corporation ("CBC"), and _____________, an individual ("Owner"). R E C I T A L S A. Pursuant to the Purchase Agreement, dated May 15, 1995 by and among Purchaser, CBC, the Controlling Westmark Owners and the Individual Westmark Owners (the "1995 Purchase Agreement"), Purchaser acquired all of the voting and ownership interests in Westmark Realty Advisors L.L.C., a Delaware limited liability company ("Westmark"), from the Controlling Westmark Owners and the Individual Westmark Owners (as defined in the 1995 Purchase Agreement). B. Purchaser currently is obligated to pay to Owner, the other Controlling Westmark Owners and the Individual Westmark Owners the Supplemental Purchase Price under the terms and conditions set forth in the 1995 Purchase Agreement (the "Supplemental Purchase Price"). C. Purchaser desires to purchase from Owner, and Owner desires to sell to Purchaser, all of Purchasers' right, title and interest in and to the Supplemental Purchase Price. D. The parties hereto desire to modify certain of the rights and obligations of the parties established by the 1995 Purchase Agreement and the ancillary agreements entered into in connection therewith. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, agreements and covenants herein contained, and for other consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 TRANSACTIONS ------------ 1.1 Payment in Satisfaction of Supplemental Purchase Price. Subject to ------------------------------------------------------ the conditions set forth in Section 1.5, Purchaser hereby agrees to pay to Owner the SPP Payment as set forth in Schedule 1.1 on the Payment Date set forth on such Schedule by cashier's check payable to Owner, and Owner agrees to accept such payment, in full and complete satisfaction of any and all obligations of Purchaser or CBC (whether -1- presently accrued or to accrue hereafter) to pay the Supplemental Purchase Price under the 1995 Purchase Agreement. 1.2 Changes to Transaction Documentation. Purchaser and CBC, on the one ------------------------------------ hand, and Owner, on the other hand, hereby agree that effective as of the date on which all of the conditions set forth in Section 1.5 shall have been satisfied or waived by Purchaser and CBC (the "Effective Date") and without any further action of any party: (a) 1995 Purchase Agreement Amendments. The 1995 Purchase Agreement is ----------------------------------- amended as follows: (i) Article 3 thereof is deleted in its entirety and replaced with "[intentionally omitted]". (ii) Section 9.14, 9.16 and 9.18 thereof each is deleted in their entirety and replaced with "[intentionally omitted]". (iii) Article 11 thereof is amended by deleting all references to Sections 9.16 and 9.18 contained therein. (iv) Section 14.5 thereof is deleted in its entirety. (v) Section 15.11 thereof is deleted in its entirety. (b) Termination of Incentive Compensation Plan. Owner acknowledges and ------------------------------------------ agrees that: (i) the Westmark Realty Advisers Incentive Compensation Plan (the "Incentive Plan") is terminated; (ii) Vincent F. Martin, Jr., Bruce L. Ludwig and Stanton F. Zarrow resign as members of the Incentive Plan Committee (as defined in the Incentive Plan), and appoint Walter V. Stafford, John C. Haeckel and Ronald Plakshe to fill the resulting vacancies; and (iii) Owner has no interest of any kind, whether presently accrued or to accrue hereafter, resulting from, relating to or arising out of, directly or indirectly, the Incentive Plan. 1.3 Release of Purchaser and CBC. Owner agrees that effective as of the ----------------------------- Effective Date and without any further action of any party: (a) Owner, on behalf of himself or herself and on behalf of his or her heirs, executors, administrators, beneficiaries, assigns, successors, attorneys- in-fact and anyone claiming an interest through or under any of them (collectively, -2- "Releasor"), unconditionally and irrevocably releases and discharges Purchaser, CBC and Westmark and all of their respective present and former parent companies, subsidiaries, predecessors, successors, divisions, partnerships and/or associated companies, corporations, partnerships and organizations and all of their present and former officers, directors, employees, agents, representatives, attorneys, partners, affiliates and stockholders (collectively, the "Released Parties") with respect to any and all manner of action or actions, suits, cause or causes of action, in law or in equity or otherwise, claims, covenants, controversies, promises, contracts, agreements, accounts, payments, acts, liabilities, obligations, defenses, demands, damages, losses, costs or expenses of any kind or nature whatsoever, known or unknown, fixed, contingent, foreseen or unforeseen, suspected or unsuspected, whether presently accrued or to accrue hereafter, whether or not heretofore asserted (collectively, the "Claims") which Releasor ever had, now has or may hereafter have against one or more of the Released Parties resulting from, relating to or arising out of, directly or indirectly, the payment of Supplemental Purchase Price (collectively, the "Released Matters"). (b) This Agreement shall be effective as a full and final accord and satisfaction of any and all Claims of Releasor as set forth in paragraph (a) above. In furtherance of this intention, Releasor acknowledges that he or she is familiar with any and all rights and benefits which he or she may have under section 1542 of the Civil Code of the State of California, which provides as follows: "Certain claims not affected by general release. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor." Releasor expressly waives and relinquishes any rights or benefits which he or she had, now has or may have in the future under section 1542 of the Civil Code of the State of California, or any similar provision of statutory or non- statutory law, to the fullest extent that he or she may lawfully waive any such rights and benefits pertaining to the subject matter of this Agreement. In this regard, Releasor acknowledges that he or she is aware that he or she may hereinafter discover Claims or facts in addition to or different from those which he or she now knows or believes to exist with respect to the subject matter of this Agreement, and it is Releasor's intention to fully, finally and forever settle and release all such Claims. (c) Releasor shall not bring, commence, institute, maintain or prosecute or allow any person, entity or organization to bring, commence, institute, maintain or prosecute in the name of Releasor, any other action at law or in -3- equity, or any legal proceeding whatsoever, in whole or in part upon any fact or event described or released herein. This Agreement may be plead as a full and complete defense to, and may be used as a basis for injunctive relief against, any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of this Section 1.3. (d) (i) Releasor acknowledges that he or she has been fully advised with respect to his or her rights and obligations under this Agreement and understands those rights and obligations. Releasor also acknowledges that prior to the execution of this Agreement, he or she has had an adequate opportunity to make whatever investigation or inquiries were deemed necessary or desirable with respect to the subject matter of this Agreement. (ii) Releasor acknowledges that he or she has had the opportunity to seek the advice of counsel regarding this Agreement. Releasor acknowledges that whether or not he or she seeks the advice of counsel is his or her prerogative, and any failure on Releasor's part to seek the advice of counsel cannot be asserted as a basis to claim that Releasor was unaware of the terms and meaning of this Agreement. Releasor acknowledges that the consideration recited herein is the sole and only consideration for this Agreement and that Releasor has voluntarily entered into this Agreement. (iii) Releasor understands and agrees that if the facts to which this Agreement is executed are found hereinafter to be other than, or different from, the facts now believed by Releasor to be true, Releasor expressly accepts and agrees that this Agreement shall be and remain effective notwithstanding such differences in facts. (iv) Releasor warrants and represents that he or she is the sole and lawful owner of all right, title and interest in and to all the Claims released herein, and that he or she has not voluntarily, by operation of law or otherwise, assigned or transferred or purported to assign or transfer to any other person or entity any Claims, or any part or portion thereof, or any interest therein. (e) Releasor shall indemnify the Released Parties from and against any and all liabilities, damages, losses, costs or expenses of any kind or nature whatsoever, including (without limitation) attorneys' fees and costs of defense, resulting from relating to or arising out of Releasor's breach of this Section 1.3. 1.4 Other Agreements. Each of the parties agrees to use best efforts to ---------------- take or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by -4- this Article 1, including the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Article 1. 1.5 Conditions to Effectiveness. The effectiveness of the agreements of --------------------------- the parties set forth in this Article 1 are subject to the satisfaction of the following conditions, unless waived by Purchaser and CBC: (a) Controlling Westmark Owners and Individual Westmark Owners entitled to receive at least 95% of the Supplemental Purchase Price (and each Controlling Westmark Owner and Individual Westmark Owner that currently is an employee of Westmark) shall have executed and delivered to Purchaser and CBC an SPP Purchase Agreement in the form hereof; (c) The Note Amendment Agreement, of even date herewith, by and among Purchaser, CBC, the Noteholders listed therein and the Westmark Owners Representative (the "Note Amendment Agreement") shall have been executed and delivered to Purchaser and CBC by the holders of all of the outstanding principal amount of the Notes (as defined in the Note Amendment Agreement). ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF OWNERS ---------------------------------------- Owner represents and warrants to Purchaser and CBC as of the date hereof and as of the Effective Date as follows: 2.1 Authority. --------- (a) Owner has all necessary right, power, capacity, and authority and has taken all action necessary to execute and deliver this Agreement, to consummate the transactions contemplated hereby and to perform his or her obligations hereunder, and no other proceedings on his or her part are necessary to authorize this Agreement and the transactions contemplated hereby, and this Agreement has been duly executed and delivered by Owner and constitutes his or her valid and binding obligation enforceable in accordance with its terms. (b) No consent, approval, order, waiver or authorization is required by or with respect to Owner in connection with his or her execution or delivery of this Agreement or his or her consummation of the transactions contemplated hereby. -5- ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND CBC --------------------------------------------------- Purchaser and CBC jointly and severally represent and warrant to Owner as of the date hereof and as of the Effective Date as follows: 3.1 Organization. Purchaser is a limited partnership duly organized and ------------ validly existing under the laws of the State of Delaware. CBC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 3.2 Authority. --- --------- (a) Each of Purchaser and CBC has all requisite corporate or partnership power and authority to enter into this Agreement and, subject to satisfaction of the conditions set forth herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action on the part of Purchaser and CBC. This Agreement has been duly executed and delivered by Purchaser and CBC and constitutes a valid and binding obligation of Purchaser and CBC enforceable in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under (i) any provision of the organizational documents of Purchaser or CBC or (ii) any material agreement or instrument, permit, judgment, order, statute, law, ordinance, rule or regulation applicable to Purchaser or CBC or their properties or assets, other than any such conflicts, violations, defaults, terminations, cancelations or accelerations which individually or in the aggregate would not have a Material Adverse Effect (as defined in the 1995 Purchase Agreement) on Purchaser or CBC, as applicable. (b) No consent, approval, order, waived or authorization is required by or with respect to Purchaser or CBC in connection with the execution and delivery of this Agreement or the consummation by Purchaser or CBC of the transactions contemplated hereby. -6- ARTICLE 4 GENERAL ------- 4.1 Notices. Any notice, request, instruction or other document to be ------- given hereunder by any party to the other shall be in writing and delivered personally or sent by certified mail, postage prepaid, by telecopy, or by courier service, as follows: if to Purchaser or CBC, to: CB Commercial Real Estate Group, Inc. 533 So. Fremont Avenue Los Angeles, CA 90071 Attention: Walter V. Stafford Fax: (213) 613-3015 with a copy to: Pillsbury Madison & Sutro LLP 725 South Figueroa Street, Suite 1200 Los Angeles, CA 90017 Attention: John T. Vangel Fax: (213) 629-1033 and if to Owner, to: as set forth on Schedule 4.1 with a copy to: Stanton H. Zarrow 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 Fax: (213) 683-4201 and Gibson, Dunn & Crutcher LLP 333 S. Grand Avenue Los Angeles, CA 90071 Attention: Richard Strong Fax: (213) 229-7520 or to such other persons as may be designated in writing by the parties, by a notice given as aforesaid. 4.2 Expenses. -------- (a) Except as provided in Section 4.2(b), Purchaser and CBC, on the one hand, and Owner, on the other hand, shall each pay their own fees and expenses incurred incident to the preparation and carrying out of the transactions contemplated herein or in the Note Amendment Agreement. (b) On the Effective Date, Purchaser and CBC will pay on behalf of Owner and the other Controlling Westmark Owners and Individual Westmark Owners who -7- shall have executed a SPP Purchase Agreement or the Note Amendment Agreement, collectively, an amount, not to exceed $30,000, equal to all reasonable, documented legal fees and expenses of Gibson, Dunn & Crutcher LLP incurred by such persons incident to the preparation and carrying out of the transactions contemplated herein or in the Note Amendment Agreement. 4.3 Amendments. This Agreement may be amended only by a written ---------- instrument executed by each party hereto. 4.4 Headings. The headings of the several sections of this Agreement are -------- inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. 4.5 Counterparts. This Agreement may be executed in counterparts, and ------------ when so executed each counterpart shall be deemed to be an original, and said counterparts together shall constitute one and the same instrument. 4.6 Binding Nature; Assignment. This Agreement and all of the provisions -------------------------- hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but except as otherwise specifically provided, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by Owner without the express written consent of Purchaser which consent will not be withheld unless Purchaser reasonably determines that such assignment will or has a reasonable likelihood of materially and adversely affecting the benefits to Purchaser of the transactions contemplated hereby. 4.7 Applicable Law. This Agreement shall be governed by, construed and -------------- enforced in accordance with the laws of the State of California as applied to contracts entered into solely between residents of, and to be performed entirely in, such state. 4.8 Dispute Resolution. Any dispute arising out of or relating to this ------------------ Agreement (or any exhibit or schedule hereto) or the transactions contemplated hereby or thereby or the breach, termination or validity hereof or thereof, shall be resolved in the manner contemplated by Section 15.8 of the 1995 Purchase Agreement. 4.9 Severability. If for any reason whatsoever, any one or more of the ------------ provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid as applied to any particular case or in all cases, such circumstances shall not have the effect of rendering such provision invalid in any other case or of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid. -8- 4.10 No Third Party Beneficiary. Except as expressly set forth herein, no -------------------------- provision of this Agreement, including the Exhibits and Schedules hereto, is intended or should be construed to create any third party beneficiaries or to give any rights, including rights of subrogation, to any person other than the parties to this Agreement. IN WITNESS WHEREOF, Purchaser, CBC and Owner have caused this Agreement to be signed all as of the date first above written. WESTMARK REAL ESTATE ACQUISITION PARTNERSHIP, L.P. By: CB COMMERCIAL REAL ESTATE GROUP, INC., its general partner By _______________________________________________ CB COMMERCIAL REAL ESTATE GROUP, INC. By ____________________________________________________ OWNER: _______________________________________________________ -9- EX-21 10 SUBSIDIARIES OF THE COMPANY EXHIBIT 21
SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ---------- --------------------------------- BL/Westmark, Inc. California Bonutto-Hofer Investments California CB Bienes Raices, S.A. de C.V. Mexico CB Commercial Partners, Inc. Delaware CB Commercial/Koll Corporate Facilities Management, Inc. Delaware CB Commercial Real Estate Group, Inc. Delaware CB Commercial Real Estate Fund Management, Inc. California CB Commercial Real Estate Group of Canada, Inc. Ontario, Canada CB Commercial Real Estate Group of Colorado, Inc. Delaware (dba: CB Commercial Real Estate Group, Inc.) CB Commercial Real Estate Group of Hawaii, Inc. Delaware CB Commercial Real Estate Group of Iowa Iowa CB Commercial Realty Advisors, Inc. California CB Commercial Sutton & Towne, Inc. New York CB Commercial Warehouse Property Corp. Delaware CBS Investment Realty, Inc. (dba: CBS Property Services, Inc.) Arizona CBS Investment Realty of New Mexico, Inc. (dba: CBS Property Arizona Services of New Mexico, Inc.) D.A. Management, Inc. California Global Professional Assurance Company Vermont Holdpar A (limited partnership formed under the laws of Delaware) Delaware Holdpar B (limited partnership formed under the laws of Delaware) Delaware KEA/I, Inc. Delaware KEA/II, Inc. Delaware KMS Construction Co. Delaware KMS Corporate Real Estate Services, Inc. Toronto, Canada Koll 1031 Exchange Services, Inc. Delaware Koll Asia Pacific-Hawaii, Inc. Hawaii Koll Bren Realty Advisors, Inc. Delaware Koll Capital Markets Group, Inc. Delaware Koll Corporate Management Systems, Inc. Delaware Koll Holdings International, Inc. Delaware Koll Investment Management, Inc. (dba: K/B Realty Advisors) California Koll Management Service Corporation Colorado Koll Management Services, Inc. Delaware Koll Partnerships I, Inc. Delaware Koll Partnerships II, Inc. Delaware Koll Real Estate Services Delaware Koll Specialty Finance Corporation Delaware Koll Strategic HR Services, Inc. (dba: Real Estate Temps, Inc.) California
SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ---------- --------------------------------- Koll Tender Corporation II Delaware Koll Tender Corporation III Delaware Koll Von Karman, Inc. Delaware L. J. Melody & Company Texas L. J. Melody Investments, Inc. Texas Property Management Services, Inc. Hawaii Roger C. Schultz, Inc. California Sol L. Rabin, Inc. California Stanton H. Zarrow, Inc. California Sutter Fremont, Inc. California Sutter Fremont Property Services, Inc. Washington Sutter Fremont Real Estate Merchant Capital Corporation California Vincent F. Martin, Jr., Inc. California Westmark Realty Advisors L.L.C. Delaware Westmark Real Estate Acquisition Partnership, L.P. Delaware (limited partnership formed under the laws of Delaware) WPI/Koll Real Estate Services Company Delaware
EX-23 11 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statements: Form S-8 (File No. 33-39436), Form S-8 (File No. 33-40953), Form S-8 (File No. 33-44346), Form S-8 (File No. 33-273236), Form S-8 (File No. 33-90014), Form S-8 (File No. 333-21597), Form S-8 (File No. 333-21599), Form S-8 (File No. 333-34375), Form S-8 (File No. 333-41697) and Form S-8 (File No. 333-43433). /s/ Arthur Andersen LLP ----------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 24, 1998 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 47,181 0 86,714 8,980 0 150,413 99,240 48,931 505,191 157,876 0 0 40 188 157,543 505,191 730,224 730,224 0 671,136 0 0 15,780 45,906 20,558 25,348 0 951 0 24,397 1.34 1.28
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