<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1996
REGISTRATION NO. 333-12757
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CB COMMERCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6531 52-1616016
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION
ORGANIZATION) CODE NUMBER)
533 SOUTH FREMONT AVENUE
LOS ANGELES, CALIFORNIA 90071-1798
(213) 613-3123
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES J. DIDION
CHIEF EXECUTIVE OFFICER
CB COMMERCIAL HOLDINGS, INC.
533 SOUTH FREMONT AVENUE
LOS ANGELES, CALIFORNIA 90071-1798
(213) 613-3123
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RICHARD S. GREY, ESQ. GREGG A. NOEL, ESQ.
PETER V. LEPARULO, ESQ. RAND S. APRIL, ESQ.
PILLSBURY MADISON & SUTRO LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
P.O. BOX 7880 300 GRAND AVENUE, SUITE 3400
SAN FRANCISCO, CALIFORNIA 94120 LOS ANGELES, CALIFORNIA 90071
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
======================================================================================================
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value................................. $117,477,675 $39,205(2)
======================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) $29,741 of this filing fee has previously been paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1996
PROSPECTUS
4,347,000 SHARES
[LOGO OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.]
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.
COMMON STOCK
-----------
All of the 4,347,000 shares (the "Shares") of common stock, par value $.01
per share (the "Common Stock"), of CB Commercial Real Estate Services Group,
Inc. (the "Company") offered hereby (the "Offering") are being sold by the
Company. Prior to the Offering, there has been no established public market for
the Common Stock. It is currently estimated that the initial public offering
price of the Common Stock offered hereby will be between $21.50 and $23.50 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price of the Common Stock. The Common
Stock has been approved for listing on the Nasdaq National Market under the
symbol "CBCG."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)...................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date of the Prospectus, to purchase up to an
additional 652,050 shares of Common Stock to cover over-allotments, if any.
If all of such shares of Common Stock are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-----------
The Shares are offered by the several Underwriters, subject to prior sale
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York on or about , 1996.
-----------
MERRILL LYNCH & CO. MONTGOMERY SECURITIES
-----------
The date of this Prospectus is November , 1996.
<PAGE>
[MAP OF U.S. WITH LOCATION OF OFFICES AND BAR CHART]
A bar graph which depicts the Company's revenue for each of the four
quarters and the trailing four quarters in the years 1992-1995 and for the
first two quarters of 1996.
Photographs of directors and officers along the left side of the fold
out. Graphic depiction of World Map showing location of Company's offices.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the matters set forth in "Risk Factors." Except as set forth in the
consolidated financial statements and notes thereto or otherwise as specified
herein, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Effective upon consummation of the
Offering, the Company will change its name from CB Commercial Holdings, Inc. to
CB Commercial Real Estate Services Group, Inc. Unless the context requires
otherwise, the term the "Company" or "CB Commercial" means CB Commercial Real
Estate Services Group, Inc. and each of its consolidated subsidiaries.
COMPANY OVERVIEW
Founded in 1906, the Company believes that it is the largest vertically-
integrated commercial real estate services company in the United States with
aggregate 1995 revenue of $468.5 million and 231 business unit offices in 107
locations. In addition, the Company has established exclusive alliances with
international commercial real estate services firms which have offices in an
additional 109 locations in 30 countries. The Company provides a full range of
services to commercial real estate tenants, owners, and investors including:
(i) brokerage (facilitating sales and leases), investment properties
(acquisitions and sales on behalf of investors), corporate services, property
management, and real estate market research (collectively, "Property and User
Services"), and (ii) mortgage banking (mortgage loan origination and
servicing), investment management and advisory services, and valuation and
appraisal services (collectively, "Investor Services"). The Company believes
that, on the basis of revenues, its brokerage and independent commercial
mortgage origination businesses are the largest such businesses in the United
States, and that the Company is among the top ten providers of commercial
property management, investment management and advisory services and commercial
mortgage loan servicing in the United States. The Company's diverse client base
includes local, national and multinational corporations, financial
institutions, pension funds and other tax exempt entities, local, state and
national governmental entities, and individuals.
The Company believes that it enjoys a variety of competitive advantages in
the commercial real estate services industry, including the Company's--
. Significant deal flow and strong market presence in its core brokerage and
property management businesses, both of which are employed for the benefit
of all of the Company's business disciplines;
. 90-year tradition and history of providing high-quality services and client
coverage and internationally recognized "brand" identity which the Company
believes is widely respected in the real estate services industry;
. Experienced and trained professionals in all business disciplines, including
almost 2,000 sales professionals in Property and User Services who have an
average tenure of more than eight years with the Company;
. Multi-discipline capabilities and extensive multi-market network;
. State-of-the-art technology and professional education programs which enable
the Company to deliver superior services;
. Experienced management team, the members of which have an average tenure of
more than 16 years with the Company and will own approximately 15.9% of the
Company's Common Stock (including exercisable stock options and shares held
through the Company's Deferred Compensation Plan) after the Offering; and
. Employees who will own more than 40% of the Company's Common Stock after the
Offering.
3
<PAGE>
As part of its growth strategy, the Company is continually assessing
acquisition opportunities. Management believes that there are significant
opportunities in the fragmented and consolidating real estate services industry
to acquire additional companies to complement and expand the Company's existing
operations. Since the beginning of 1995, the Company has completed three
strategic acquisitions. In July 1996, the Company acquired L.J. Melody &
Company and L.J. Melody & Company of California (collectively "L.J. Melody"), a
nationally-known mortgage banking firm, for $15 million. The L.J. Melody
acquisition provides the Company with leadership for its own mortgage banking
business, access to loan sources not previously available to the Company and an
enhanced ability to access the Company's deal flow in its investment properties
and brokerage businesses as a source of mortgage originations. In June 1995,
the Company acquired Westmark Realty Advisors L.L.C. ("Westmark"), an
investment management and advisory business with approximately $3.0 billion of
assets under management, for $37.5 million, plus a supplemental purchase price
component of up to $18.0 million based upon Westmark's adjusted operating
income. The Westmark acquisition has moved the Company into a business area
which the Company believes has the potential for significant growth. In April
1995, the Company acquired Langdon Rieder Corporation ("Langdon Rieder"), a
nationally-known tenant representation firm, for $1.5 million in cash and a
deferred payment of $1.9 million payable over three years. The deferred payment
is subject to forfeiture under certain circumstances. The Langdon Rieder
acquisition strengthened the Company's ability to provide sophisticated tenant
representation services to its corporate clients.
INDUSTRY TRENDS
Over the last ten years, the commercial real estate industry has experienced
various structural changes and more recently has been experiencing a broad
recovery from the real estate "depression" of the early 1990s. The Company
believes that these factors and the resulting trends, which are summarized
below, create an opportunity for the Company to leverage its experience, multi-
discipline integrated services, multi-market presence and brand equity to its
competitive advantage--
. CHANGING COMPOSITION AND NEEDS OF INVESTORS AND OWNERS. Investors in and
owners of commercial real estate assets have become increasingly
institutional with geographically diverse portfolios. This change in the
ownership characteristics and management requirements of institutional real
estate investors and owners has fueled the demand for, and growth of,
sophisticated multi-service, nationally-oriented real estate service
providers.
. CONTINUING OUTSOURCING TREND. The Company believes that the combination of
corporate managements' heightened awareness that corporate real estate
assets are a major component of corporate net worth and competitive
pressures encouraging a greater focus on core businesses has caused
corporations to downsize and, as a result, outsource their non-core
activities to third-parties. As a consequence, the demand for multi-
disciplined, multi-market professional real estate services firms that
provide integrated services capable of supplementing a corporate real estate
department has increased significantly.
. ONGOING INDUSTRY CONSOLIDATION. The Company also believes that the
combination of institutional and corporate real estate service needs and
demands, together with the real estate "depression" of the early 1990s, has
made it necessary for real estate services firms to (i) provide
comprehensive, high-quality services, (ii) make significant investments in
corporate infrastructure, including information technology and professional
education, and (iii) have access to sufficient capital to support these
service and investment
4
<PAGE>
needs. These factors have fueled the consolidating industry environment,
which the Company believes will motivate local and regional real estate
service providers to sell to, or form alliances with, major national and
international companies.
. EXPANDING CMBS MARKET. Wall Street firms and financial institutions have
recently been providing a significant amount of third-party commercial
mortgage financing and have been accessing the public debt markets by
issuing commercial mortgage-backed securities ("CMBS") in order to
securitize their portfolios and avoid holding mortgage loans for the long-
term, resulting in increasing liquidity in the real estate markets. The
Company's access to real estate transaction deal flow and national mortgage
origination capabilities enable it to benefit from this expansion of the
CMBS market which creates demand for mortgage originations.
. RECOVERING MARKETS. Coincident with the long term structural shifts in the
commercial real estate industry, commercial real estate markets in the
United States have been recovering over the last several years,
experiencing increased leasing and sale activity in many product types and
geographic market areas. As a result, brokerage and property management
fees, which are based upon a percentage of transaction value and total rent
collections, respectively, have begun to increase.
THE COMPANY'S BUSINESSES
PROPERTY AND USER SERVICES
Property and User Services include a broad range of services, delivered
primarily to users and owners of commercial real estate, including brokerage
(facilitating sales and leases), investment properties (acquisitions and sales
on behalf of investors), corporate services, property management, and real
estate market research. These services are provided with respect to a wide
range of commercial real estate properties, including, but not limited to,
office space, industrial buildings, retail properties, multifamily residential
properties and unimproved land.
Brokerage. Brokerage, the Company's original and core business, advises
buyers, sellers, landlords and tenants in connection with the leasing and sale
of office space, industrial buildings, retail properties, multifamily
residential properties and unimproved land. Brokerage employs approximately
1,640 sales professionals nationally generating significant deal flow and
real-time market data. This market presence provides the Company with a
competitive advantage in developing business opportunities and client contacts
and in developing CB Commercial's brand identity for the Company's other
business disciplines. The Company believes its commercial brokerage business
is the market-leader in the United States based upon both 1995 revenue, which
totaled approximately $294.3 million, and the number of completed
transactions, which totaled approximately 19,800.
Investment Properties. The Company provides sophisticated strategic planning
for, and execution of, acquisitions and sales of income-producing commercial
properties for its clients through its investment properties sales
professionals. In 1995, approximately 1,000 sales transactions were completed
with some of the country's largest and most sophisticated investors,
including, as examples, Prudential Insurance Co., RREEF and Security Capital.
With aggregate estimated sales consideration of more than $4.0 billion in
1995, the Company believes that it is one of the largest providers of
investment properties sales services in the United States.
Corporate Services. Corporate services, which generally operates through the
CBC/Madison Advisory Group, addresses the multiple-market domestic and
international real estate needs of corporate America by providing
comprehensive, quality services on a cost efficient basis through a single
point-of-contact at the Company. Corporate services coordinates the
utilization of all the Company's various disciplines to deliver an integrated
service to some of the largest and most sophisticated companies in the United
States, including, as examples, Eastman Kodak, Ford Motor Company, and
Allstate Insurance Company. CBC/Madison Advisory
5
<PAGE>
Group directly addresses client demand driven by corporate downsizing,
outsourcing, and alliance partnering, expanding a client's real estate
department and performing most of the functions involved in corporate real
estate administration. CBC/Madison Advisory Group has been one of the Company's
fastest growing services, with revenue having increased at a compound annual
rate of 50% from 1993 through 1995.
Property Management. Property management provides operations, maintenance,
marketing and leasing services for income-producing properties owned primarily
by institutional investors. The Company provides asset management-oriented
services to its clients to implement their specific goals and objectives,
focusing on the enhancement of property values through maximization of cash
flow. The Company was recently ranked the eighth largest property management
firm in the United States by National Real Estate Investor's 1996 Annual Survey
based on square footage under management during 1995. As of September 30, 1996,
the Company managed 792 properties aggregating approximately 104 million square
feet.
Real Estate Market Research. The Company provides its research and
forecasting services to its other businesses as well as outside corporate and
institutional investor clients through CB Commercial/Torto Wheaton Research,
the widely-recognized research division of the Company based in Boston,
Massachusetts. The Company's research reports and forecasts are utilized by all
of the Company's businesses to assist clients with analysis and interpretation
of market data in order to provide them with a competitive edge in the rapidly
changing real estate marketplace. The Company's publications and products
provide real estate data for more than 50 of the largest Metropolitan
Statistical Areas ("MSAs") in the United States and are sold on a subscription
basis to many of the largest portfolio managers, insurance companies and
pension funds in the United States.
INVESTOR SERVICES
Investor Services includes mortgage banking (mortgage loan origination and
servicing), investment management and advisory services, and valuation and
appraisal services relating primarily to office space, industrial buildings,
retail properties, multifamily residential properties and unimproved land.
Mortgage Banking. The Company provides its mortgage origination and servicing
through L.J. Melody, a wholly-owned subsidiary of the Company acquired in July
1996 and based in Houston, Texas. On a combined basis including originations by
L.J. Melody prior to its acquisition, the Company originated $2.3 billion, $2.0
billion and $1.1 billion of mortgage loans in 1995, 1994 and 1993,
respectively. As part of these origination activities, the Company originates
mortgages through special conduit arrangements with affiliates of Merrill
Lynch, Citicorp, and Lehman Brothers which permit it to service the mortgage
loans that it originates and is currently negotiating a similar arrangement
with an affiliate of NationsBank. In addition, the Company is a major mortgage
originator for insurance companies having originated, on a combined basis,
mortgage loans in the names of the insurance companies valued at $1.6 billion
in 1995, of which it serviced $891.4 million. As of December 31, 1995, 1994 and
1993, the Company, on a combined basis, serviced mortgage loan portfolios of
$7.3 billion, $7.1 billion and $6.3 billion, respectively. Based upon available
statistics, the Company believes that, on a combined basis, it is the largest
independent commercial mortgage originator in the United States. As of December
31, 1995, the Company, on a combined basis, was the eighth largest commercial
mortgage loan servicer in the United States. The Company believes it will have
a significant competitive advantage in the commercial mortgage loan origination
business due to its anticipated integration with the deal flow generated
through the Company's brokerage and investment properties sales activities.
This integration will not only provide advantages to mortgage banking, but will
also facilitate sales transactions enhancing the Company's capability to
execute clients' sales assignments.
Investment Management and Advisory. The Company provides its investment
management and advisory services primarily to large institutions and pension
funds through Westmark which employs over 100 professionals and operates
nationally from its headquarters in Los Angeles, California. Westmark operates
as a
6
<PAGE>
separate and independent subsidiary, providing advisory services and managing
approximately $3.7 billion in tax-exempt capital invested in more than 220
office, industrial and retail properties located in more than 40 major U.S.
markets with an aggregate of more than 40 million square feet. The Company's
investment management and advisory activities include creating investment
products, raising investor capital, identifying and acquiring specific
properties and managing the operations and dispositions of the assets. As of
September 30, 1996, the Company represented more than 180 investors in 13
commingled funds and a variety of nondiscretionarily managed separate accounts.
Valuation and Appraisal Services. Valuation and appraisal services delivers
sophisticated commercial real estate valuations through a variety of products
including market value appraisals, portfolio valuations, discounted cash flow
analyses, litigation support, feasibility land use studies and fairness
opinions. The Company's appraisal staff has more than 80 professionals with
more than 50% of its professionals holding the Member Appraisal Institute
("MAI") professional designation. Valuation and appraisal services operates
nationally through 21 regional offices, and its clients are generally portfolio
owners, both corporate and institutional. The Company believes it is among the
leading commercial real estate appraisal firms in the United States.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Compa-
ny................................ 4,347,000 shares(1)
Common Stock to be outstanding af-
ter the Offering.................. 13,266,171 shares(1)(2)
Use of proceeds.................... The net proceeds from the Offering will be
used to repay a portion of the Company's
senior secured indebtedness and to pay
accrued and unpaid interest on the
Company's senior subordinated indebtedness.
Any remaining net proceeds will be used for
general corporate purposes, including to
fund acquisitions. See "Use of Proceeds."
Listing............................ The Common Stock has been approved for
listing on the Nasdaq National Market under
the symbol "CBCG."
</TABLE>
- --------
(1) Does not include up to 652,050 shares subject to an over-allotment option
granted to the Underwriters by the Company. See "Underwriting."
(2) Excludes (i) 1,046,890 shares issuable upon exercise of stock options under
the Company's stock option plans as of September 30, 1996, (ii) shares of
Class C-R and Class J common stock to be repurchased by the Company for an
aggregate of $8,000 in connection with the Offering and (iii) 4,000,000
shares of Preferred Stock convertible into a lesser number of shares of
Common Stock at the option of the holder after the Offering. Includes
444,444 shares of Common Stock issuable upon conversion of the 800,000
shares of the Company's Class C-1 common stock (assuming an initial public
offering price per share of $22.50). See "Capitalization" and "Description
of Capital Stock--Preferred Stock" and "--The Recapitalization."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary financial and other data for the
Company on a consolidated historical basis and a consolidated pro forma basis
for the periods and dates indicated. The summary historical balance sheet data
as of December 31, 1995 and 1994 and the statement of operations data for each
of the three years in the period ended December 31, 1995 are derived from the
financial statements of the Company that have been audited by Arthur Andersen
LLP, independent public accountants, included herein. The summary historical
balance sheet data as of December 31, 1993, 1992 and 1991 and the statement of
operations data for the years ended December 31, 1992 and 1991 are derived from
audited financial statements not included herein. The summary historical
financial data for each of the nine month periods ended September 30, 1996 and
1995 are derived from unaudited financial statements prepared on the same basis
as the audited financial statements and containing, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position at such dates and
the operating results and cash flows for such periods. Period to period
comparability in 1995 and 1996 is affected by the Westmark acquisition
completed in June 1995 and the L.J. Melody acquisition completed in July 1996.
A significant portion of the Company's revenue is transactional in nature and
seasonal. Historically, this seasonality has caused the Company's revenue,
operating income, net income and EBITDA to be lower in the first two calendar
quarters and higher in the third and fourth calendar quarters of each year. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of results to be expected for the entire year ending
December 31, 1996 or for any future period.
The summary unaudited pro forma statement of operations data, balance sheet
data and other data give effect to the acquisitions of Westmark, L.J. Melody as
well as the Offering and Recapitalization as if such transactions had occurred
as of January 1, 1995 with respect to operating and other data, and as if the
Offering and the Recapitalization had occurred as of September 30, 1996 with
respect to the pro forma balance sheet data. The pro forma financial data set
forth below is not necessarily indicative of the results that would have been
achieved had such transactions been consummated as of the dates indicated or
that may be achieved in the future.
The information set forth below should be read in conjunction with "Unaudited
Pro Forma Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements for
each of the Company, L.J. Melody and Westmark and related notes thereto which
are included elsewhere in this Prospectus.
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1996 1996 1996 1995
----------- ----------- ---------- ----------
PRO FORMA
------------------------
ACQUISITION
ACQUISITION AND
ONLY OFFERING
----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenue......... $ 394,280 $ 394,280 $ 390,863 $ 324,890
Costs and
expenses:
Commissions,
fees and other
incentives..... 198,240 198,240 195,465 167,569
Operating,
administrative
and other...... 160,741 160,741 159,196 134,839
Depreciation and
amortization (1) 10,267 10,267 9,749 8,173
Non-recurring
charges........ -- -- -- --
---------- ---------- ---------- ----------
Operating income
(loss)......... 25,032 25,032 26,453 14,309
Interest income. 1,180 1,180 1,035 1,228
Interest
expense........ 18,099 13,672 17,883 16,944
---------- ---------- ---------- ----------
Income (loss)
before
provision
(benefit) for
income tax..... 8,113 12,540 9,605 (1,407)
Provision for
income tax..... 4,323 6,094 4,610 238
Reduction of
valuation
allowances..... (40,400) (40,400) (40,400) --
---------- ---------- ---------- ----------
Net provision
(benefit) for
income tax (2). (36,077) (34,306) (35,790) 238
---------- ---------- ---------- ----------
Net income
(loss)......... $ 44,190 $ 46,846 $ 45,395 $ (1,645)
========== ========== ========== ==========
Net income
(loss) per
common and
common
equivalent
share
outstanding.... $ 3.20 $ 3.37 $ 3.29 $ (0.14)
Number of shares
used in
computing per
share
amounts (3).... 13,815,434 13,006,876 13,815,434 11,732,012
OTHER DATA:
EBITDA (4)...... $ 35,299 $ 35,299 $ 36,202 $ 22,482
Ratio of
earnings to
fixed charges
at period
end (5) 1.27 1.49 1.42 0.93
Net cash
provided by
(used in)
operating
activities..... $ 24,170 $ 551
Net cash (used
in) investing
activities..... $ (9,517) $ (21,960)
Net cash
provided by
(used in)
financing
activities..... $ (12,795) $ 3,481
Investments
under
management at
period end (6). $3,730,226 $3,918,825
Loans originated
(7)............ $2,180,485 $ 603,097
Loans serviced
(7)............ $7,498,905 $3,671,532
Total
consideration
of properties
sold ......... $6,393,389 $4,517,550
Number of sale
transactions... 2,758 2,491
Number of lease
transactions... 12,521 12,733
---------- ----------
Total sale and
lease
transactions... 15,279 15,224
========== ==========
Square feet
under
management (8). 103,754 95,406
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1995 1995 1995 1994 1993 1992 1991
------------ ------------ ---------- ---------- ---------- ---------- ----------
PRO FORMA
-------------------------
ACQUISITIONS
ACQUISITIONS AND
ONLY OFFERING
------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenue......... $ 489,684 $ 489,684 $ 468,460 $ 428,988 $ 392,037 $ 360,223 $ 338,119
Costs and
expenses:
Commissions,
fees and other
incentives..... 245,564 245,564 239,018 225,085 206,070 187,582 175,142
Operating,
administrative
and other...... 200,341 200,341 187,968 170,234 160,073 152,402 159,791
Depreciation and
amortization (1) 14,502 14,502 11,631 8,091 49,606 45,855 51,946
Non-recurring
charges........ -- -- -- -- -- 4,500 12,030
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)......... 29,277 29,277 29,843 25,578 (23,712) (30,116) (60,790)
Interest income. 1,926 1,926 1,674 1,109 915 1,083 1,349
Interest
expense........ 26,080 20,177 23,267 17,362 14,240 15,516 24,805
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before
provision
(benefit) for
income tax..... 5,123 11,026 8,250 9,325 (37,037) (44,549) (84,246)
Provision for
income tax..... 220 2,581 841 152 112 12 135
Reduction of
valuation
allowances..... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net provision
(benefit) for
income tax (2). 220 2,581 841 152 112 12 135
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)......... $ 4,903 $ 8,445 $ 7,409 $ 9,173 $ (37,149) $ (44,561) $ (84,381)
========== ========== ========== ========== ========== ========== ==========
Net income
(loss) per
common and
common
equivalent
share
outstanding.... $ 0.37 $ 0.35 $ 0.55 $ 0.70 $ (3.26) $ (3.94) $ (7.52)
Number of shares
used in
computing per
share
amounts (3).... 13,414,437 12,605,879 13,414,437 13,179,014 11,378,540 11,319,273 11,221,984
OTHER DATA:
EBITDA (4)...... $ 43,779 $ 43,779 $ 41,474 $ 33,669 $ 25,894 $ 15,739 $ (8,844)
Ratio of
earnings to
fixed charges
at period
end (5) 1.13 1.36 1.28 1.40 -- -- --
Net cash
provided by
(used in)
operating
activities..... $ 30,632 $ 31,418 $ 19,609 $ 10,911 $ (25,307)
Net cash (used
in) investing
activities..... $ (24,888) $ (3,865) $ (5,629) $ (4,821) $ (3,715)
Net cash
provided by
(used in)
financing
activities..... $ (11,469) $ (4,923) $ (14,662) $ (2,157) $ 16,012
Investments
under
management at
period end (6). $3,901,727 $ 879,809 $ 760,554 $ 883,761 $ 776,010
Loans originated
(7)............ $ 989,872 $ 874,159 $ 613,071 $ 458,792 $ 135,022
Loans serviced
(7)............ $3,779,069 $3,578,962 $3,140,635 $3,787,941 $3,830,502
Total
consideration
of properties
sold ......... $6,549,861 $6,521,451 $4,995,234 $4,478,472 $3,986,576
Number of sale
transactions... 3,503 3,693 3,249 3,042 2,590
Number of lease
transactions... 17,476 17,930 18,338 17,909 17,431
---------- ---------- ---------- ---------- ----------
Total sale and
lease
transactions... 20,979 21,623 21,587 20,951 20,021
========== ========== ========== ========== ==========
Square feet
under
management (8). 105,356 92,311 76,065 70,707 71,156
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------------------- ----------------------------------------------------
1996 1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- --------
PRO FORMA
OFFERING
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 26,502 $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 $ 6,822 $ 2,889
Total assets............ 248,835 232,575 180,038 190,954 150,100 128,914 173,274 212,249
Total long-term debt.... 143,113 231,986 252,468 250,142 233,571 239,853 239,473 240,401
Total liabilities....... 250,596 339,469 344,184 345,642 314,648 303,774 311,630 306,123
Total stockholders' eq-
uity (deficit)......... (1,761) (106,894) (164,146) (154,688) (164,548) (174,860) (138,356) (93,874)
</TABLE>
(footnotes on following page)
9
<PAGE>
- -------
(1) 1993, 1992, and 1991 reflect the amortization of intangibles associated
with the acquisition in 1989 of CB Commercial Real Estate Group, Inc. of
$42.9 million, $40.7 million and $47.1 million, respectively.
(2) Net provision (benefit) for income tax on a consolidated basis for the nine
months ended September 30, 1996 was ($35.8) million, a decrease of $36.0
million from $0.2 million for the nine months ended September 30, 1995.
During the quarter ended September 30, 1996, the Company projected, on a
more likely than not basis, that a portion of its net operating loss
carryforwards ("NOLs") would be realized in current and future periods and,
accordingly, reduced existing deferred tax asset valuation allowances of
$45.7 million, of which $5.3 million has been allocated to the purchase
price of L.J. Melody, based on its estimated future potential to generate
taxable income, and the remaining $40.4 million has been recorded as a tax
benefit (a reduction in income taxes provision). With the recognition of
the deferred tax asset, current and future provisions for income tax will
be recorded at the full effective tax rate. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Net
Operating Losses."
(3) Includes the dilutive effect of 1,046,890 shares issuable upon exercise of
stock options outstanding as of September 30, 1996 under the Company's
stock option plans. Acquisitions and offering pro forma data excludes
shares of Class C-R and Class J common stock to be repurchased by the
Company in connection with the Offering and shares of Preferred Stock
convertible at the option of the holder into Common Stock after the
Offering. Pro forma data includes 444,444 shares of Common Stock issuable
upon conversion of the 800,000 shares of the Company's Class C-1 common
stock (assuming an initial public offering price per share of $22.50). See
"Description of Capital Stock--Preferred Stock" and "--The
Recapitalization."
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, thereby removing the effect of certain non-cash charges on
income, consisting of depreciation and the amortization of intangible
assets relating to acquisitions. Management believes that the presentation
of EBITDA will enhance a reader's understanding of the Company's operating
performance and ability to service debt as it provides a measure of cash
generated that can be used by the Company to service its debt and for other
required or discretionary purposes. Management has used EBITDA as one of
the primary measures of operating performance in evaluating its recent
acquisitions. Net cash available to the Company for discretionary purposes
represents remaining cash after debt service and other cash requirements,
such as capital expenditures, which are deducted from EBITDA. EBITDA should
not be considered as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles
("GAAP")) or (ii) operating cash flow (determined in accordance with GAAP).
(5) The ratio of earnings to fixed charges represents earnings before income
taxes and fixed charges divided by fixed charges. Fixed charges include
interest expense, one-third of rent expense relating to operating leases,
and, for purposes of the pro forma ratios, preferred stock dividends. For
purposes of this calculation preferred stock dividends are computed to
demonstrate earnings required on a pre-tax basis. The Company's earnings
were not sufficient to cover its fixed charges requirements by $16.5
million, $22.2 million and $52.4 million, in 1993, 1992 and 1991,
respectively. Earnings included non-cash depreciation and amortization
charges of $9.7 million, $8.2 million, $11.6 million, $8.1 million, $49.6
million, $45.9 million and $51.9 million for the nine month periods ended
September 30, 1996 and 1995, and for the years ended December 31, 1995,
1994, 1993, 1992 and 1991, respectively.
(6) Investments under management represent the market value of the assets
managed as of the end of the period shown.
(7) Mortgage loans originated represent the initial principal amount of loans
originated during the period and loans serviced represents the outstanding
principal balance of loans being serviced as of the end of the period
shown. The increase in mortgage loans originated and serviced primarily
reflects the acquisition of L.J. Melody on July 1, 1996.
(8) Square feet under management represents the total square footage of
properties for which the Company provided property management services as
of the end of the period shown.
10
<PAGE>
THE RECAPITALIZATION
In connection with the Offering, (i) the Company's Certificate of
Incorporation will be amended to, among other things, change the name of the
Company from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services
Group, Inc., effect the conversion of the Class B-1 and Class B-2 common stock
of the Company into the Common Stock on a 1-for-1 basis, effect the conversion
of the Class C-1 common stock of the Company into a lesser number of shares of
Common Stock based upon the initial public offering price per share and provide
for the convertibility of the Company's Preferred Stock into Common Stock at
the holder's option, and (ii) the Company will repurchase all of the
outstanding shares of its Class C-R common stock and Class J common stock for
$.01 per share, in each case upon the consummation of the Offering, as part of
the proposed recapitalization of the Company's capital structure (the
"Recapitalization"). After the Recapitalization, the holders of the 1,000,000
shares of Series A-1 Preferred Stock will continue to have two votes per share
for such shares on all matters submitted to a vote of stockholders of the
Company, and the 1,000,000 shares of Series A-3 Preferred Stock will continue
to have no right to vote on matters unless otherwise entitled by statute. See
"Description of Capital Stock--Preferred Stock" and "--The Recapitalization."
FORWARD LOOKING INFORMATION
When used in this Prospectus, the words "expects," "anticipates,"
"estimates," "believes" and words of similar import may constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended. Such statements, which include statements contained in
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" concerning
projections of revenue growth and statements of management's objectives and
expectations as to levels of expenditures, are subject to risks and
uncertainties, including those set forth under "Risk Factors" and elsewhere in
this Prospectus, that could cause actual results to differ materially from
those projected. These forward-looking statements speak only as of the date of
this Prospectus. The Company expressly disclaims any obligation or undertaking
to publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectation with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors
in addition to the other information presented in this Prospectus before
purchasing the shares of Common Stock offered hereby.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate will adversely affect certain segments of the
Company's business. Such economic conditions could result in a general decline
in rents which in turn would adversely affect revenues from property
management fees and brokerage commissions derived from property sales and
leases. Such conditions could also lead to a decline in sale prices as well as
a decline in demand for funds invested in commercial real estate and related
assets. An economic downturn or increase in interest rates also may reduce the
amount of loan originations and related servicing by the Company's commercial
mortgage banking business. If the Company's brokerage and mortgage banking
businesses are adversely affected, it is also quite likely that other segments
of the Company's business will also be adversely affected, due to the
relationship among the Company's various business segments.
GEOGRAPHIC CONCENTRATION
For the year ended December 31, 1995, approximately $141.4 million or 37.0%
of total sale and lease revenue of $382.4 million was generated from
transactions originated in the state of California. Total revenue from sale
and lease transactions for 1995 was 81.6% of the Company's total revenue for
1995. As a result of this geographic concentration, any negative performance
of the commercial real estate markets and the local economies in various areas
within California could materially adversely affect the Company's results of
operations.
COMPETITION
The Company competes in a variety of service disciplines within the
commercial real estate industry, including (i) brokerage (facilitating sales
and leases on behalf of investors), investment properties (acquisitions and
sales), corporate services, property management, and real estate market
research and (ii) mortgage banking (loan origination and servicing),
investment management and advisory services, and valuation and appraisal
services. Each of these business areas is highly competitive on a national as
well as local level. The Company faces competition not only from other real
estate service providers, but also from institutional lenders, insurance
companies and investment advisory, mortgage banking, accounting and appraisal
firms. Some of the Company's principal competitors in certain of these
business areas are better established and have substantially more experience
than the Company. Moreover, although many of the Company's competitors are
local or regional firms that are substantially smaller than the Company on an
overall basis, they may be substantially larger on a local or regional basis.
Because of these factors, these companies may be better able than the Company
to obtain new customers, pursue new business opportunities or to survive
periods of industry consolidation. In addition, the Company has faced
increased competition in recent years in the property management and
investment advisory segment of its business which has resulted in decreased
property management fee rates and margins and decreased investment advisory
fees and margins. In general, in each of the Company's businesses there can be
no assurance that the Company will be able to continue to compete effectively
or that it will be able to maintain current commission or fee levels or
margins or that it will not encounter increased competition which could limit
the Company's ability to maintain or increase its market share.
Coldwell Banker, a former sister company of CB Commercial Real Estate Group,
Inc., recently acquired by HFS, Inc., has announced that it intends to expand
its franchise program from the residential real estate brokerage franchising
business into commercial brokerage franchising. The activities of Coldwell
Banker franchisees as direct competitors of the Company could cause name
confusion in the industry between the Company and Coldwell Banker franchisees,
which could result in a dilution of the value of the trade name "CB
Commercial." See "Business--Competition."
12
<PAGE>
RISKS INHERENT IN ACQUISITION GROWTH STRATEGY
Lack of Availability of Acquisition Candidates
A significant component of the Company's growth in 1995 and 1996 has been,
and part of its principal strategy for continued growth is, through
acquisitions. Recent acquisitions have included L.J. Melody (mortgage banking
services), Westmark (investment management and advisory services) and Langdon
Rieder Corporation (tenant advisory services). The Company expects to continue
its acquisition program. The Company's future growth through acquisitions will
be partially dependent upon the continued availability of suitable acquisition
candidates at favorable prices and upon favorable terms and conditions;
however, there can be no assurance that future acquisitions can be consummated
at favorable prices or upon favorable terms and conditions. In addition,
acquisitions entail risks that businesses acquired will not perform in
accordance with expectations and that business judgments with respect to the
value, strengths and weaknesses of businesses acquired or the consequences of
any such acquisition will prove incorrect. See "Business--Acquisitions."
Difficulty of Integration
In addition, there can be no assurance that significant difficulties in
integrating operations acquired from other companies will not be encountered,
including difficulties arising from the diversion of management's attention
from other business concerns and the potential loss of key employees of either
the Company or the acquired operations. The Company encountered a number of
these difficulties when it acquired Westmark and, to a lesser extent, when it
acquired L.J. Melody. The Company believes that most acquisitions will have an
adverse impact on EBITDA, operating income and net income during the first six
months following the acquisition. There can be no assurance that the Company's
management will be able to effectively manage the acquired businesses or that
such acquisitions will benefit the Company overall.
Lack of Available Financing
The Company will require additional financing to sustain its acquisition
program. The Company expects to finance future acquisitions and internal
growth through a combination of funds available under its senior secured
credit facilities (as in effect following the consummation of the Offering),
cash flow from operations, additional indebtedness incurred by the Company
(including, in the case of acquisitions, seller financing) and public or
private sales of the Company's capital stock. The covenants in the Company's
credit agreements as in effect following the consummation of the Offering will
restrict the Company's ability to raise additional capital in certain
respects. There can be no assurance that financing will be available to the
Company or, if available, that it will be sufficient to finance acquisitions
and internal growth. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and "The
Company's Credit Agreements."
SEASONALITY
A substantial component of the Company's revenues is transactional in nature
and as a result is subject to seasonality. Historically, the Company's
revenues, operating income and net income in the first two calendar quarters
are generally lower than in the third and fourth calendar quarters due to
seasonal fluctuations, which are consistent with the industry generally. In
the first quarter of the calendar year, the Company has historically sustained
a loss. The Company's non-variable operating expenses, which are treated as
expenses when incurred during the year, are relatively constant in total
dollars on a quarterly basis. As a consequence of the seasonality of revenues
and the relatively constant level of quarterly expenses, a substantial
majority of the Company's operating income and net income has historically
been realized in the third and fourth calendar quarters. The Company believes
that future operating results will continue to follow these historical
patterns, although revenues are also likely to be affected by both broad
economic fluctuations and supply and demand cyclicality relating to commercial
real estate. There can be no assurance that the Company will be profitable on
a quarterly or annual basis in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
13
<PAGE>
THE COMPANY'S LEVERAGE AND INTANGIBLE NATURE OF ITS ASSETS
Following the Offering, the Company will have indebtedness of approximately
$154 million as to which it will have annual principal and interest
obligations of more than $30 million which must be paid regardless of the
Company's operating cash flow. Any material downturn in the Company's revenue
or increase in its costs and expenses could result in the Company's being
unable to meet its debt obligations.
After giving effect to the Offering, the Company will have total assets of
$248.8 million on a pro forma basis, approximately $73.5 million of which will
be goodwill and other intangible assets which would not be realizable at their
carrying amounts in liquidation.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering could have an adverse effect on the market price of the Common
Stock. 6,667,264 shares will be eligible for sale in the public market
immediately following the Offering. Additionally, 180 days after the closing
of the Offering, 2,299,017 shares will become eligible for sale without any
volume restriction, and 2,256,152 shares will become eligible for sale,
subject to the volume limitations of Rule 144 of the Securities Act of 1933,
as amended (the "Securities Act"). Furthermore, holders of the Company's
4,000,000 shares of outstanding Preferred Stock have the right to convert such
shares into Common Stock after the date of the Offering at a conversion ratio
ranging from .60 to .78 shares of Common Stock for each share of Preferred
Stock, depending on the market price of the Common Stock.The holders of the
Preferred Stock have agreed not to sell any shares of Common Stock they
acquire upon such conversion for 180 days from the date of this Prospectus
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Thereafter, for an additional six months, such holders are
contractually bound to sell such shares within the volume limitations of Rule
144 if the sale is made at a price per share below the initial public offering
price unless such sales are pursuant to block trades which do not involve a
broker's transaction executed on any exchange or in the over-the-counter
market. See "Shares Eligible for Future Sale" and "Underwriting."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for listing on the Nasdaq National
Market, there can be no assurance that an active trading market will develop
or be sustained. The price of shares of Common Stock to be sold in the
Offering will be determined by negotiations among the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of the Offering. See "Underwriting" for
factors to be considered in determining such offering price. The market price
of the Common Stock could be subject to significant fluctuations in response
to quarter-to-quarter variations in operating results of the Company or its
competitors, conditions in the commercial real estate industry, the
commencement of, developments in or outcome of litigation, changes in
estimates of the Company's performance by securities analysts, and other
events or factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock. See "Underwriting."
RETAINED RISKS OF MORTGAGE LOANS SOLD
In connection with the Company's origination and sale of certain mortgage
loans in its mortgage banking business, the Company must make certain
representations and warranties concerning mortgages originated by the Company
and sold to "conduit" purchasers or to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). These representations and warranties cover such
matters as title to the mortgaged property, lien priority, environmental
reviews and certain other matters. The Company's representations and
warranties rely in part on similar representations and warranties made by the
borrower or others. The Company would have a claim against the borrower or
another party in the event of a breach of any of these representations or
warranties; however, the
14
<PAGE>
Company's ability to recover on any such claim would be dependent upon the
financial condition of the party against which such claim is asserted. There
can be no assurance that the Company will not experience a material loss as a
result of representations and warranties it makes.
POTENTIAL LACK OF SPACE TO LEASE
A significant portion of the Company's brokerage business involves
facilitating the lease of commercial property including retail, industrial,
and office space. Since the real estate depression of the early 1990s, the
development of new retail, industrial, and office space has been limited. As a
consequence, in certain areas of the country there is beginning to be
inadequate office, industrial and retail space to meet demand and there is a
potential for a decline in the Company's overall number of lease transactions,
the effect of which may, over time, be partially offset by increasing sales,
including sales of undeveloped land (which would benefit the Company's
brokerage business). There can be no assurance that any such increase in the
sale of undeveloped land will coincide with any decline in the number of lease
transactions.
DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of Common Stock. As a result, purchasers of
shares of Common Stock in the Offering will incur immediate and substantial
dilution.
ENVIRONMENTAL CONCERNS
Numerous laws and regulations have been enacted which regulate exposure to
potentially hazardous materials often found in and around buildings. Some of
these laws and regulations directly and indirectly impact the commercial real
estate market by imposing additional costs and liability on owners, operators
and sellers as well as lenders. Such laws and regulations tend to discourage
sales and leasing activities and mortgage lending with respect to some
properties, and may therefore adversely affect the Company. In addition, the
failure of the Company to disclose environmental issues may subject the
Company to liability to a buyer or lessee of property or to a purchaser of a
mortgage loan.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as within this Prospectus generally. In
addition, when used in this Prospectus, the words "anticipates," "expects" and
words of similar import may constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act. Such statements are subject to a
number of risks and uncertainties. Actual results in the future could differ
materially from those described in the forward-looking statements as a result
of the risk factors set forth above and the matters set forth in the
Prospectus generally. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
15
<PAGE>
THE COMPANY
The Company's business was founded under the name Tucker, Lynch & Coldwell
by Colbert Coldwell in San Francisco in 1906 as a commercial real estate
brokerage firm. The firm was renamed Coldwell, Cornwall & Banker with the
arrival of Benjamin Arthur Banker in 1913, became Coldwell, Banker & Company
in 1940 and was acquired by Sears, Roebuck & Co. ("Sears") in 1981.
In March 1989 the Company was incorporated in Delaware for the purpose of
acquiring Coldwell Banker Commercial Group, Inc. from Sears by a group of six
officers of Coldwell Banker Commercial Group, Inc. led by Mr. James J. Didion,
the Company's Chairman and Chief Executive Officer, and an investor group
formed by Mr. Frederic V. Malek and The Carlyle Group, L.P., a Washington,
D.C.-based private merchant bank. The acquisition was completed in April 1989
and the name of Coldwell Banker Commercial Group, Inc. was changed to
CB Commercial Real Estate Group, Inc. in 1991. The Company is a holding
company that conducts its operations solely through CB Commercial Real Estate
Group, Inc. and its subsidiaries. In connection with the Offering the Company
will change its name to CB Commercial Real Estate Services Group, Inc.
The Company's executive offices are located at 533 South Fremont Avenue, Los
Angeles, California 90071-1798 and its telephone number is (213) 613-3123.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 4,347,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately $90.5
million ($104.0 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $22.50 per
share and after deducting the estimated underwriting discount and offering
expenses payable by the Company.
The Company intends to use $79.9 million of the net proceeds ($86.7 million
if the Underwriter's over-allotment option is exercised in full) to repay a
portion of the Company's senior secured indebtedness and $9.0 million (whether
or not the Underwriter's over-allotment option is exercised in full) to pay
accrued and unpaid interest on the Company's senior subordinated indebtedness.
The remaining $1.6 million of net proceeds ($8.3 million if the Underwriters'
over-allotment option is exercised in full) will be used for general corporate
purposes, including to fund acquisitions. Pending such uses, the net proceeds
will be invested in short-term, investment grade, interest-bearing securities.
As of September 30, 1996, the balance of the Company's outstanding senior
secured indebtedness was $139.8 million and bore interest at a rate of
approximately 7.0% per annum. The terms of the senior secured indebtedness, as
amended in connection with the Recapitalization and the Offering, will provide
for a final maturity date of December 31, 2001. As of September 30, 1996, the
balance of the Company's senior subordinated indebtedness was $71.0 million
and bore interest at a rate of 5.875% per annum. The terms of the senior
subordinated indebtedness, as amended in connection with the Recapitalization
and the Offering, will provide for a final maturity date of July 23, 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--The Company's Credit Agreements."
16
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends on its Common Stock in the
foreseeable future. The Company's Series A-1, Series A-2 and Series A-3
Preferred Stock (collectively, the "Preferred Stock") is entitled to a
quarterly dividend of $0.25 per share. Until the Company has completed its
acquisition program, it does not intend to pay the dividend on the Preferred
Stock. As a consequence, such dividend will accumulate and bear interest which
will be paid on a current basis, and the Company will be prohibited from
prepaying long-term debt until such accumulated dividend and interest have
been paid in full. In addition to the restrictions imposed by the terms of the
Preferred Stock, the Company's credit agreements, as amended, will restrict
its ability to pay dividends with respect to the Common Stock. See "Business--
The Company's Credit Agreements" and "Description of Capital Stock--Preferred
Stock."
Prior to the Offering, there has been no established public market for the
Company's Common Stock. As of September 30, 1996, there were 1,467 holders of
record of the Company's Class B-2 Common Stock, nine holders of record of the
Company's Class B-1 Common Stock, two holders of record of the Company's Class
C-R Common Stock, three holders of record of the Company's Class C-1 Common
Stock and two holders of record of the Company's Class J Common Stock. As of
September 30, 1996, there was one holder of record of the Company's Series A-1
Preferred Stock, two holders of record of the Company's Series A-2 Preferred
Stock and one holder of record of the Company's Series A-3 Preferred Stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to give effect to the Offering at an
assumed initial public offering price of $22.50 per share and the application
of the estimated net proceeds therefrom as set forth under "Use of Proceeds."
This table should be read in conjunction with "Unaudited Pro Forma Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Company's consolidated financial statements,
including the related notes thereto, all appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion...... $ 231,986 $ 143,113
Stockholders' equity:
Preferred Stock, $.01 par value;--8,000,000
shares authorized; 4,000,000 shares issued and
outstanding;--4,000,000 shares issued and
outstanding, as adjusted(2)................... 40 40
Common Stock, $.01 par value;--100,000,000
shares authorized; 10,074,729 shares issued
and outstanding; 13,266,171 shares issued and
outstanding, as adjusted...................... 101 133
Additional paid-in capital..................... 117,826 208,266
Notes receivable from sale of stock............ (5,109) (5,109)
Accumulated deficit............................ (219,752) (205,091)
------------ ------------
Total stockholders' equity (deficit)......... $ (106,894) $ (1,761)
------------ ------------
Total capitalization............................. $ 125,092 $ 141,352
============ ============
</TABLE>
- --------
(1) Assumes an increase in the Company's authorized Common Stock to
100,000,000 shares of Common Stock, the conversion of the Class B-1 and
Class B-2 common stock of the Company into Common Stock on a 1-for-1
basis, the conversion of the 800,000 shares of the Class C-1 common stock
of the Company into 444,444 shares of Common Stock assuming an initial
public offering price per share in the Offering of $22.50, and the
repurchase by the Company for $0.01 per share of the 800,000 outstanding
shares of the Company's Class C-R common stock and two outstanding shares
of the Company's Class J common stock, which in each case will occur upon
the consummation of the Offering as part of the Recapitalization. See
"Description of Capital Stock--The Recapitalization."
(2) The Preferred Stock is convertible into Common Stock at the holder's
option after the consummation of the Offering at a ratio based upon the
per share market price of the Common Stock, ranging from .60 shares of
Common Stock per share of Preferred Stock at a market price of $30.00 or
more per share of Common Stock to .78 shares of Common Stock per share of
Preferred Stock at a market price of $10.00 to $21.99 per share of Common
Stock. No conversion of the Preferred Stock is permitted when the market
price of the Common Stock is below $10.00 per share. See "Description of
Capital Stock--Preferred Stock."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data for the
Company on a consolidated historical basis and a consolidated pro forma basis
for the periods and dates indicated. The selected historical balance sheet
data as of December 31, 1995 and 1994 and the statement of operations data for
each of the three years in the period ended December 31, 1995 are derived from
the financial statements of the Company that have been audited by Arthur
Andersen LLP, independent public accountants, included herein. The selected
historical balance sheet data as of December 31, 1993, 1992 and 1991 and the
statement of operations data for the years ended December 31, 1992 and 1991
are derived from audited financial statements not included herein. The
selected historical financial data for each of the nine-month periods ended
September 30, 1996 and 1995 are derived from unaudited financial statements
prepared on the same basis as the audited financial statements and containing,
in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position at such dates and the operating results and cash flows for such
periods. Period to period comparability in 1995 and 1996 is affected by the
Westmark acquisition completed in June 1995 and the L.J. Melody acquisition
completed in July 1996. A significant portion of the Company's revenue is
transactional in nature and seasonal. Historically, this seasonality has
caused the Company's revenue, operating income, net income and EBITDA to be
lower in the first two calendar quarters and higher in the third and fourth
calendar quarters of each year. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of results to be
expected for the entire year ending December 31, 1996 or for any future
period.
The selected unaudited pro forma statement of operations data, balance sheet
data and other data give effect to the acquisitions of Westmark, L.J. Melody
as well as the Offering and Recapitalization as if such transactions had
occurred as of January 1, 1995 with respect to operating and other data, and
as if the Offering and the Recapitalization had occurred as of September 30,
1996 with respect to the pro forma balance sheet data. The pro forma financial
data set forth below is not necessarily indicative of the results that would
have been achieved had such transactions been consummated as of the dates
indicated or that may be achieved in the future.
The information set forth below should be read in conjunction with
"Unaudited Pro Forma Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements for each of the Company, L.J. Melody and Westmark and related notes
thereto which are included elsewhere in this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1996 1996 1996 1995
----------- ----------- ---------- ----------
PRO FORMA
------------------------
ACQUISITION
ACQUISITION AND
ONLY OFFERING
----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenue......... $ 394,280 $ 394,280 $ 390,863 $ 324,890
Costs and
expenses:
Commissions,
fees and other
incentives..... 198,240 198,240 195,465 167,569
Operating,
administrative
and other...... 160,741 160,741 159,196 134,839
Depreciation and
amortization (1). 10,267 10,267 9,749 8,173
Non-recurring
charges........ -- -- -- --
---------- ---------- ---------- ----------
Operating income
(loss)......... 25,032 25,032 26,453 14,309
Interest income. 1,180 1,180 1,035 1,228
Interest
expense........ 18,099 13,672 17,883 16,944
---------- ---------- ---------- ----------
Income (loss)
before
provision
(benefit) for
income tax..... 8,113 12,540 9,605 (1,407)
Provision for
income tax..... 4,323 6,094 4,610 238
Reduction of
valuation
allowances..... (40,400) (40,400) (40,400) --
---------- ---------- ---------- ----------
Net provision
(benefit) for
income tax (2). (36,077) (34,306) (35,790) 238
---------- ---------- ---------- ----------
Net income
(loss)......... $ 44,190 $ 46,846 $ 45,395 $ (1,645)
========== ========== ========== ==========
Net income
(loss) per
common and
common
equivalent
share
outstanding.... $ 3.20 $ 3.37 $ 3.29 $ (0.14)
Number of shares
used in
computing per
share
amounts (3).... 13,815,434 13,006,876 13,815,434 11,732,012
OTHER DATA:
EBITDA (4)...... $ 35,299 $ 35,299 $ 36,202 $ 22,482
Ratio of
earnings to
fixed charges
at period
end (5) 1.27 1.49 1.42 0.93
Net cash
provided by
(used in)
operating
activities..... $ 24,170 $ 551
Net cash (used
in) investing
activities..... $ (9,517) $ (21,960)
Net cash
provided by
(used in)
financing
activities..... $ (12,795) $ 3,481
Investments
under
management at
period end (6). $3,730,226 $3,918,825
Loans originated
(7)............ $2,180,485 $ 603,097
Loans serviced
(7)............ $7,498,905 $3,671,532
Total
consideration
of properties
sold ......... $6,393,389 $4,517,550
Number of sale
transactions... 2,758 2,491
Number of lease
transactions... 12,521 12,733
---------- ----------
Total sale and
lease
transactions... 15,279 15,224
========== ==========
Square feet
under
management (8). 103,754 95,406
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1995 1995 1995 1994 1993 1992 1991
------------ ------------ ---------- ---------- ---------- ---------- ----------
PRO FORMA
-------------------------
ACQUISITIONS
ACQUISITIONS AND
ONLY OFFERING
------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenue......... $ 489,684 $ 489,684 $ 468,460 $ 428,988 $ 392,037 $ 360,223 $ 338,119
Costs and
expenses:
Commissions,
fees and other
incentives..... 245,564 245,564 239,018 225,085 206,070 187,582 175,142
Operating,
administrative
and other...... 200,341 200,341 187,968 170,234 160,073 152,402 159,791
Depreciation and
amortization (1) 14,502 14,502 11,631 8,091 49,606 45,855 51,946
Non-recurring
charges........ -- -- -- -- -- 4,500 12,030
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)......... 29,277 29,277 29,843 25,578 (23,712) (30,116) (60,790)
Interest income. 1,926 1,926 1,674 1,109 915 1,083 1,349
Interest
expense........ 26,080 20,177 23,267 17,362 14,240 15,516 24,805
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before
provision
(benefit) for
income tax..... 5,123 11,026 8,250 9,325 (37,037) (44,549) (84,246)
Provision for
income tax..... 220 2,581 841 152 112 12 135
Reduction of
valuation
allowances..... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net provision
(benefit) for
income tax (2). 220 2,581 841 152 112 12 135
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)......... $ 4,903 $ 8,445 $ 7,409 $ 9,173 $ (37,149) $ (44,561) $ (84,381)
========== ========== ========== ========== ========== ========== ==========
Net income
(loss) per
common and
common
equivalent
share
outstanding.... $ 0.37 $ 0.35 $ 0.55 $ 0.70 $ (3.26) $ (3.94) $ (7.52)
Number of shares
used in
computing per
share
amounts (3).... 13,414,437 12,605,879 13,414,437 13,179,014 11,378,540 11,319,273 11,221,984
OTHER DATA:
EBITDA (4)...... $ 43,779 $ 43,779 $ 41,474 $ 33,669 $ 25,894 $ 15,739 $ (8,844)
Ratio of
earnings to
fixed charges
at period
end (5) 1.13 1.36 1.28 1.40 -- -- --
Net cash
provided by
(used in)
operating
activities..... $ 30,632 $ 31,418 $ 19,609 $ 10,911 $ (25,307)
Net cash (used
in) investing
activities..... $ (24,888) $ (3,865) $ (5,629) $ (4,821) $ (3,715)
Net cash
provided by
(used in)
financing
activities..... $ (11,469) $ (4,923) $ (14,662) $ (2,157) $ 16,012
Investments
under
management at
period end (6). $3,901,727 $ 879,809 $ 760,554 $ 883,761 $ 776,010
Loans originated
(7)............ $ 989,872 $ 874,159 $ 613,071 $ 458,792 $ 135,022
Loans serviced
(7)............ $3,779,069 $3,578,962 $3,140,635 $3,787,941 $3,830,502
Total
consideration
of properties
sold ......... $6,549,861 $6,521,451 $4,995,234 $4,478,472 $3,986,576
Number of sale
transactions... 3,503 3,693 3,249 3,042 2,590
Number of lease
transactions... 17,476 17,930 18,338 17,909 17,431
---------- ---------- ---------- ---------- ----------
Total sale and
lease
transactions... 20,979 21,623 21,587 20,951 20,021
========== ========== ========== ========== ==========
Square feet
under
management (8). 105,356 92,311 76,065 70,707 71,156
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------------------- ----------------------------------------------------
1996 1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- --------
PRO FORMA
OFFERING
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 26,502 $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 $ 6,822 $ 2,889
Total assets............ 248,835 232,575 180,038 190,954 150,100 128,914 173,274 212,249
Total long-term debt.... 143,113 231,986 252,468 250,142 233,571 239,853 239,473 240,401
Total liabilities....... 250,596 339,469 344,184 345,642 314,648 303,774 311,630 306,123
Total stockholders' eq-
uity (deficit)......... (1,761) (106,894) (164,146) (154,688) (164,548) (174,860) (138,356) (93,874)
</TABLE>
(footnotes on following page)
20
<PAGE>
- --------
(1) 1993, 1992, and 1991 reflect the amortization of intangibles associated
with the acquisition in 1989 of CB Commercial Real Estate Group, Inc. of
$42.9 million, $40.7 million and $47.1 million, respectively.
(2) Net provision (benefit) for income tax on a consolidated basis for the
nine months ended September 30, 1996 was ($35.8) million, a decrease of
$36.0 million from $0.2 million for the nine months ended September 30,
1995. During the quarter ended September 30, 1996, the Company projected,
on a more likely than not basis, that a portion of its NOLs would be
realized in current and future periods and, accordingly, reduced existing
deferred tax asset valuation allowances of $45.7 million, of which $5.3
million has been allocated to the purchase price of L.J. Melody, based on
its estimated future potential to generate taxable income, and the
remaining $40.4 million has been recorded as a tax benefit (a reduction in
income taxes provision). With the recognition of the deferred tax asset,
current and future provisions for income tax will be recorded at the full
effective tax rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Net Operating Losses."
(3) Includes the dilutive effect of 1,046,890 shares issuable upon exercise of
stock options outstanding as of September 30, 1996 under the Company's
stock option plans. Acquisitions and offering pro forma data excludes
shares of Class C-R and Class J common stock to be repurchased by the
Company in connection with the Offering and shares of Preferred Stock
convertible at the option of the holder into Common Stock after the
Offering. Pro forma data includes 444,444 shares of Common Stock issuable
upon conversion of the 800,000 shares of the Company's Class C-1 common
stock (assuming an initial public offering price per share of $22.50). See
"Description of Capital Stock--Preferred Stock" and "--The
Recapitalization."
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, thereby removing the effect of certain non-cash charges on
income, consisting of depreciation and the amortization of intangible
assets relating to acquisitions. Management believes that the presentation
of EBITDA will enhance a reader's understanding of the Company's operating
performance and ability to service debt as it provides a measure of cash
generated that can be used by the Company to service its debt and for
other required or discretionary purposes. Management has used EBITDA as
one of the primary measures of operating performance in evaluating its
recent acquisitions. Net cash available to the Company for discretionary
purposes represents remaining cash after debt service and other cash
requirements, such as capital expenditures, which are deducted from
EBITDA. EBITDA should not be considered as an alternative either (i) to
operating income (determined in accordance with GAAP) or (ii) operating
cash flow (determined in accordance with GAAP).
(5) The ratio of earnings to fixed charges represents earnings before income
taxes and fixed charges divided by fixed charges. Fixed charges include
interest expense, one-third of rent expense relating to operating leases,
and, for purposes of the pro forma ratios, preferred stock dividends. For
purposes of this calculation preferred stock dividends is computed to
demonstrate earnings required on a pre-tax basis. The Company's earnings
were not sufficient to cover its fixed charges requirements by $16.5
million, $22.2 million and $52.4 million, in 1993, 1992 and 1991,
respectively. Earnings included non-cash depreciation and amortization
charges of $9.7 million, $8.2 million, $11.6 million, $8.1 million, $49.6
million, $45.9 million and $51.9 million for the nine month periods ended
September 30, 1996 and 1995, and for the years ended December 31, 1995,
1994, 1993, 1992 and 1991, respectively.
(6) Investments under management represent the market value of the assets
managed as of the end of the period shown.
(7) Mortgage loans originated represent the initial principal amount of loans
originated during the period and loans serviced represents the outstanding
principal balance of loans being serviced as of the end of the period
shown. The increase in mortgage loans originated and serviced primarily
reflects the acquisition of L.J. Melody on July 1, 1996.
(8) Square feet under management represents the total square footage of
properties for which the Company provided property management services as
of the end of the period shown.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The integrated real estate services provided by the Company include (i)
Property and User Services, consisting of brokerage (facilitating sales and
leases), investment properties (acquisitions and sales on behalf of
investors), corporate services, property management, and real estate market
research, and (ii) Investor Services, consisting of mortgage banking (mortgage
origination and servicing) through L.J. Melody, investment management and
advisory services through Westmark, and valuation and appraisal services.
During the third quarter of 1996, the Company projected, on a more likely
than not basis, that a portion of its net operating loss carryforwards ("NOL")
would be realizable in future periods and, accordingly, reduced its existing
deferred tax asset valuation allowances by $45.7 million of which $5.3 million
has been allocated to the purchase price of L.J. Melody based on its estimated
future potential to generate taxable income, and the remaining $40.4 million
has been recorded as a tax benefit (a reduction in income tax provision). With
the recognition of deferred tax assets, the current period and the future
periods provisions for income tax will be recorded at the full effective tax
rate. For the nine months ended September 30, 1996, a $4.6 million provision
for income taxes has been recorded. Net income for the nine months ended
September 30, 1996 was $45.4 million ($3.29 per share of common stock), which
includes the net benefit for income tax of $35.8 million. Net income for the
nine months ended September 30, 1996 would have been $8.8 million ($.64 per
share of common stock) if the Company had not recorded tax benefits related to
projected future taxable income. An additional $16.3 million reduction of
valuation allowances and related tax benefit is expected to be recorded in the
fourth quarter of 1996 as a result of the Offering and related reduction in
future interest expense. The $40.4 million recognized tax benefit has a
material effect on the reported net income for the nine months ended September
30, 1996. This $40.4 million tax benefit is a non-recurring item and is
unrelated to the Company's performance and should not be used in evaluating
the Company's prospects or future performance. See "Net Operating Losses"
below and "Unaudited Pro Forma Balance Sheet."
A significant portion of the Company's revenue is transactional in nature
and seasonal. Historically, this seasonality has caused the Company's revenue,
operating income and net income to be lower in the first two calendar quarters
and higher in the third and fourth calendar quarters of each year. The results
of operations for the nine months ended September 30, 1996 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1996 or for any future period. See "Risk Factors--Seasonality."
Revenue from Property and User Services, which constitutes a substantial
majority of the Company's revenue, is largely transactional in nature and
subject to economic cycles. However, the Company's significant size,
geographic coverage, number of transactions, and large client base has made
the Company's annual revenue more stable. Due in large part to acquisitions,
revenue from Investor Services, a significant portion of which is non-
transactional in nature, has grown more rapidly than revenue from Property and
User Services. Approximately 54.0% of the costs and expenses associated with
Property and User Services are directly correlated to revenue while
approximately 25.0% of the costs and expenses of Investor Services are
directly correlated to revenue.
The Company has recently completed three strategic acquisitions and is
continually assessing acquisition opportunities as part of its growth strategy
(see "Business--Acquisitions"). Because of the substantial non-cash goodwill
and intangible amortization charges incurred by the Company in connection with
acquisitions subject to purchase accounting, management anticipates that
future acquisitions may result in a decrease in net income. Management's
strategy is to pursue acquisitions that are expected to be accretive to income
before provision for income taxes and to operating cash flows after all
integration costs.
22
<PAGE>
Since 1992, the Company's results have benefitted from its ability to take
advantage of a significant and ongoing recovery in U.S. commercial real estate
markets and the generally rising level of occupancy and rental levels, and, as
a result, property values. Since brokerage fees are typically based upon a
percentage of transaction value, and property management fees are typically
based upon a percentage of total rent collections, recent occupancy and rental
rate increases at the property level have generated an increase in brokerage
and property management fees to the Company.
Upon consummation of the Offering, the Company's total outstanding
indebtedness will be reduced from $256.5 million to $167.7 million. The
reduction of the Company's total outstanding indebtedness, net of the effect
of the increase in the interest rate on the Senior Subordinated Credit
Agreement, will result in a savings in interest expense to the Company of
approximately $5.9 million per year. See "The Company's Credit Agreements--
Senior Subordinated Debt Amendments." The 2.5% quarterly dividend on the
Company's Preferred Stock, which will accrue from October 1, 1996, will
result, if and when paid, in a cost of $1.0 million per quarter. Until the
Company has completed its acquisition program, it does not intend to pay
dividends on the Preferred Stock. As a consequence, such dividends will
accumulate and bear interest which will be paid on a current basis and the
Company will be prohibited from prepaying long-term debt until such
accumulated dividend has been paid in full. Effective upon the consummation of
the Offering, the terms of the Company's Preferred Stock will be amended to
provide that it is convertible at the option of the holders into shares of
Common Stock. See "Description of Capital Stock--Preferred Stock."
RESULTS OF OPERATIONS
The following unaudited table sets forth items derived from the Company's
consolidated statements of operations for each of the periods presented in
dollars and as a percentage of revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
------------------ ------------------ -------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $390,863 100.0 % $324,890 100.0 % $468,460 100.0% $428,988 100.0% $392,037 100.0 %
Costs and Expenses:
Commissions, fees and
other incentives...... 195,465 50.1 167,569 51.6 239,018 51.0 225,085 52.5 206,070 52.6
Operating,
administrative and
other................. 159,196 40.7 134,839 41.5 187,968 40.1 170,234 39.7 160,073 40.8
Depreciation and
amortization.......... 9,749 2.4 8,173 2.5 11,631 2.5 8,091 1.9 49,606 12.7
--------- ------ --------- ------ -------- ----- -------- ----- -------- -----
Operating income (loss). 26,453 6.8 14,309 4.4 29,843 6.4 25,578 5.9 (23,712) (6.1)
Interest income......... 1,035 0.2 1,228 0.3 1,674 0.4 1,109 0.3 915 0.2
Interest expense........ 17,883 4.5 16,944 5.2 23,267 5.0 17,362 4.0 14,240 3.6
--------- ------ --------- ------ -------- ----- -------- ----- -------- -----
Income (loss) before
provision (benefit) for
income tax............. 9,605 2.5 (1,407) (0.5) 8,250 1.8 9,325 2.2 (37,037) (9.5)
Provision for income
tax.................... 4,610 1.2 238 0.0 841 0.2 152 0.0 112 0.0
Reduction of valuation
allowances............. (40,400) 10.3 -- -- -- -- -- -- -- --
--------- ------ --------- ------ -------- ----- -------- ----- -------- -----
Net provision (benefit)
for income tax......... (35,790) (9.1) 238 0.0 841 0.2 152 0.0 112 0.0
--------- ------ --------- ------ -------- ----- -------- ----- -------- -----
Net income (loss)....... $ 45,395 11.6 $ (1,645) (0.5)% $ 7,409 1.6% $ 9,173 2.2% $(37,149) (9.5)%
========= ====== ========= ====== ======== ===== ======== ===== ======== =====
</TABLE>
23
<PAGE>
The following unaudited tables summarize the revenue, cost and expenses, and
operating income by operating segment for the nine months ended September 30,
1996 and 1995 and the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
------------------------------- ---------------------------------------------------
1996 1995 1995 1994 1993
-------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTY AND USER SERV-
ICES
Revenue:
Brokerage.............. $227,756 66.7% $208,913 70.8% $294,290 69.6% $284,775 71.1% $270,063 74.2%
Investment Properties.. 80,406 23.5 58,520 19.9 87,576 20.7 81,394 20.4 67,388 18.5
Corporate Services..... 17,436 5.1 13,524 4.6 21,723 5.1 15,631 3.9 9,640 2.6
Property Management(1)
...................... 14,705 4.3 13,139 4.5 18,332 4.4 17,692 4.4 16,432 4.5
Real Estate Market
Research.............. 1,198 0.4 627 0.2 912 0.2 758 0.2 649 0.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
341,501 100.0 294,723 100.0 422,833 100.0 400,250 100.0 364,172 100.0
Costs and expenses:
Commissions, fees and
other incentives...... 183,951 53.9 159,475 54.1 227,387 53.8 215,506 53.8 196,425 53.9
Operating,
administrative and
other................. 130,764 38.3 116,085 39.4 160,415 37.9 152,141 38.0 143,394 39.4
Depreciation and
amortization.......... 6,830 2.0 6,617 2.2 8,889 2.1 7,485 1.9 44,268 12.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income
(loss)................ $ 19,956 5.8% $ 12,546 4.3% $ 26,142 6.2% $ 25,118 6.3% $(19,915) (5.5)%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
INVESTOR SERVICES
Mortgage Banking
Revenue................ $ 14,035 100.0% $ 6,533 100.0% $ 10,417 100.0% $ 9,488 100.0% $ 7,218 100.0%
Costs and expenses:
Commissions, fees and
other
incentives............ 5,611 40.0 2,663 40.8 4,209 40.4 3,914 41.3 2,805 38.9
Operating,
administrative and
other................. 6,409 45.6 4,823 73.8 6,338 60.8 5,538 58.4 4,521 62.6
Depreciation and
amortization.......... 386 2.8 184 2.8 268 2.6 195 2.1 1,372 19.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income....... $ 1,629 11.6% $ (1,137) (17.4)% $ (398) (3.8)% $ (159) (1.8)% $ (1,480) (20.5)%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Investment Management
and Advisory
Revenue................ $ 22,239 100.0% $ 11,575 100.0% $ 18,610 100.0% $ 5,902 100.0% $ 5,091 100.0%
Costs and expenses:
Operating,
administrative and
other................. 16,351 73.5 8,451 73.0 13,745 73.9 5,580 94.5 5,103 100.2
Depreciation and
amortization.......... 2,207 9.9 1,126 9.7 2,148 11.5 149 2.5 1,245 24.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss). $ 3,681 16.6% $ 1,998 17.3% $ 2,717 14.6% $ 173 3.0% $ (1,257) (24.7)%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Valuation and Appraisal
Services
Revenue................ $ 13,088 100.0% $ 12,059 100.0% $ 16,600 100.0% $ 13,348 100.0% $ 15,556 100.0%
Costs and expenses:
Commissions, fees and
other incentives...... 5,903 45.1 5,431 45.1 7,422 44.7 5,665 42.4 6,840 44.0
Operating,
administrative and
other................. 5,672 43.3 5,480 45.4 7,470 45.0 6,975 52.3 7,055 45.4
Depreciation and
amortization.......... 326 2.5 246 2.0 326 2.0 262 2.0 2,721 17.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income
(loss)................ $ 1,187 9.1% $ 902 7.5% $ 1,382 8.3% $ 446 3.3% $ (1,060) (6.9)%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
TOTAL INVESTOR SERVICES
Revenue................ $ 49,362 100.0% $ 30,167 100.0% $ 45,627 100.0% $ 28,738 100.0% $ 27,865 100.0%
Costs and expenses:
Commissions, fees and
other incentives...... 11,514 23.3 8,094 26.8 11,631 25.5 9,579 33.3 9,645 34.6
Operating,
administrative and
other................. 28,432 57.6 18,754 62.2 27,553 60.4 18,093 63.0 16,679 59.9
Depreciation and
amortization.......... 2,919 5.9 1,556 5.2 2,742 6.0 606 2.1 5,338 19.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income
(loss)................ $ 6,497 13.2% $ 1,763 5.8% $ 3,701 8.1% $ 460 1.6% $ (3,797) (13.7)%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- -------
(1) Does not include reimbursable costs associated with the wages of on-site
employees and the cost of field office rent, furniture, computers,
supplies and utilities. Revenues from leasing services provided to the
Company's property management clients are reflected in brokerage rather
than property management revenue.
24
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
REVENUE on a consolidated basis for the nine months ended September 30, 1996
was $390.9 million, an increase of $66.0 million or 20.3% from $324.9 million
for the nine months ended September 30, 1995. The overall increase in revenue,
compared to the same period in 1995, reflected a continued improvement in the
commercial real estate markets in most areas of the United States. This
improvement reflected increasing investor confidence, increasing prices and a
more liquid market than in prior periods resulting from declining vacancy
levels and the return of some bargaining power to landlords.
Property and User Services revenue was $341.5 million for the nine months
ended September 30, 1996, an increase of $46.8 million or 15.9% from $294.7
million for the nine months ended September 30, 1995. Brokerage revenue
accounted for $227.8 million, an increase of $18.8 million or 9.0% from $208.9
million, and investment properties revenue accounted for $80.4 million, an
increase of $21.9 million or 37.4% from $58.5 million. These increases
resulted in part from an increase in the total number and size of brokerage
and investment properties sale transactions closed during the nine months
ended September 30, 1996 compared to transactions closed during the nine
months ended September 30, 1995. Although the number of lease transactions
declined from the nine months ended September 30, 1995 to the nine months
ended September 30, 1996, the average commission amount for lease transactions
increased from the nine months ended September 30, 1995 to the nine months
ended September 30, 1996, resulting in an overall increase in revenue from
leasing. Property management revenue was $14.7 million, an increase of $1.6
million or 11.9% from $13.1 million and corporate services revenue was $17.4
million, an increase of $3.9 million or 28.9% from $13.5 million.
Investor Services revenue was $49.4 million for the nine months ended
September 30, 1996, an increase of $19.2 million or 63.6% from $30.2 million
for the nine months ended September 30, 1995. This increase was primarily due
to an increase in investment management and advisory revenue to $22.2 million
from $11.6 million, resulting from the Westmark acquisition. Valuation and
appraisal services revenue accounted for $13.1 million, an increase of
$1.0 million or 8.5% from $12.1 million, and mortgage banking revenue was
$14.0 million, an increase of $7.5 million or 114.8% from $6.5 million,
primarily as a result of the Melody acquisition together with increased sales
and refinancing activity.
COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis for the nine
months ended September 30, 1996 were $195.5 million, an increase of $27.9
million or 16.6% from $167.6 million for the nine months ended September 30,
1995. The increase in these costs is directly correlated to the increase in
revenue since most of the Company's sales professionals are compensated based
on revenue. As a percentage of revenue, commissions, fees and other incentives
decreased from 51.6% to 50.0%. The decrease in commissions, fees and other
incentives as a percentage of revenue is primarily due to the acquisition of
Westmark, which significantly increased the revenue of investment management
and advisory which does not incur this type of revenue-based expense.
Excluding investment management and advisory, commissions, fees and other
incentives, on a consolidated basis, were relatively flat as a percentage of
revenue decreasing to 53.0% for the nine months ended September 30, 1996 from
53.5% for the nine months ended September 30, 1995.
Property and User Services commissions, fees and other incentives were
$184.0 million for the nine months ended September 30, 1996, an increase of
$24.5 million or 15.3% from $159.5 million for the nine months ended
September 30, 1995 and a decrease as a percentage of revenue from 54.1% to
53.9%.
Investor Services commissions, fees and other incentives were $11.5 million
for the nine months ended September 30, 1996, an increase of $3.4 million or
42.3% from $8.1 million for the nine months ended September 30, 1995 and a
decrease as a percentage of revenue from 26.8% to 23.3%.
OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis for the nine
months ended September 30, 1996 was $159.2 million, an increase of $24.4
million or 18.1% from $134.8 million for the nine months ended September 30,
1995, and decreased as a percentage of revenue for such periods from 41.5% to
40.7%.
Property and User Services operating, administrative and other was $130.8
million for the nine months ended September 30, 1996, an increase of $14.7
million or 12.6% from $116.1 million for the nine months ended September 30,
1995. This increase was primarily associated with increased operating
activities.
Investor Services operating, administrative and other was $28.4 million for
the nine months ended September 30, 1996, an increase of $9.7 million or 51.6%
from $18.8 million for the nine months ended September 30, 1995, primarily
resulting from the Westmark acquisition.
25
<PAGE>
DEPRECIATION AND AMORTIZATION on a consolidated basis for the nine months
ended September 30, 1996 was $9.7 million, an increase of $1.5 million or
19.3% from $8.2 million for the nine months ended September 30, 1995,
resulting primarily from the Westmark and Melody acquisitions.
Property and User Services depreciation and amortization was $6.8 million
for the nine months ended September 30, 1996, an increase of $0.2 million or
3.2% from $6.6 million for the nine months ended September 30, 1995.
Investor Services depreciation and amortization was $2.9 million for the
nine months ended September 30, 1996, an increase of $1.4 million or 87.6%
from $1.6 million for the nine months ended September 30, 1995.
OPERATING INCOME on a consolidated basis for the nine months ended September
30, 1996 was $26.5 million, an increase of $12.2 million or 84.9% from $14.3
million for the nine months ended September 30, 1995. The increase in
operating income resulted from an increase in revenue of $66.0 million or
20.3% partially offset by a related increase in commission expense of
$27.9 million or 16.6%, a $24.4 million or 18.1% increase in operating
expenses and a $1.5 million or 19.3% increase in depreciation and amortization
as described above.
Property and User Services operating income was $20.0 million for the nine
months ended September 30, 1996, an increase of $7.4 million or 59.1% from
$12.5 million for the nine months ended September 30, 1995. The increase in
Property and User Services operating income resulted from an increase in
Property and User Services revenue of $46.8 million or 15.9% partially offset
by a related increase in commission expense of $24.5 million or 15.3%, a $14.7
million or 12.6% increase in operating expenses and a $0.2 million or 3.2%
increase in depreciation and amortization as described above.
Investor Services operating income was $6.5 million for the nine months
ended September 30, 1996, an increase of $4.7 million or 268.5% from $1.8
million for the nine months ended September 30, 1995. The increase in Investor
Services operating income resulted from an increase in Investor Services
revenue of $19.2 million or 63.6% partially offset by a related increase in
commission expense of $3.4 million or 41.5%, a $9.7 million or 51.6% increase
in operating expenses and a $1.4 million or 87.6% increase in depreciation and
amortization as described above.
INTEREST INCOME on a consolidated basis for the nine months ended September
30, 1996 was $1.0 million, a decrease of $0.2 million or 15.7% from $1.2
million for the nine months ended September 30, 1995.
INTEREST EXPENSE on a consolidated basis for the nine months ended September
30, 1996 was $17.9 million, an increase of $1.0 million or 5.5% from $16.9
million for the nine months ended September 30, 1995, primarily resulting from
additional debt incurred with respect to the Westmark and Melody acquisitions,
offset by reduced average bank borrowing levels on other Company indebtedness
and a decline in interest rates on bank debt.
NET PROVISION (BENEFIT) FOR INCOME TAX on a consolidated basis for the nine
months ended September 30, 1996 was ($35.8) million, compared to a charge of
$0.2 million for the nine months ended September 30, 1995. During the third
quarter of 1996, the Company projected, on a more likely than not basis, that
a portion of its NOL would be realizable in future periods and, accordingly,
reduced its existing deferred tax asset valuation allowances by $45.7 million
of which $5.3 million has been allocated to the purchase price of L.J. Melody
based on its estimated future potential to generate taxable income, and the
remaining $40.4 million has been recorded as a tax benefit (a reduction in
income tax provision). With the recognition of deferred tax assets, the
current period and the future periods provisions for income tax will be
recorded at the full effective tax rate. For the nine months ended September
30, 1996, a $4.6 million provision for income taxes has been recorded. Net
income for the nine months ended September 30, 1996 was $45.4 million ($3.29
per share of common stock), which includes the net benefit for income tax of
$35.8 million. Net income for the nine months ended September 30, 1996 would
have been $8.8 million ($.64 per share of common stock) if the Company had not
recorded tax benefits related to projected future taxable income. An
additional $16.3 million reduction of valuation allowances and related tax
benefit is expected to be recorded in the fourth quarter of 1996 as a result
of the Offering and related reduction in future interest expense. The
$40.4 million recognized tax benefit has a material effect on the reported net
income for the nine months ended September 30, 1996. This $40.4 million tax
benefit is a non-recurring item and is unrelated to the Company's performance
and should not be used in evaluating the Company's prospects or future
performance.
26
<PAGE>
NET INCOME on a consolidated basis for the nine months ended September 30,
1996 was $45.4 million ($3.29 per share of common stock), after giving effect
to the tax benefit resulting from the reduction of valuation allowances of
$40.4 million ($2.92 per share of common stock) an improvement of
$47.0 million from a net loss of $1.6 million ($0.14 per share of common
stock) for the nine months ended September 30, 1995. The improvement also
resulted from a revenue increase of $66.0 million or 20.3% which was partially
offset by a related increase in commission expense of $27.9 million or 16.6%,
a $24.4 million or 18.1% increase in operating expenses and a $1.5 million or
19.3% increase in depreciation and amortization as described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE on a consolidated basis in 1995 was $468.5 million, an increase of
$39.5 million or 9.2% from $429.0 million in 1994. The overall increase in
revenue, compared to 1994, reflected a continued improvement in the commercial
real estate markets in most areas of the United States. This improvement
reflected increasing investor confidence, increasing prices and a more liquid
market than in prior years resulting from declining vacancy levels and the
return of some bargaining power to landlords.
Property and User Services revenue was $422.8 million in 1995, an increase
of $22.5 million or 5.6% from $400.3 million in 1994. Brokerage revenue
accounted for $294.3 million, an increase of $9.5 million or 3.3% from $284.8
million and investment properties revenue accounted for $87.6 million, an
increase of $6.2 million or 7.6% from $81.4 million. Corporate services
revenue accounted for $21.7 million, an increase of $6.1 million or 39% from
$15.6 million. Although the number of sale and lease transactions closed
decreased in 1995 from 1994, the average dollar amount of both sale and lease
transactions increased approximately 9.0%, resulting in a net increase in
brokerage and investment properties revenue.
Investor Services revenue was $45.6 million in 1995, an increase of $16.9
million or 58.8% from $28.7 million in 1994, largely due to an increase in
investment management and advisory revenue to $18.6 million from $5.9 million,
primarily resulting from the Westmark acquisition. Valuation and appraisal
services revenue accounted for $16.6 million, an increase of $3.3 million or
24.4% from $13.3 million and mortgage banking revenue accounted for $10.4
million, an increase of $0.9 million or 9.8% from $9.5 million.
COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1995 were
$239.0 million, an increase of $13.9 million or 6.2% from $225.1 million in
1994. The increase in these costs is directly correlated to the increase in
revenue since most of the Company's sales professionals are compensated based
on revenue. As a percentage of revenue, commissions, fees and other incentives
decreased from 52.5% in 1994 to 51.0% in 1995. The decrease in commissions,
fees and other incentives as a percentage of revenue is primarily due to the
significant revenue growth of investment management and advisory, which does
not incur this type of revenue-based expense. Excluding investment management
and advisory, commissions, fees and other incentives on a consolidated basis
remained constant as a percent of revenues at 53.2% for 1995 and 1994.
Property and User Services commissions, fees and other incentives was
$227.4 million in 1995, an increase of $11.9 million or 5.5% from $215.5
million in 1994 and a decrease as a percentage of revenue from 53.9% to 53.8%.
Investor Services commissions, fees and other incentives was $11.6 million
in 1995, an increase of $2.0 million or 21.4% from $9.6 million in 1994 and a
decrease as a percentage of revenue from 33.4% to 25.6%.
OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1995 was
$188.0 million, an increase of $17.8 million or 10.4% from $170.2 million in
1994, remaining relatively stable as a percentage of revenue for such periods
at 40.0% and 39.7%, respectively.
Property and User Services operating, administrative and other was $160.4
million in 1995, an increase of $8.3 million or 5.4% from $152.1 million in
1994. This increase was caused, in part, by additions to staff in anticipation
of further increases in operating activities and resulted in higher levels of
administrative, technical
27
<PAGE>
and other support expenditures and related personnel costs, as well as higher
business promotion and other expenses.
Investor Services operating, administrative and other was $27.6 million in
1995, an increase of $9.5 million or 52.3% from $18.1 million in 1994,
primarily resulting from the Westmark acquisition.
DEPRECIATION AND AMORTIZATION on a consolidated basis in 1995 was $11.6
million, an increase of $3.5 million or 43.8% from $8.1 million in 1994 as a
result of the Westmark acquisition and new capital leases for computer
equipment entered into in 1995.
Property and User Services depreciation and amortization was $8.9 million in
1995, an increase of $1.4 million or 18.8% from $7.5 million in 1994.
Investor Services depreciation and amortization was $2.7 million in 1995, an
increase of $2.1 million or 352.5% from $0.6 million in 1994.
OPERATING INCOME on a consolidated basis in 1995 was $29.9 million, an
increase of $4.3 million or 16.7% from $25.6 million in 1994. The increase in
operating income resulted from an increase in revenue of $39.5 million or 9.2%
partially offset by a related increase in commission expense of $13.9 million
or 6.2%, a $17.8 million or 10.4% increase in operating expenses and a $3.5
million or 43.8% increase in depreciation and amortization as described above.
Property and User Services operating income was $26.1 million in 1995, an
increase of $0.9 million or 4.1% from $25.2 million in 1994. The increase in
Property and User Services operating income resulted from an increase in
Property and User Services revenue of $22.5 million or 5.6% partially offset
by a related increase in commission expense of $11.9 million or 5.5%, an $8.3
million or 5.4% increase in operating expenses and a $1.4 million or 18.8%
increase in depreciation and amortization as described above.
Investor Services operating income was $3.7 million in 1995, an increase of
$3.3 million or 704.6% from $0.4 million in 1994. The increase in Investor
Services operating income resulted from an increase in Investor Services
revenue of $16.9 million or 58.8% partially offset by a related increase in
commission expense of $2.0 million or 21.4%, a $9.5 million or 52.3% increase
in operating expenses and a $2.1 million or 352.5% increase in depreciation
and amortization primarily as a result of the Westmark acquisition as
described above.
INTEREST INCOME on a consolidated basis in 1995 was $1.7 million, an
increase of $0.6 million or 50.1% from $1.1 million in 1994. This increase
primarily resulted from increased interest rates and improved cash management.
INTEREST EXPENSE on a consolidated basis in 1995 was $23.3 million, an
increase of $5.9 million or 34.0% from $17.4 million in 1994. This increase
resulted from a general increase in interest rates, the full year impact of
the higher interest rates on the senior secured and senior subordinated debt
of LIBOR plus 250 basis points and LIBOR plus 125 basis points, respectively,
which were effective June 30, 1994, and the addition of the debt incurred with
respect to the Westmark acquisition, offset in part by reduced average
borrowing levels on other Company indebtedness.
NET INCOME on a consolidated basis in 1995 was $7.4 million ($0.55 per share
of common stock), a decrease of $1.8 million or 19.2% from $9.2 million ($0.70
per share of common stock) in 1994. The increase in net income resulted from
an increase in revenue of $39.5 million or 9.2% partially offset by a related
increase in commission expense of $13.9 million or 6.2%, a $17.8 million or
10.4% increase in operating expenses, a $3.5 million or 43.8% increase in
depreciation and amortization and an increase in interest expense of
$5.9 million or 34.0% as described above.
28
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUE on a consolidated basis in 1994 was $429.0 million, an increase of
$37.0 million or 9.4% from $392.0 million in 1993.
Property and User Services revenue was $400.3 million in 1994, an increase
of $36.1 million or 9.9% from $364.2 million in 1993. Brokerage revenue
accounted for $284.8 million, an increase of $14.7 million or 5.5% from $270.1
million and investment properties revenue accounted for $81.4 million, an
increase of $14.0 million or 20.8% from $67.4 million. Corporate services
revenue accounted for $15.6 million, an increase of $6.0 million or 62.1% from
$9.6 million and property management revenue accounted for $17.7 million, an
increase of $1.3 million or 7.7% from $16.4 million. These increases resulted
in part from an increase in the total number and size of brokerage, investment
properties and corporate services sale transactions closed during 1994 and in
part from an increase in total size of brokerage lease transactions closed
during 1994. Although the number of lease transactions declined in 1994 from
1993, the average lease commission amount increased by approximately 9.7%,
resulting in an overall increase in revenue from leasing.
Investor Services revenue was $28.7 million in 1994, an increase of $0.9
million or 3.1% from $27.8 million in 1993. Investment Management and Advisory
revenue accounted for $5.9 million, an increase of $0.8 million or 15.9% from
$5.1 million. Valuation and Appraisal Services revenue accounted for $13.3
million, a decrease of $2.3 million or 14.2% from $15.6 million as a result of
a change in federal regulations, which modified appraisal standards and
requirements. Mortgage Banking revenue accounted for $9.5 million, an increase
of $2.3 million or 31.5% from $7.2 million, primarily resulting from improved
availability of credit to finance commercial real estate transactions.
COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1994 were
$225.1 million, an increase of $19.0 million or 9.2% from $206.1 million in
1993. An increase in these costs is directly correlated to an increase in
revenue since most of the Company's sales professionals are compensated based
on revenue. As a percentage of revenue, commissions, fees and other expenses
remained relatively flat decreasing from 52.6% in 1993 to 52.5% in 1994.
Property and User Services commissions, fees and other incentives was $215.5
million in 1994, an increase of $19.1 million or 9.7% from $196.4 million in
1993 and a decrease as a percentage of revenue from 53.9% to 53.8%.
Investor Services commissions, fees and other incentives was $9.6 million
for both years, a decrease as a percentage of revenues from 34.6% to 33.3%.
OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1994 was
$170.2 million, an increase of $10.2 million or 6.3% from $160.1 million in
1993, and remained relatively flat as a percentage of revenue for such periods
at 39.7% and 40.8%, respectively, due to the cost control measures implemented
in 1994. These increases were primarily the result of the Company's expansion
of loan closing and underwriting activities and continuing investments in
information technology and the additions of sales support personnel and LAN
(local area network) administrators and technicians to enhance the
productivity of sales personnel.
Property and User Services operating, administrative and other was $152.1
million in 1994, an increase of $8.7 million or 6.1% from $143.4 million in
1993.
Investor Services operating, administrative and other was $18.1 million in
1994, an increase of $1.4 million or 8.5% from $16.7 million in 1993.
DEPRECIATION AND AMORTIZATION on a consolidated basis in 1994 was $8.1
million, a decrease of $41.5 million or 83.7% from $49.6 million in 1993 as a
result of the write-off of intangibles in 1993 associated with the
Acquisition.
29
<PAGE>
Property and User Services depreciation and amortization was $7.5 million in
1994, a decrease of $36.8 million or 83.1% from $44.3 million in 1993.
Investor Services depreciation and amortization was $0.6 million in 1994, a
decrease of $4.7 million or 88.7% from $5.3 million in 1993.
OPERATING INCOME on a consolidated basis in 1994 was $25.6 million, an
improvement of $49.3 million from an operating loss of $23.7 million in 1993.
The improvement in operating income resulted from an increase in revenue of
$37.0 million or 9.4% partially offset by a related increase in commission
expense of $19.0 million or 9.2%, a $10.2 million or 6.3% increase in
operating expenses and a $41.5 million or 83.7% decrease in depreciation and
amortization as a result of the write-off of intangibles in 1993 as described
above.
Property and User Services operating income was $25.2 million in 1994, an
improvement of $45.1 million from $(19.9) million in 1993. The improvement in
Property and User Services operating income resulted from an increase in
Property and User Services revenue of $36.1 million or 9.9% partially offset
by a related increase in commission expense of $19.1 million or 9.7%, an $8.7
million or 6.1% increase in operating expenses and a $36.8 million or 83.1%
decrease in depreciation and amortization as a result of the write-off of
intangibles in 1993 as described above.
Investor Services operating income was $0.4 million in 1994, an improvement
of $4.2 million from an operating loss of $3.8 million in 1993. The
improvement in Investor Services operating income resulted primarily from a
$4.7 million or 88.7% decrease in depreciation and amortization as a result of
the write-off of intangibles in 1993 as described above.
INTEREST INCOME on a consolidated basis in 1994 was $1.1 million, an
increase of $0.2 million or 21.2% from $0.9 million in 1993.
INTEREST EXPENSE on a consolidated basis in 1994 was $17.4 million, an
increase of $3.2 million or 21.9% from $14.2 million in 1993. This increase
resulted from a general increase in interest rates and the impact of the
higher interest rates on the senior secured indebtedness and senior
subordinated indebtedness, which were effective June 30, 1994.
NET INCOME on a consolidated basis in 1994 was $9.2 million ($0.70 per share
of common stock), an improvement of $46.4 million from a net loss of
$37.2 million ($3.26 per share of common stock) in 1993. The improvement in
net income resulted from an increase in revenue of $37.0 million or 9.4%
partially offset by a related increase in commission expense of $19.0 million
or 9.2%, a $10.2 million or 6.3% increase in operating expenses, a $41.5
million or 83.7% decrease in depreciation and amortization as a result of the
write-off of intangibles in 1993 and an increase in interest expense of $3.3
million or 21.9% as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and non-acquisition
related capital expenditures primarily with internally generated funds,
operating leases and, to a much lesser extent, capital leases, and borrowings
under a revolving credit facility. In order to finance the acquisition of CB
Commercial Real Estate Group, Inc. and related expenses, in April 1989 the
Company incurred borrowings of $251.0 million, which included $170.0 million
under a senior secured credit agreement (the "Senior Secured Credit
Agreement") and $81.0 million under a senior subordinated credit agreement
(the "Senior Subordinated Credit Agreement"). As of September 30, 1996, the
Company had outstanding $139.8 million, including $4.8 million of deferred
interest, under the Senior Secured Credit Agreement and $8.0 million under a
revolving credit facility ("Revolving Credit Facility A"), no amounts
outstanding under its second revolving credit facility ("Revolving Credit
Facility B" and together with Revolving Credit Facility A, the "Revolving
Credit Facilities") and $71.0 million (including $9.0 million of deferred
interest) under the Senior Subordinated Credit Agreement. The outstanding
amount under the Senior Secured Credit Agreement reflects principal repayments
of $41.3 million since June 30, 1994.
30
<PAGE>
In addition, as of September 30, 1996 the Company had outstanding other long-
term indebtedness, consisting primarily of acquisition debt, totaling
approximately $45.7 million. Consistent with the seasonality of the Company's
revenue, as of October 31, 1996 all outstanding borrowings under the Revolving
Credit Facility A have been repaid.
$79.9 million of the net proceeds of the Offering will be used to repay a
portion of the Senior Secured Credit Agreement and $9.0 million will be used
to pay accrued and unpaid interest on the Senior Subordinated Credit
Agreement. The remaining $1.6 million of net proceeds will be used for general
corporate purposes, including to fund acquisitions. As proposed, effective
upon completion of the Offering, the Revolving Credit Facility B will be
converted into a facility for acquisitions and will bear interest at LIBOR
plus 300 basis points. The Company has begun discussions to increase Revolving
Credit Facility B from $10.0 million to $20.0 million sometime in 1997,
although there can be no assurance that such discussions will be successful or
if successful that $20.0 million will be adequate to finance the Company's
acquisition program.
In connection with the Offering and the repayment of a portion thereof, the
senior secured lenders have agreed to amend the terms of the Senior Secured
Credit Agreement. As amended, the Company will be required to make quarterly
principal payments of $2.625 million commencing March 31, 1997 with a final
payment of $2.2 million on September 30, 2001. Revolving Credit Facility A
permits maximum borrowings of $20.0 million which must be paid off in full for
at least 30 consecutive days in each year commencing with 1997. See "The
Company's Credit Agreements--Senior Secured Debt Repayment and Amendments."
Also in connection with the Offering, the senior subordinated lenders have
agreed to amend the terms of the Senior Subordinated Credit Agreement. As
amended, interest will be payable on a current basis commencing January 1,
1997 and the entire amount outstanding under the Senior Subordinated Credit
Agreement will be due on July 23, 2002. Interest payments on the amounts
outstanding under Senior Subordinated Credit Agreement had been deferred since
June 1994 until the payment in full of amounts outstanding under the Senior
Secured Credit Agreement. See "The Company's Credit Agreements--Senior
Subordinated Debt Amendments."
Upon consummation of the Offering and the Recapitalization, principal
payments on the Senior Secured Credit Agreement, Senior Subordinated Credit
Agreement and the Company's other indebtedness, including debt incurred to
finance the acquisitions of Westmark and L.J. Melody, are as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
---------
<S> <C>
1996........................................................... $ 13,841
1997........................................................... 22,470
1998........................................................... 18,516
1999........................................................... 12,827
2000........................................................... 26,283
2001........................................................... 8,536
2002........................................................... 62,000
Thereafter..................................................... 3,181
--------
$167,654
========
</TABLE>
The Company expects to have capital expenditures of approximately $4.0
million in 1997. In connection with the Westmark acquisition, the sellers may
be entitled to a supplemental purchase price based on the operating results of
Westmark payable over a period of six years and subject to a maximum aggregate
payment of $18.0 million. See "Note 1 of Notes to Consolidated Financial
Statements." The Company expects to use net cash provided by operating
activities for the next several years primarily to fund acquisitions,
including earnout payments, and to make required principal payments under the
Company's outstanding indebtedness. The Company believes that it can satisfy
these obligations as well as working capital requirements from internally
generated cash flow, borrowings under the Revolving Credit Facilities and,
with respect to acquisitions, seller financing and third-party borrowing.
31
<PAGE>
The 2.5% quarterly dividend on the Company's Preferred Stock, which will
accrue from October 1, 1996, will result, if and when paid, in a cost of $1.0
million per quarter. The Company currently expects to pay dividends on the
Preferred Stock out of working capital generated from operating cash flow
after it has completed its acquisition program.
The Company anticipates that its existing sources of liquidity, including
cash flow from operations, will be sufficient to fund its operations for at
least the next twelve months.
The Company's EBITDA was $36.2 million, $22.5 million, $41.5 million, $33.7
million and $25.9 million for the nine months ended September 30, 1996, and
September 30, 1995, and the years ended December 31, 1995, December 31, 1994
and December 31, 1993, respectively. The improvement in EBITDA in the nine
months ended September 30, 1996 and the years ended December 31, 1995 and 1994
reflects the overall period to period revenue growth discussed above.
EBITDA represents earnings before interest, income taxes, depreciation and
amortization, thereby removing the effect of certain non-cash charges on
income consisting of depreciation and the amortization of intangible assets
relating to acquisitions. Management believes that the presentation of EBITDA
will enhance a reader's understanding of the Company's operating performance
and ability to service debt as it provides a measure of cash generated that
can be used by the Company to service its debt and other required or
discretionary purposes. Net cash that will be available to the Company for
discretionary purposes represents remaining cash after debt service and other
cash requirements, such as capital expenditures, are deducted from EBITDA. In
addition, EBITDA should not be considered as an alternative to (i) operating
income determined in accordance with GAAP or (ii) operating cash flow
determined in accordance with GAAP.
Ratio of earnings to fixed charges was 1.42, 0.93, 1.28 and 1.4 at September
30, 1996, September 30, 1995, December 31, 1995, December 31, 1994. For the
year ended December 31, 1993 fixed charges exceeded earnings by $16.5 million
due primarily to a write-off of certain intangible assets in the amount of
$16.5 million. The improvement at September 30, 1996 compared to December 31,
1995 reflected an increase in earnings.
CASH FLOWS
Net cash provided by (used in) operating activities for the nine months
ended September 30, 1996 was $24.2 million, an increase of $24.8 million from
($0.6) million for the nine months ended September 30, 1995. The increase
resulted primarily from an improvement in net income, excluding the tax
benefit from the reduction of valuation allowances, of $11.2 million. See "Net
Operating Losses." Additionally, non-cash charges, consisting of depreciation,
amortization and deferred compensation and interest, included in net income
for the nine months ended September 30, 1996, were $3.6 million higher than
for the nine months ended September 30, 1995. Net cash provided by operating
activities was also impacted by changes in components of other operating
assets and liabilities which provided a net increase to net cash provided by
operating activities of $9.5 million.
Net cash used in investing activities was $9.5 million for the nine months
ended September 30, 1996, compared to $22.0 million for the nine months ended
September 30, 1995 as a result of the Westmark acquisition in June 1995 and
the L. J. Melody acquisition in July 1996.
Net cash provided by (used in) financing activities was $(12.8) million for
the nine months ended September 30, 1996, compared to $3.5 million for the
nine months ended September 30, 1995. The $16.3 million decrease in cash
provided by financing activities resulted from $18.2 million repayment of
amounts outstanding under the Senior Secured Credit Agreement as compared to
$14.8 million repayment for the nine months ended September 30, 1995, $21.0
million proceeds offset by $13.0 million repayment from the Revolving Credit
Facility A during the nine months ended September 30, 1996 as compared to
$14.0 million proceeds offset by $4.0 million repayment for the nine months
ended September 30, 1995, a $0.7 million reduction in capital lease repayments
and $10.0 million proceeds from senior subordinated loans in connection with
the Westmark acquisition during the nine months ended September 30, 1995.
32
<PAGE>
Net cash provided by operating activities was $30.6 million in 1995 compared
to $31.4 million in 1994. The decrease primarily resulted from a reduction in
net income of $1.8 million in 1995 compared to 1994, offset in part by changes
in components of operating assets and liabilities. Net cash provided by
operating activities in 1994 was $31.4 million compared to $19.6 million in
1993. The increase primarily resulted from an increase in net income of $46.3
million, offset by changes in components of operating assets and liabilities.
Net cash used in investing activities was $24.9 million in 1995 compared to
$3.9 million in 1994. The increase was caused by the acquisitions of Westmark
and Langdon Rieder in 1995 for $22.4 million (see "Business--Acquisitions"),
partially offset by a $2.1 million decrease in purchases of property and
equipment. Net cash used in investing activities was $3.9 million in 1994
compared to $5.6 million in 1993. The decrease was primarily caused by a
decrease in purchases of property and equipment and a reduction in other
investing activities.
Net cash used in financing activities was $11.5 million in 1995 compared to
$4.9 million in 1994. The increase in 1995 resulted from the $19.0 million
repayment of senior term loans and $2.2 million repayment of capital leases,
partially offset by proceeds from the senior subordinated loan of $10.0
million. Net cash used in financing activities was $4.9 million in 1994
compared to $14.7 million in 1993. The decrease in 1994 resulted from the
$14.0 million net repayment of senior revolving credit line in 1993, partially
offset by the $4.1 million repayment of senior term loans in 1994.
NET OPERATING LOSSES
The Company had NOLs of approximately $221.0 million as of December 31,
1995, corresponding to $77.6 million of the Company's $87.5 million in net
deferred tax assets, all of which were reserved through valuation allowances.
The valuation allowances were based on management's conclusion regarding the
realizability of this deferred tax asset on a more likely than not basis, as
defined in SFAS No. 109. In reaching this conclusion, management considered
the Company's past operating results, the current year events and trends,
including the impact, if any, of the acquisitions that were concluded during
the year and other factors.
Management evaluates the appropriateness of all or part of these valuation
allowances on a periodic basis and if the Company concludes there is a change
with respect to realizability, any necessary adjustments are made at that
time. As of September 30, 1996, the Company has experienced continuing
profitability due to a variety of reasons, including the strength of the
commercial real estate markets. In addition, the Company has operated Westmark
for one full year since acquiring Westmark in June 1995, and as a result has
concluded that Westmark should make a positive contribution to the Company's
consolidated taxable income. Finally, the acquisition of L.J. Melody in July
1996 is also expected to make a positive contribution to the Company's
consolidated taxable income. As a result of these factors, during the third
quarter of 1996, the Company projected, on a more likely than not basis, that
a portion of its NOL would be realizable in future periods and, accordingly,
reduced its existing deferred tax asset valuation allowances by $45.7 million
of which $5.3 million has been allocated to the purchase price of L.J. Melody
based on its estimated future potential to generate taxable income, and the
remaining $40.4 million has been recorded as a tax benefit (a reduction in
income tax provision). With the recognition of deferred tax assets, the
current period and the future periods provisions for income tax will be
recorded at the full effective tax rate. For the nine months ended
September 30, 1996, a $4.6 million provision for income taxes has been
recorded. Net income for the nine months ended September 30, 1996 was
$45.4 million ($3.29 per share of common stock), which includes the net
benefit for income tax of $35.8 million. Net income for the nine months ended
September 30, 1996 would have been $8.8 million ($.64 per share of common
stock) if the Company had not recorded tax benefits related to projected
future taxable income. An additional $16.3 million reduction of valuation
allowances and related tax benefit is expected to be recorded in the fourth
quarter of 1996 as a result of the Offering and related reduction in future
interest expense. The $40.4 million recognized tax benefit has a material
effect on the reported net income for the nine months ended September 30,
1996. This $40.4 million tax benefit is a non-recurring item and is unrelated
to the Company's performance and should not be used in evaluating the
Company's prospects or future performance. The Company would have to generate
future taxable income of approximately $110 million to realize the deferred
tax assets
33
<PAGE>
recorded on the consolidated balance sheet as of September 30, 1996. The
Company's taxable income has historically been higher than pretax income for
financial reporting primarily due to certain charges in the financial
statements that were not deductible for tax purposes. The Company expects its
full year 1996 taxable income to be higher than its full year pretax earnings
for financial reporting purposes. The Company believes that its future taxable
income will be adequate to realize the deferred tax assets on the September
30, 1996 balance sheet.
In addition, the Company believes that when the Offering is completed, it
will be able to generate additional taxable income in the future through
interest savings resulting from the paydown of part of its Senior Secured
Credit Agreement using the proceeds from the Offering. Accordingly, the
Company expects to record an estimated additional reduction in the deferred
tax asset valuation allowances of $16.3 million upon completion of the
Offering.
The ability of the Company to utilize NOLs may also be limited in the future
if an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended, were deemed to occur. Such an ownership
change may be deemed to occur if the Company engages in certain transactions
involving the issuance of shares of Common Stock, including the issuance of
shares of Common Stock in connection with an acquisition or otherwise or by
reason of a sale of capital stock by an existing shareholder. If an ownership
change were to occur, Section 382 would impose an annual limit on the amount
of NOLs the Company could utilize. The Company believes that the Offering and
Recapitalization will not result in an ownership change. An ownership change
may not be within the control of the Company, however, and therefore there is
no assurance that an ownership change will not occur in the future. The
availability of NOLs is, in any event, subject to uncertainty since their
validity is not reviewed by the Internal Revenue Service until such time as
they are utilized to offset income.
INFLATION
The Company's operations are directly affected by various national and
economic conditions, including interest rates, the availability of credit to
finance commercial real estate transactions and the impact of tax laws. To
date, the Company does not believe that general inflation has had a material
impact upon its operations. Revenues, commissions and other variable costs
related to revenues are primarily affected by real estate market supply and
demand versus general inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In 1993, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions and SFAS No. 112, Employers' Accounting for Postemployment Benefits.
These standards did not have a material impact on the Company's financial
statements.
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, SFAS No. 122, Accounting for Mortgage Servicing Rights and SFAS No. 123,
Accounting for Stock-Based Compensation. These standards did not have a
material impact on the Company's financial statements.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement is required to be adopted by the Company in 1997. Management of the
Company has not yet determined the impact, if any, that the adoption of this
statement will have on the Company's financial position or results of
operations.
QUARTERLY RESULTS OF OPERATIONS AND OTHER FINANCIAL DATA
The following table sets forth certain unaudited consolidated statement of
operations data for each of the Company's last eleven quarters and the
percentage of the Company's revenues represented by each line item
34
<PAGE>
reflected in each consolidated income statement. In the opinion of management,
this information has been presented on the same basis as the audited financial
statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments and accruals,
that the Company considers necessary for a fair presentation. The unaudited
quarterly information should be read in conjunction with the audited financial
statements of the Company and the notes thereto. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- -------------------------------------- --------------------------------------
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Opera-
tions:
Revenue.......... $147,168 $130,954 $112,741 $143,570 $116,603 $108,361 $ 99,926 $128,905 $112,843 $103,730 $ 83,510
Costs and
expenses:
Commissions,
fees and other
incentives..... 74,196 66,262 55,007 71,449 57,804 57,370 52,395 67,919 59,645 54,367 43,154
Operating,
administrative
and other....... 56,042 53,594 49,560 53,129 47,803 44,206 42,830 46,316 42,675 42,487 38,756
Depreciation and
amortization... 3,431 3,038 3,280 3,458 3,546 2,297 2,330 2,562 1,797 1,783 1,949
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss).......... 13,499 8,060 4,894 15,534 7,450 4,488 2,371 12,108 8,726 5,093 (349)
Interest income.. 286 354 395 446 345 393 490 370 270 255 214
Interest expense. 6,196 5,759 5,928 6,323 6,428 5,313 5,203 4,747 5,383 3,790 3,442
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before provision
(benefit) for
income tax...... 7,589 2,655 (639) 9,657 1,367 (432) (2,342) 7,731 3,613 1,558 (3,577)
Provision
(benefit) for
income tax...... 4,220 438 (48) 603 138 26 74 (73) 75 75 75
Reduction of
valuation
allowances...... (40,400) -- -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net provision
(benefit) for
income tax...... (36,180) 438 (48) 603 138 26 74 (73) 75 75 75
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss).......... $ 43,769 $ 2,217 $ (591) $ 9,054 $ 1,229 $ (458) $ (2,416) $ 7,804 $ 3,538 $ 1,483 $ (3,652)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Other Financial
Data:
EBITDA........... $ 16,930 $ 11,098 $ 8,174 $ 18,992 $ 10,996 $ 6,785 $ 4,701 $ 14,670 $ 10,523 $ 6,876 $ 1,600
Net cash provided
by (used in)
operating
activities...... $ 22,150 $ 13,865 $(11,845) $ 31,133 $ 7,564 $ 6,418 $(14,483) $ 21,911 $ 13,817 $ 5,894 $(10,204)
Net cash (used
in) investing
activities...... $ (9,401) $ 1,768 $ (1,884) $ (2,928) $ (595) $(18,887) $ (2,478) $ (1,321) $ (1,006) $ (748) $ (790)
Net cash provided
by (used in)
financing
activities...... $(15,297) $ (4,306) $ 6,808 $(16,002) $ (8,098) $ 15,391 $ (2,760) $ (4,369) $ (5,114) $ (5,407) $ 9,967
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
--------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------------------------- -------------------------
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... 100.0 % 100.0% 100.0 % 100.0% 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0% 100.0 %
Costs and ex-
penses:
Commissions,
fees and other
incentives..... 50.4 50.6 48.8 49.8 49.6 52.9 52.4 52.7 52.9 52.4 51.7
Operating,
administrative
and other...... 38.1 40.9 44.0 37.0 41.0 40.8 42.9 35.9 37.8 41.0 46.4
Depreciation and
amortization... 2.3 2.3 2.9 2.4 3.0 2.1 2.3 2.0 1.6 1.7 2.3
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss).......... 9.2 6.2 4.3 10.8 6.4 4.2 2.4 9.4 7.7 4.9 (0.4)
Interest income.. 0.2 0.3 0.3 0.3 0.3 0.3 0.5 0.3 0.3 0.3 0.2
Interest expense. 4.2 4.4 5.2 4.4 5.5 4.9 5.2 3.7 4.8 3.7 4.1
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss)
before provision
(benefit) for
income tax...... 5.2 2.1 (0.6) 6.7 1.2 (0.4) (2.3) 6.0 3.2 1.5 (4.3)
Provision for
income tax...... 2.9 0.3 (0.0) 0.4 0.1 0.0 0.1 (0.1) 0.1 0.1 0.1
Reduction of
valuation
allowances...... (27.5) -- -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net provision
(benefit) for
income tax...... (24.6) 0.3 (0.0) 0.4 0.1 0.0 0.1 (0.1) 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income
(loss).......... 29.7 % 1.8% (0.6)% 6.3% 1.1% (0.4)% (2.4)% 6.1 % 3.1% 1.4% (4.4)%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
35
<PAGE>
BUSINESS
COMPANY OVERVIEW
Founded in 1906, the Company believes that it is the largest vertically-
integrated commercial real estate services company in the United States with
aggregate 1995 revenue of $468.5 million, and 231 business unit offices in 107
locations. In addition, the Company has established exclusive alliances with
international commercial real estate services firms which have offices in an
additional 109 locations in 30 countries. The Company provides a full range of
services to commercial real estate tenants, owners, and investors including:
(i) brokerage (facilitating sales and leases), investment properties
(acquisitions and sales on behalf of investors), corporate services, property
management, and real estate market research (collectively, "Property and User
Services"), and (ii) mortgage banking (mortgage loan origination and
servicing), investment management and advisory services, and valuation and
appraisal services (collectively, "Investor Services"). Management believes
that, on the basis of revenue, its brokerage and independent commercial
mortgage loan origination are the largest such businesses in the United
States, and that the Company is among the top ten providers of commercial
property management and mortgage loan servicing in the United States.
The Company believes that one of its most important competitive advantages
as a diversified commercial real estate services provider is its ability to
capitalize on the significant deal flow and strong market presence of its core
brokerage, investment properties and property management businesses. These
businesses provide the Company with real-time, in-depth local, national and,
through its alliances, international market information and entree to clients.
This real-time information is employed for the benefit of all of the Company's
business disciplines and enables the Company to capitalize upon client demand
for a variety of integrated commercial real estate services. The Company's
diverse client base includes local, national and multinational corporations,
financial institutions, pension funds and other tax exempt entities, local,
state and national governmental entities, and individuals.
The Company believes that it enjoys a variety of competitive advantages in
the commercial real estate services industry, including the Company's--
. 90-year tradition and history of providing high-quality services and client
coverage;
. Internationally recognized "brand" identity which the Company believes is
widely respected in the real estate services industry;
. Experienced and trained professionals in all business disciplines,
including approximately 2,000 sales professionals in Property and User
Services who have an average tenure of more than eight years with the
Company;
. Multi-discipline capabilities and extensive multi-market network;
. State-of-the-art technology and professional education programs which
enable the Company to deliver superior services;
. Experienced management team, the executive and key employees of which have
an average tenure of more than 16 years with the Company and will own
collectively approximately 15.9% of the Company's Common Stock (including
exercisable stock options and shares held through the Company's Deferred
Compensation Plan) after the Offering; and
. Employees who will own more than 40% of the Common Stock of the Company
after the Offering.
INDUSTRY TRENDS
Over the last ten years, the commercial real estate industry has experienced
various structural changes and more recently has been experiencing a broad
recovery from the real estate "depression" of the early 1990s. Management
believes these factors and the resulting trends, the most important of which
are discussed below, create an opportunity for the Company to leverage its
experience, multi-discipline integrated services, multi-market presence and
brand equity to its competitive advantage.
36
<PAGE>
. CHANGING COMPOSITION AND NEEDS OF INVESTORS IN AND OWNERS OF COMMERCIAL
REAL ESTATE ASSETS.
Investors in and owners of commercial real estate assets have become
increasingly institutional. Simultaneously, their investment and management
needs have become increasingly multi-market due to the fact that the
commercial real estate properties in their portfolios are typically located in
numerous geographic locations. This change in the ownership characteristics
and management requirements of institutional real estate investors and owners
has fueled the demand for and growth of sophisticated multi-service,
nationally-oriented real estate service providers.
. CONTINUING CORPORATE OUTSOURCING TREND.
Shareholder pressure for higher performance and return on equity within most
American corporations in the 1980's heightened corporate managements'
awareness that corporate real estate assets are a major component of corporate
net worth. Simultaneously, with competitive pressures encouraging greater
focus on core businesses, companies have emphasized leaner staffing in non-
core activities and, as a result, outsourced their non-core activities to
third-parties. As a consequence, the demand for multi-discipline, multi-market
professional real estate service firms that provide integrated services
capable of supplementing a corporate real estate department has increased
significantly.
. ONGOING INDUSTRY CONSOLIDATION.
The Company believes that the combination of more intense institutional and
corporate real estate service needs and demands, together with the real estate
"depression" of the early 1990s, has made it imperative that real estate
service firms (i) provide comprehensive, high-quality services, (ii) make
significant investments in corporate infrastructure, including information
technology and professional education, and (iii) have access to sufficient
capital to support these service and investment needs. These factors have
fueled the current consolidating industry environment, which the Company
believes will motivate local and regional real estate service providers to
sell to, or form alliances with, major national and international companies.
. EXPANDING CMBS MARKET.
Historically, the majority of third-party financing for commercial real
estate assets was provided by banks and insurance companies who generally held
the mortgage loans they originated to the maturity date of the mortgage loans.
More recently, Wall Street firms and financial institutions have been
providing a significant amount of third-party mortgage financing, and have
been accessing the public debt markets by issuing CMBs in order to securitize
their portfolios and avoid holding mortgage loans for the long-term. The
Company believes that its overall market presence, extensive available market
data and access to real estate transaction deal flow positions its mortgage
banking business to benefit substantially from the expansion of the CMBS
market. The Company's national geographic coverage and mortgage origination
capabilities create the opportunity to be a major supplier of mortgages to the
CMBS market. In addition, the Company expects to service a majority of the
mortgage loans that it originates, and the profit margin potential for
servicing an increasing volume of mortgage loans may be significant to the
Company's mortgage banking business. The acquisition and subsequent
combination with L.J. Melody in July 1996 was a strategic step in
substantially expanding the Company's capabilities in this area. The Company
does not currently securitize loans and has no present intention of doing so.
. RECOVERING COMMERCIAL REAL ESTATE MARKETS.
Coincident with the longer term structural shifts in the commercial real
estate industry, commercial real estate markets in the United States have been
recovering over the last several years, experiencing increased activity in
many product types and geographic market areas. This has been particularly
true in California, where the Company has a significant market presence.
National office and industrial building occupancy levels have generally been
rising, rental rates are beginning to increase, and correspondingly, property
values are increasing.
37
<PAGE>
Geographically, recoveries are underway in a number of major U.S. real
estate markets where the Company has operations, including California,
Arizona, Texas, and the Washington, D.C./Baltimore areas. Additionally, the
Company believes market activity levels in Chicago, Philadelphia, Seattle, and
Atlanta have increased.
BUSINESS OBJECTIVE AND GROWTH STRATEGIES
The Company's primary business objective is to continue to expand through
acquisitions and internal growth, while simultaneously delivering strong
consistent growth in its annual results of operations. The key business
strategies by which the Company plans to accomplish this objective include--
. LEVERAGING EXISTING BUSINESS DISCIPLINES, MARKET PRESENCE AND "BRAND"
EQUITY TO CAPITALIZE ON INDUSTRY STRUCTURAL CHANGES.
The Company believes that structural changes in the market for commercial
real estate have led to an increasing demand for real estate services
providers who can satisfy a wide range of customer needs on a vertically-
integrated basis. Furthermore, as the ownership of commercial real estate
becomes increasingly institutional, large firms who can efficiently service a
nationwide real estate portfolio are gaining market share over smaller local
and regional operators. The Company's ability to provide multi-discipline,
integrated real estate services on a nationwide basis with strong brand
identity is an important competitive advantage. The Company's strategy is to
leverage these advantages to grow its revenues and market share in the large
and fragmented real estate services industry.
. PURSUING STRATEGIC ACQUISITIONS AND PARTNERSHIPS TO STRENGTHEN EXISTING
BUSINESS AND EXPAND GEOGRAPHIC COVERAGE.
Although the Company is currently a leading national provider of multi-
discipline, integrated commercial real estate services, 37% of its total sale
and lease revenue in 1995 was generated from transactions originated in the
state of California. Through strategic acquisitions and partnerships, the
Company intends to continue to strengthen, not only the range and quality, but
also the geographic coverage of its services. The Company has recently
completed three strategic acquisitions -- L.J. Melody (mortgage banking),
Westmark (investment management and advisory services), and Langdon Rieder
(corporate services). In addition, through its "CB Commercial/Partners"
program, the Company has begun establishing relationships with leading local
brokerage firms in order to expand the Company's geographic coverage in
markets that are not currently being served by the Company. Due to the
fragmented nature of the commercial real estate services industry, the Company
believes that there will be substantial opportunities to strengthen its
capabilities through acquisitions and strategic partnerships, and a tactical
plan for growth through acquisitions has been developed for implementation
over the next several years.
As the Company continues to strengthen its integrated services capability,
it intends to develop and/or acquire additional service disciplines to expand
its client relationships. Development and construction management, dedicated
facilities management, and real estate merchant banking are a few of the
services under consideration and study. The Company believes it can increase
its market share by increasing its services "menu" and the capabilities
offered to its clients.
. BENEFITTING FROM RECOVERING COMMERCIAL REAL ESTATE MARKETS.
In addition to growth through expansion opportunities, brokerage fees and
property management fees from contracts with existing clients have begun to
increase as a result of the recovery in U.S. commercial real estate markets
and the generally rising level of occupancy and rental levels and, as a
result, property values. Since brokerage fees are typically based upon a
percentage of transaction value, and property management fees are typically
based upon a percentage of total rent collections, recent occupancy and rental
rate increases at the property level have generated an increase in brokerage
and property management fees to the Company.
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. CAPITALIZING ON THE CORPORATE OUTSOURCING TREND.
Large corporations seeking to focus on core businesses and reduce operating
costs are looking to the multi-discipline, integrated national and
international real estate service provider to outsource their real estate
needs. By relying on a single integrated provider for all their real estate-
related needs, corporations are able to reduce their ongoing overhead expense
while taking advantage of the Company's real estate expertise. This
outsourcing trend has accelerated in recent years and the Company believes
that it will continue in the future. The Company is one of the major
participants in this segment of the real estate services industry and believes
that only a small percentage of the market has been penetrated. As a result,
this trend provides the Company with attractive revenue opportunities.
. GENERATING INTERNAL GROWTH BY INCREASING MARKET SHARE AND EMPLOYEE
PRODUCTIVITY.
Market Share. In order to increase its market share in the markets that the
Company currently serves, the Company is focusing on increasing the number of
brokerage professionals in its existing national network of offices. The
Company's current sales professionals only occupy approximately 73%, on
average, of its available office space for sales professionals, and the
Company believes that revenue growth can be generated without a corresponding
growth in management and infrastructure costs through the hiring of additional
professionals.
Employee Productivity. The Company also focuses on the enhancement of
revenues and profit margins through the delivery of services to its clients in
a more efficient manner. In order to improve each employee's productivity, the
Company invests a substantial amount on an annual basis in information
technology and for the professional education of both its management and
revenue-producing professionals through its training programs, provided by its
CB Commercial University. The success of this strategy is evidenced by the
annual improvement in revenues per employee in the Company's brokerage group.
Since 1993, the average revenue per sales professional has increased
approximately 23% from $176,000 to $216,000 in 1995, while spending on
information technology and professional development per employee increased
approximately 16% from $2,800 to $3,300 in 1995. Through previously made and
continuing investments in information technology and professional education,
the Company believes it is well-positioned for further employee productivity
gains.
. ENCOURAGING LOCAL MARKET INNOVATION WITHIN CB COMMERCIAL'S QUALITY
FRAMEWORK.
In order to deliver consistently superior, vertically-integrated services,
the Company requires each office to adhere to strict standards of quality
consistency. Although the Company encourages each business discipline to
innovate locally to meet its respective clients' needs, the Company believes
that this framework, or "envelope" of consistency, is responsive to client
demand, strengthening client relationships and increasing the potential for
multiple assignments with each client.
. CAPITALIZING ON CROSS BORDER ACTIVITY BY INCREASING INTERNATIONAL
PRESENCE.
Internationally, the Company has established exclusive alliances in various
markets throughout Europe with DTZ and in Asia with C.Y. Leung, both leading
firms in their respective markets. Historically, the Company's ability to
offer real estate acquisition and disposition services, including related
advisory services, internationally has enabled it to expand market share with
its domestic clients, especially corporations. In addition, Westmark is
currently exploring the development of new cross-border investment products in
conjunction with DTZ and C.Y. Leung.
ACQUISITIONS
The Company is continually assessing acquisition opportunities as part of
its growth strategy. Management believes that there are significant
opportunities in the fragmented and consolidating real estate services
industry to acquire additional companies to complement and expand the
Company's existing operations. Since the beginning of 1995, the Company has
completed three strategic acquisitions--
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L.J. MELODY. In July 1996, the Company acquired L.J. Melody for $15.0
million, including $6.0 million in seller financing, of which $2.3 million is
contingent upon the continued employment by the Company of the former owner of
L.J. Melody. The combined pre-acquisition mortgage originations of the Company
and L.J. Melody for 1995 were $2.5 billion, and the combined pre-acquisition
mortgage loans serviced as of December 31, 1995 were $7.3 billion. The L.J.
Melody acquisition provides the Company with leadership for its own mortgage
banking business, access to mortgage loan sources not previously available to
the Company and the enhanced ability to access its investment properties and
brokerage businesses as a source of mortgage originations. The Company expects
to complete the integration of its mortgage banking business with that of L.J.
Melody in the fourth quarter of 1996. The combined businesses will be
headquartered in Houston, Texas.
WESTMARK. In June 1995, the Company acquired Westmark, a Los Angeles,
California-based investment management and advisory business with
approximately $3.0 billion of assets under management. The purchase price for
Westmark was $37.5 million plus $2.9 million in net liabilities assumed and an
additional $1.0 million in costs related to the acquisition, with $20.0
million financed by the sellers, $10.0 million financed by a venture capital
affiliate of a national bank and $7.5 million paid in cash by the Company. The
sellers are also entitled to receive up to an additional $18.0 million of
purchase price and $4.0 million of bonuses over a six-year period based upon
Westmark's adjusted operating income. By early 1996, the Company had combined
its $880.0 million investment management and advisory business with that of
Westmark to create a company with approximately $3.7 billion in tax-exempt
assets under management. The Westmark acquisition has moved the Company into a
business area which the Company believes has the potential for significant
growth and high margins.
LANGDON RIEDER. In April 1995, the Company acquired Langdon Rieder, a
nationally-known tenant representation firm based in Los Angeles, California,
for $1.5 million in cash, and a deferred payment of $1.9 million payable over
three years ($633,333 payable on each of January 2, 1997, 1998 and 1999). This
acquisition strengthened the Company's ability to provide sophisticated tenant
representation services to its corporate clients. Langdon Rieder has been
combined with the Company's CBC/Madison Advisory Group, enhancing the
Company's corporate services capabilities.
The Company expects to continue its acquisitions program over the next
several years and will focus on acquisitions in its mortgage banking, property
management, and investment management and advisory businesses. The Company
will also consider opportunistic acquisitions for its brokerage and investment
properties businesses. Based upon its historical experience, the Company
believes that seller financing generally will provide 40% to 50% of the
purchase price for an acquisition, with the balance financed from third-party
borrowings and internally generated cash flow.
Because of the substantial non-cash goodwill and intangible amortization
charges incurred by the Company in connection with acquisitions subject to
purchase accounting and because of interest expense associated with
acquisition financing, management anticipates that future acquisitions may
adversely affect net income. In addition, during the first six months
following an acquisition, the Company believes there are generally significant
one-time costs relating to integrating information technology, accounting and
management services and rationalizing personnel levels. Management's strategy
is to pursue acquisitions that are expected to be accretive to EBITDA after
all integration costs.
THE COMPANY'S BUSINESSES
PROPERTY AND USER SERVICES
BROKERAGE
The Company has provided commercial real estate brokerage services since
1906 through the representation of buyers, sellers, landlords and tenants in
connection with the sale and lease of office space, industrial buildings,
retail properties, multifamily residential properties and unimproved land. The
Company believes that it is the
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largest provider of commercial real estate brokerage services in the United
States, based upon both 1995 total revenues, and the number of completed
transactions, which totaled approximately $294.3 million and approximately
19,800, respectively. In 1995, brokerage facilitated over 2,500 sale
transactions with an aggregate estimated total consideration over $2.5 billion
and approximately 17,500 lease transactions involving aggregate rents, under
the terms of leases facilitated, of over $8.3 billion.
Brokerage services comprise the largest source of revenue for the Company
and provide a foundation for growing the Company's other disciplines which
make up its multi-discipline integrated commercial real estate services. The
Company believes that its position in the brokerage services industry provides
a competitive advantage for all of its lines of business by enabling them to
leverage off brokerage's (i) national network of relationships with owners and
users of commercial real estate, (ii) real-time knowledge of completed
transactions and real estate market trends, and (iii) brand recognition in the
brokerage area.
Operations. As of September 30, 1996 the Company employed approximately
1,640 brokerage professionals in 79 offices located in most of the largest
MSAs in the United States. The Company maintains a decentralized approach to
brokerage services, bringing significant local knowledge and expertise to each
assignment. Each local office draws upon the broad range of support services
provided by the Company's other business groups, including a national network
of market research, mortgage originations, client relationships and
transaction referrals which the Company believes provide it with significant
economies of scale over many local competitors.
Each brokerage services professional is carefully selected based upon
education, experience and knowledge of commercial real estate and receives on-
going training through centralized and local office education programs. The
Company believes that its market position provides a competitive advantage for
recruiting and retaining its employees. As of September 30, 1996, the average
tenure of sales professionals in Property and User Services was over eight
years. Collectively, the Company's sales professionals only occupy
approximately 73%, on average, of the Company's available office space for
sales professionals, and substantive revenue growth can be generated without
corresponding growth in management and infrastructure costs through the hiring
of additional professionals.
In order to increase market share in its domestic brokerage business, the
Company recently announced a plan to establish "partnerships" with leading
local firms in order to institute geographic coverage in markets that
currently are not being served by the Company. To date, through the "CB
Commercial/Partners" program, the Company has identified approximately 80
markets on which it intends to focus during the next three years. To date, the
Company has established such partnership-type arrangements in Pittsburgh,
Pennsylvania and Memphis, Tennessee. Revenue anticipated from this program
will be a combination of an initial fee, fixed annual fees and a percentage of
revenue in excess of a pre-agreed threshold, comparable to a classic franchise
program. This program requires minimal capital outlay, and management believes
it has an attractive profit potential once the initial infrastructure is
established.
Compensation. Under a typical brokerage services agreement, the Company is
entitled to receive sale or lease commissions. Sale commissions, which are
calculated as a percentage of sales price, are generally earned by the Company
at the close of escrow. Sale commissions typically range from approximately 1%
to 6% with the rate of commission declining as the price of the property
increases. Lease commissions, which are calculated as a percentage of the
minimum rent payable during the term of the lease, are generally earned by the
Company at the commencement of a lease and are not contingent upon the tenant
fulfilling the terms of the lease. In cases where a third-party brokerage firm
is not involved, lease commissions earned by the Company for a new lease
typically range between 2% and 6% of minimum rent payable under the lease
depending upon the value of the lease. For renewal of an existing lease, such
fees are generally 50% of a new lease commission. In sales and leases where a
third-party broker is involved, the Company must typically share 50% of the
commission it would have otherwise received with the third-party broker. The
Company's brokerage sales professionals typically receive 50% of the Company's
share of commissions before costs and expenses.
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INVESTMENT PROPERTIES
Since 1992, investment properties has provided sophisticated strategic
planning for, and execution of, acquisitions and sales of income-producing
properties for its clients. In 1995, the Company completed approximately 1,000
investment property transactions with an aggregate value over $4.0 billion,
generating total revenues of $87.6 million, exceeding the transaction volume
of most of its major competitors, including investment banking firms in the
United States. Based upon these results, the Company believes that it is one
of the largest providers of commercial real estate investment properties
services in the United States. On behalf of property owners seeking to dispose
of investment properties, the Company strives to ensure that the owner
achieves the maximum value in the minimum amount of time by providing services
which include (i) accessing the Company's proprietary databases and other
information sources to provide real-time knowledge of available properties,
completed comparable transactions, real estate market trends, and active
investors in the market, and to assist with valuation and buyer
identification, and (ii) designing the appropriate marketing strategy that
allows the owner to target probable buyers or buyer categories. On behalf of
prospective investors, access to the same sources of information provides the
Company's clients with a competitive advantage by enabling the Company's
professionals (i) to identify the geographical areas and specific properties
which are most suitable for the investor and (ii) to advise investors in
negotiations and due diligence.
Operations. As of September 30, 1996, the Company employed approximately 280
investment properties professionals who exclusively handle acquisitions and
sales of investment properties and are located in 37 offices in most of the
largest MSAs in the United States. As of September 30, 1996, the average
tenure of brokerage and investment properties sales professionals with the
Company was more than eight years.
A team of professionals with expertise within a given market and property
type is assembled for each investment properties assignment to best accomplish
the client's objectives. As necessary, the team may also include professionals
from the Company's other disciplines. On larger and more complex assignments,
the Company's financial consulting professionals provide sophisticated
financial and analytical resources to the client, the marketing team and the
investor. This counseling is accomplished by identifying cash flow, accounting
and tax issues in order to propose appropriate strategies for optimal
financial results. These services provide the client with in-depth analyses of
transaction specific data as well as real estate market data. Additionally,
mortgage banking may be involved to provide advice regarding available debt
financing as well as the origination of new debt.
Compensation. Under a typical investment properties agreement, the Company
is entitled to receive sale commissions, which are calculated as a percentage
of sales price and are generally earned by the Company at the close of escrow.
In cases where another real estate broker is not involved, sale commissions
earned by the Company typically range from 1% to 6% of the sales price, with
the rate of commissions generally declining as the sales price increases. In
cases where another firm is involved in the transaction, the Company must
typically share up to 50% of the commission it would have otherwise received
with the other firm. The Company's investment properties professionals
typically receive 50% of the Company's commission before costs and expenses.
CORPORATE SERVICES
Since 1992, the Company has provided corporate services through CBC/Madison
Advisory Group, assisting corporations in developing and executing multiple-
market real estate strategies. The Company's objective is to establish long-
term relationships with corporations that require continuity in the delivery
of high-quality, multi-market management services and strategic advisory
services including acquisition, disposition and consulting services. Global
competition, the focus on quality, "right-sizing" of corporate organizations
and changes in management philosophy have all contributed to an increased
interest in and reliance on outside third-party real estate service providers.
Specifically, through contractual relationships, the Company assists major,
multi-market companies in developing and executing real estate strategies as
well as addressing specific occupancy and facilities management objectives.
Corporate services coordinates the utilization of all the Company's various
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disciplines to deliver an integrated service to its clients. Essentially,
Corporate Services expands a client's real estate department and supports most
of the functions involved in a corporate real estate department. The Company's
clients include, as examples, the following Fortune 500 companies -- Allstate
Insurance Co. Inc., American Express, Eastman Kodak Co. Inc., Ford Motor
Company, Gillette Company Inc., Household International Inc., IBM, John
Hancock Mutual Life Insurance Co. Inc., McDonald's, Northwest Mutual, and
Prudential Insurance Co.
Operations. CBC/Madison Advisory Group is organized into three geographic
regions in the Eastern, Western and Central areas of the United States, with
each geographic region comprised of consulting, corporate services and team
management professionals who provide corporate service clients with a broad
array of financial, real estate, technological and general business skills. In
addition to CBC/Madison Advisory Group's objective of providing a full range
of corporate services in a contractual relationship, the group will respond to
client requests generated by other Company business groups for significant,
single-assignment acquisition, disposition and consulting assignments that may
lead to long-term relationships.
Compensation. A typical corporate services agreement gives the Company the
right to execute some or all of the client's future sales and leasing
transactions. The commission rate with respect to such transactions frequently
reflects a discount for the captive nature and large volume of the business.
Term. A typical corporate services agreement includes a stated term of at
least one year and normally contains provisions for extensions of the
agreement. Agreements typically include a provision for cancellation by either
party, upon notice, within a specified short time frame.
PROPERTY MANAGEMENT
The Company provides value-added property management services for income-
producing properties owned primarily by institutional investors and, as of
September 30, 1996, managed approximately 104 million square feet of
commercial space.
According to National Real Estate Investor's 1996 Annual Survey of property
managers, the Company's property management business was ranked the eighth
largest in the United States based on square footage under management during
1995. Property management services include maintenance, marketing and leasing
services for investor-owned properties, including office, industrial, retail
and multi-family residential properties. Additionally, the Company provides
construction management services, which relate primarily to tenant
improvements. The Company works closely with its clients to implement their
specific goals and objectives, focusing on the enhancement of property values
through maximization of cash flow. The Company markets its services primarily
to long-term institutional owners of large commercial real estate assets. The
Company's property management clients include Allstate Insurance Co. Inc., AMB
Institutional Realty Advisors Inc., Citicorp, The Equitable Life Assurance
Society of the United States, GE Capital Investment Advisors, Prudential
Insurance Company of America, Inc., Metropolitan Life Insurance Co., Westmark
Realty Advisors L.L.C. and The Yarmouth Group, Inc.
Operations. The Company employs approximately 130 property management
professionals in 31 offices. Most property management services are performed
by management teams located on-site or in the vicinity of the properties they
manage. This provides property owners and tenants with immediate and easily
accessible service enhancing client awareness of manager accountability. All
personnel are extensively trained and are encouraged to continue their
education through both Company-sponsored and outside training. The Company
provides each local office with centralized corporate resources including
investments in computer software and hardware as described below under the
caption "Information Technology." Property management personnel utilize state-
of-the-art computer systems for accounting, marketing, and maintenance
management. The Company believes that these investments in technology
represent a competitive advantage for (i) accumulating and synthesizing
property
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data from multiple locations into customized financial and operating reports
required by clients, and (ii) providing its services on a cost effective basis
relative to smaller competitors by spreading these fixed costs over its large
revenue base.
Compensation. Under a typical property management agreement, the Company
will be entitled to receive management fees and lease commissions. The
management fee in most cases is based upon a formula which gives the Company a
specified percentage of the monthly gross rental income collected from tenants
occupying the property under management and, as a result, will increase and
decrease as building rents and occupancies increase and decrease. Many of
these property management agreements also include a stated minimum management
fee. The Company also may be entitled to reimbursement for costs incurred that
are directly attributable to management of the property. Reimbursable costs,
which are not included in the Company's revenue, include the wages of on-site
employees and the cost of field office rent, furniture, computers, supplies
and utilities. The Company pays its property management professionals a
combination of salary and incentive-based bonuses. Lease commissions, which
are paid in addition to the management fee, are similar to those described for
brokerage services. Revenue from leasing services provided to the Company's
property management clients are reflected in brokerage rather than property
management revenue since brokerage professionals are normally engaged to
accomplish the leasing.
Term. A typical property management agreement contains an evergreen
provision which provides that the agreement remains in effect for an
indefinite period, but enables the property owner to terminate the agreement
upon 30 days prior written notice, which the Company believes to be customary
in the commercial real estate industry. As of September 30, 1996, the average
duration of the Company's tenure as property manager for properties under
contract was approximately 4.5 years.
REAL ESTATE MARKET RESEARCH
Real estate market research services are provided by eight professionals in
Boston, Massachusetts employed by CB Commercial/Torto Wheaton Research. Real
estate market research services are provided to the Company's other businesses
as well as sold to third-party clients and include (i) data collection and
interpretation, (ii) econometric forecasting, and (iii) evaluating marketing
opportunities and portfolio risk for institutional clients within and across
U.S. commercial real estate markets. The Company's publications and products
provide real estate data for more than 50 of the largest MSA's in the United
States and are sold on a subscription basis to many of the largest portfolio
managers, insurance companies and pension funds in the United States.
INVESTOR SERVICES
MORTGAGE BANKING
The Company provides its mortgage origination and mortgage loan servicing
through L.J. Melody, which was acquired in July 1996 and is based in Houston,
Texas. The Company, on a combined basis, originated $2.3 billion, $2.0 billion
and $1.1 billion of mortgages in 1995, 1994 and 1993, respectively, on a
combined basis including originations by the Company prior to its acquisition
of L.J. Melody. As part of these origination activities, the Company has
special conduit arrangements with affiliates of Merrill Lynch & Co., Citicorp,
and Lehman Brothers which permit it to service the mortgage loans which it
originates, and is currently negotiating a similar arrangement with an
affiliate of NationsBank. Under these arrangements, the Company generally
originates mortgages in its name, makes certain representations and warranties
based upon representations made to it by the borrower or another party and
immediately sells them into a conduit program. The Company also originates
mortgages into other conduit programs where it does not have servicing rights.
In addition, the Company is a major mortgage originator for insurance
companies having originated on a combined basis, mortgages in the names of the
insurance companies valued at $1.6 billion in 1995. The Company has
correspondency arrangements with various life insurance companies which
entitle it to service the mortgage loans it originates. As of December 31,
1995, 1994 and 1993, the Company, on a combined basis with L.J. Melody,
serviced mortgage loan portfolios of $7.3 billion, $7.1 billion and
$6.3 billion, respectively. Based upon
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available statistics, the Company believes that it is the largest independent
commercial mortgage originator, in general, as well as through conduits, in
the United States. As of December 31, 1995, the Company was, on a combined
basis, the eighth largest commercial mortgage loan servicer in the United
States. The Company's life insurance and pension plans clients on whose behalf
it both originates and services mortgage loans include AETNA, Allstate Life
Insurance Co., CIGNA, Lincoln National Life, Massachusetts Mutual Life,
Phoenix Home Life, New York State Teachers' Retirement System, State of
Wisconsin Investment Board, and Teachers' Retirement System of Texas. For
1995, CIGNA accounted for approximately 29.6% of the Company's mortgage
origination business on a combined basis.
Operations. The Company employs approximately 90 mortgage banking
professionals in 22 offices in the United States. The Company's mortgage loan
originations take place throughout the United States, with support from L.J.
Melody's headquarters in Houston, Texas. All of the Company's mortgage loan
servicing is handled by L.J. Melody in Houston, Texas. The Company believes
that the L.J. Melody acquisition will give it a significant competitive
advantage in the mortgage origination business due to the anticipated
integration with the deal flow generated through the Company's brokerage and
investment properties sales activities. This integration will not only provide
competitive advantages to mortgage banking, but will also facilitate sales
transactions, enhancing the Company's capability to execute clients' sales
assignments. In 1995, less than 5% of the Company's property sales were
financed by its commercial mortgage origination capabilities.
Compensation. The Company typically receives origination fees, ranging from
0.5% for large insurance company mortgage loans to 1.0% for most conduit
mortgage loans. In situations where the Company services the mortgage loans
which it originates, it also receives a servicing fee between .06% and .25%,
calculated as a percentage of the outstanding mortgage loan balance. These
agreements generally contain an evergreen provision with respect to servicing
which provides that the agreement remains in effect for an indefinite period,
but enables the lender to terminate the agreement upon 30 days prior written
notice, which the Company believes to be a customary industry termination
provision. Approximately 55.5% of the Company's 1995 mortgage loan origination
revenue, on a combined basis, was from agreements which entitle it to both
originate and service mortgage loans. The Company also originates mortgage
loans on behalf of conduits and insurance companies for whom it does not
perform servicing. In 1995, approximately 44.5% of its revenues, on a combined
basis, was attributable to such originations. The Company's client
relationships have historically been long-term. The Company pays its mortgage
banking professionals a combination of salary, commissions and incentive-based
bonuses which typically average between 46% and 49% of the Company's loan
origination fees.
INVESTMENT MANAGEMENT AND ADVISORY
The Company provides its investment management and advisory services
primarily to tax-exempt corporate and public pension funds through Westmark.
Since 1971, the Company has provided its clients with investment management
and advisory services, including the creation of investment products, raising
of investor capital, identification and acquisition of specific properties and
management and disposition of the assets. Currently, the Company represents
more than 180 clients in 13 commingled funds and a variety of separate
accounts. Westmark separate account clients include the AFL-CIO Building
Investment Trust, Alaska Permanent Fund Corporation, AT&T Telephone Real
Estate Equity Trust, California Public Employees' Retirement System (CalPERS),
California State Teachers' Retirement System (CalSTRS), Delta Air Lines
Benefit Trust, Eastman Kodak Retirement Income Plan, GTE Service Corporation
Plan for Employees' Pensions, Utah State Retirement Fund, Pacific Telesis
Group Master Pension Trust and McDonnell Douglas Corporation Master Retirement
Trust.
Operations. Westmark operates as a separate and independent subsidiary of
the Company, providing advisory services and managing approximately $3.7
billion in tax-exempt capital invested in more than 220 office, industrial and
retail properties located in 40 major U.S. markets with an aggregate of more
than 40 million square feet. Westmark's headquarters are located in Los
Angeles and it maintains regional offices in Boston, Dallas, New York City,
and Washington D.C. Westmark develops and markets a variety of investment
alternatives designed to meet its client's risk, reward, and liquidity
requirements. Westmark employs 100 professionals who perform the following
services for its investors -- market research and forecasting, acquisition
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strategy and implementation, portfolio strategy and management, specific asset
management, and development and dispositions. Westmark uses a state-of-the-art
portfolio information system that integrates property and fund-level
accounting with specific asset management data.
Westmark's investors invest through separate accounts, commingled funds, and
real estate operating companies, including limited partnerships. Certain funds
and separate accounts are subject to ERISA regulations and, with respect to
such funds and accounts, Westmark is limited in its ability to employ any
affiliated company, including the Company. Because Westmark must conduct its
operations in compliance with ERISA, where applicable, Westmark maintains both
internal and external control mechanisms to assure compliance.
While Westmark has experienced significant growth in its separate accounts
business, it has been impacted by the industry's adverse investor response to
non-property specific commingled funds. The Company believes that this lack of
investor interest in non-property specific commingled funds has been replaced
with interest in new, more narrowly focused investment vehicles. The Company
believes that the consolidation of the industry combined with the development
of these new investment vehicles should reduce pressures on fees and margins
in the second half of 1997.
Compensation. Westmark's fees are typically higher for managing commingled
and other funds than they are for separate accounts, but all of the fees are
within the ranges indicated below. Westmark receives an annual asset
management fee which is typically 0.5% to 1.2% of the lower of the cost of the
assets managed or their fair market value. When debt is managed, the asset
management fee is at the lower end of the range. Westmark also receives an
acquisition fee when it acquires property or places debt on behalf of a client
that is typically 0.5% to 1.0% of funds invested or debt placed (the placement
fee for debt is at the low end of this range). In some, but not all cases,
Westmark receives an incentive fee when an asset or a fund is sold. Typically,
the incentive fee will only be payable after the client has achieved a
specified real (adjusted for inflation) rate of return of 8% to 12% and is a
percentage of value in excess of that return. In recent years, Westmark has
experienced reduced rates of asset management and acquisition fees.
Term. The term of Westmark's advisory agreements vary by the form of
investment vehicle utilized. In the commingled funds, the term is generally 10
years with extension provisions based upon a vote of the investors. In the
Company's separate account relationships, the agreements are generally one to
three years in term, with "at will" termination provisions. In general, both
the capital managed by Westmark and its client relationships are long-term in
nature.
VALUATION AND APPRAISAL SERVICES
The Company's valuation and appraisal services business delivers
sophisticated commercial real estate valuations through a variety of products
including market value appraisals, portfolio valuations, discounted cash flow
analyses, litigation support, feasibility land use studies and fairness
opinions. The Company's appraisal staff has more than 80 professionals with
more than 50% of the staff holding the MAI professional designation. The
business is operated nationally through 22 regional offices and its clients
are generally corporate and institutional portfolio owners and lenders. The
Company believes it is among the leading real estate appraisal firms on the
basis of revenues generated in 1995.
INTERNATIONAL ALLIANCES AND ACTIVITIES
In response to growing cross-border capital flows for investment in
commercial real estate, and the multinational strategies of the Company's U.S.
corporate clients, the Company has developed exclusive alliances with leading
firms in various countries in Europe, the Far East and Southeast Asia,
Australia and New Zealand. The relationships with DTZ, a consortium of 23 real
estate advisory firms operating in 15 countries in Europe, as well as
Australia and New Zealand, and C. Y. Leung & Company, a locally-owned firm
operating in China, Singapore, and Malaysia, have allowed the Company to
provide global corporate service capabilities and significantly strengthen its
client relationships in the United States. Representative international
clients include
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Blockbuster Videos Entertainment Corp., Coca-Cola Co. Inc., Tenneco, U. S.
Robotics Corp. and Westinghouse Electric Corp. Revenues from the Company's
international activities currently represent a small portion of total
revenues. In addition to cross-border corporate space acquisition and
disposition activity, Westmark is exploring the development of new cross-
border investment products with DTZ and C.Y. Leung.
INFORMATION TECHNOLOGY
In order to enhance the quality of its real estate services and improve the
productivity of its employees, the Company has invested in state-of-the-art
computer and telecommunication systems to provide real-time real estate
information and sophisticated presentation and analysis tools. The Company's
information technology group ("IT Group"), headquartered in Torrance,
California, employs 40 professionals that operate the Company's data center,
develop custom programs, implement special systems software, and provide
support for hardware and software utilized in the Company's national network
of offices.
The Company has adopted computer hardware and software standards to maintain
the consistency and quality of its real estate services. Each office is
connected directly to the Company's IBM mainframe computer for real-time
access to the Company's centralized databases and customized software
applications. The Company also utilizes PeopleSoft's client server financial
applications on a Sun/Oracle platform to support its accounting functions.
Each evening all data is backed up to tape and stored off-site. The Company's
disaster recovery services, including a "hot site," are provided by Comdisco
Disaster Recovery Services, Inc.
The Company believes that it maintains one of the nation's largest databases
of commercial properties in the United States. The CB Commercial proprietary
property information database contains over 20 years of comprehensive data on
over 17 billion square feet of office, industrial and retail space. Nearly 150
information services coordinators, researchers, and analysts located
throughout the United States and over 2,000 of the Company's real estate
professionals support the centralized, real-time information gathering
activities. The Company also purchases commercial real estate data from third
parties.
LANs, connected to the Company's wide area network (WAN) through Frame
Relay, provide the Company's professionals with direct and simultaneous access
to current market information and industry-specific software applications that
synthesize complex and comprehensive information into charts, spreadsheets and
presentations. Products and systems available to the Company's professionals
include: (i) "virtual" property tours which incorporate demographics,
pictures, floor plans and sound providing current information on properties
located throughout the United States, (ii) standardized financial analyses and
presentation of multiple lease scenarios to compare total occupancy costs,
(iii) tracking of owned and leased property information, including
photographs, locator maps and site/floor plans, (iv) transaction management
for a corporate multi-market real estate portfolio to coordinate, facilitate,
and expedite acquisition, disposition and consulting requirements and, (v)
centralized property management data bases with an array of management,
valuation, accounting and reporting applications.
Mobile computing with remote, on-line access to the Company's databases and
software applications is available to the Company's professionals. By special
arrangement, some of the Company's clients have remote modem access to
selected client-customized software applications. The CB Commercial Web Site
has also given clients direct access through the CB Internet home page. These
systems allow clients to gain access to various levels of information,
maintain day-to-day contact with the Company's professionals, and track and
monitor property acquisition and disposition activities and property
portfolios.
EMPLOYEE EDUCATION
In 1991, the Company founded its training program, known as CB Commercial
University ("CBCU") to provide professional development and industry training
for its key professional employees. CBCU is distinguished in the industry for
its quality, intensity, scope and results. Through CBCU and its professional
education department, the Company currently offers 39 training programs and
courses. The courses offered at
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CBCU are typically one week in length and are customized to meet both
employees' and clients' needs and skill levels. Courses focus on (i)
employees' productivity and quality consistency; (ii) management leadership
and effectiveness in the context of the latest industry knowledge and
technology; and (iii) clients' needs in the Company's various business lines
and specialty practice areas. Although CBCU was originally established to
develop the skills of the Company's employees, in 1995 in response to demand
from its clients, the Company added courses to the CBCU curriculum which
involve its clients. In 1995, more than 450 employees and clients took courses
at CBCU.
COMPETITION
The market for commercial real estate brokerage and other real estate
services provided by the Company is both highly fragmented and highly
competitive. Thousands of local commercial real estate brokerage firms and
hundreds of regional commercial real estate brokerage firms have offices in
the United States. The Company believes that no more than two other major
firms have the ability to compete nationally with the Company's brokerage
business, and that the Company's national brokerage network enables it to
compete effectively with these organizations. Most of the Company's
competitors are local or regional firms that are substantially smaller than
the Company on an overall basis, but in some cases, may be larger locally.
L.J. Melody competes with a large number of mortgage banking firms and
institutional lenders as well as regional and national investment banking
firms and insurance companies in providing its mortgage banking services.
Appraisal services are provided by other national, local and regional
appraisal firms and national and regional accounting firms. Consulting
services are provided by numerous commercial real estate firms (national,
regional and local), accounting firms, appraisal firms and others.
The Company's property management business competes for the right to manage
properties controlled by third parties. The competitor may be the owner of the
property (who is trying to decide the efficiency of outsourcing) or another
property management company. Increasing competition in recent years has
resulted in having to provide additional services at lower rates through
eroding margins. In 1996, however, rates have stabilized and in some cases
increased.
Westmark competes with a significant number of investment advisors, banks
and insurance companies in attracting investor money. Over the last several
years, Westmark experienced growth in its separate accounts and its commingled
debt funds, but not in its commingled equity funds.
In all of its business disciplines, the Company competes on the basis of the
skill and quality of its personnel, the variety of services offered, the
breadth of geographic coverage and the quality of its infrastructure,
including technology. See "Risk Factors--Competition."
EMPLOYEES
As of September 30, 1996, the Company had approximately 4,000 employees,
approximately 73% of whom work in the areas of brokerage and investment
properties. All of the Company's sales professionals are parties to contracts
with the Company which subject them to the Company's rules and policies during
their employment, and limit their post-employment activities in terms of
soliciting clients or employees of the Company. The Company believes that
relations with its employees are good.
FACILITIES
The Company owns its headquarters building in downtown Los Angeles,
California. In addition to the Company's headquarters, the Company owns and
occupies three smaller office buildings in Phoenix, Arizona, San Diego and
Carlsbad, California. These properties are mortgaged to secure loans to the
Company.
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The Company also leases office space on terms that vary depending on the
size and location of the office. The leases expire at various dates through
2006. For those leases that are not renewable, the Company believes there is
adequate alternative office space available at acceptable rental rates to meet
its needs.
LEGAL PROCEEDINGS
As a result of the thousands of transactions in which the Company
participates and its employment of almost 4,000 people, it is a party to a
number of pending or threatened lawsuits, arising out of or incident to the
ordinary course of its business. At any given time, the Company typically is a
defendant in 150 to 175 legal proceedings and a plaintiff in 50 to 100 legal
proceedings. The Company believes that any liability that may result from
these proceedings will not have a material adverse effect on its consolidated
financial position or results of operation.
As part of its process of minimizing, to the extent possible, potential
litigation, the Company requires its sales professionals to agree to
contribute each month toward a "Reserve Account" to be used whenever a claim
of professional liability is asserted. In addition, each sales professional
contractually agrees to be responsible for a portion of any amount paid to
defend or settle a claim against that professional or for any resulting
judgment.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James J. Didion......... 56 Chairman of the Board and Chief Executive Officer
Gary J. Beban........... 50 President/Director
David A. Davidson....... 61 Senior Executive Vice President, Chief Financial Officer and
Treasurer
Thaddeus W. Jones....... 54 Senior Executive Vice President/Senior Executive Director--
CBC/Madison Advisory Group
George J. Kallis........ 53 Senior Executive Vice President--Brokerage Western U.S./ Director
Charles O. McBride, Jr.. 54 Senior Executive Vice President/Chief Operating Officer--
Property Management Services
Jeffrey S. Morgan....... 42 Senior Vice President/Director
Ronald J. Platisha...... 49 Executive Vice President and Principal Accounting Officer
Richard A. Pogue........ 54 Senior Executive Vice President--Brokerage/Director
Kenneth D. Sandstad..... 50 Senior Executive Vice President--Brokerage Eastern U.S.
Walter V. Stafford...... 56 Senior Executive Vice President and General Counsel
John L. Stanfill........ 55 President--CB Commercial Investment Properties
Richard C. Clotfelter... 59 President--Westmark Realty Advisors L.L.C./Director
Lawrence J. Melody...... 58 President--L.J. Melody & Company/Director
Stanton D. Anderson(2).. 56 Director
Richard C.
Blum(1)(2)(3).......... 61 Director
Frank C. Carlucci....... 65 Director
Daniel A. D'Aniello(2).. 50 Director
Hiroaki Hoshino......... 54 Director
Takayuki Kohri.......... 44 Director
Paul C. Leach(2)........ 51 Director
Frederic V. Malek(1)(3). 59 Director
Peter V. Ueber-
roth(1)(3)............. 58 Director
Gary L. Wilson(1)(3).... 56 Director
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Acquisition/Investment Committee of the Board of Directors
James J. Didion. Mr. Didion has been Chairman and Chief Executive Officer of
CB Commercial since January 1987 and a Director since the Company's
incorporation. Previously, he served as President of CB Commercial Real Estate
Group, Inc., following a career of almost 24 years in sales and management
positions in the commercial brokerage operations of CB Commercial Real Estate
Group, Inc. Mr. Didion is a member and current trustee of the Urban Land
Institute. He is also a member of the National Realty Committee and was
Chairman of the National Realty Committee from 1993 through June 1996.
Mr. Didion holds an A.B. degree from the University of California, Berkeley
and serves on the University's Advisory Board for the Haas School of Business.
Gary J. Beban. Mr. Beban has been the President of the Company since May
1995 and a Director since 1989. He joined the Company's Los Angeles office in
1970 as an industrial and investment properties specialist and thereafter
served in several management positions in Chicago. Mr. Beban has also been the
President of CB Commercial Brokerage Services since 1987. He is a member of
the Industrial Development Research Council and the National Realty Committee.
Mr. Beban serves on the Board of Directors of The First American Financial
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Corporation and its wholly-owned subsidiary, First American Title Insurance,
Inc. Mr. Beban holds a B.A. degree from the University of California, Los
Angeles.
David A. Davidson. Mr. Davidson has been Senior Executive Vice President,
Chief Financial Officer and Treasurer of the Company since November 1992. From
February 1991 to November 1992, he served as Executive Vice President and from
July 1990 to February 1991 was Senior Vice President. Mr. Davidson joined the
Company as Vice President, Treasurer and Assistant Secretary in June 1989.
During 1987 and 1988 he was Executive Vice President and Chief Operating
Officer of Nationwide Health Properties, a real estate investment trust.
Subsequently, he served as Executive Vice President of Corporation Operations
and Chief Financial Officer for Voluntary Hospitals of America, an alliance of
not-for-profit hospitals located in Dallas, Texas. From 1981 to 1987, Mr.
Davidson was Vice President, Treasurer of Beverly Enterprises, a provider of
health care services. Mr. Davidson holds a B.S. degree and a Masters of
Accountancy degree from Brigham Young University.
Thaddeus W. Jones. Mr. Jones has been Senior Executive Vice President of the
Company and Senior Executive Director of CBC/Madison Advisory Group since
1994, after having served as Executive Director--CBC/Madison Advisory Group
from 1992 to 1994. From 1986 to 1992 Mr. Jones was President of CB Commercial
Realty Advisors and from 1984 to 1986 he was a Senior Vice President, after
having served in various management positions in the Company's brokerage
business. Mr. Jones rejoined CB Commercial in 1982 after leaving in 1979.
Mr. Jones holds a B.S. degree from the University of California, Los Angeles.
George J. Kallis. Mr. Kallis has been the Company's Senior Executive Vice
President--Brokerage Western U.S. since 1992 and a Director of the Company
since 1995. Prior to that time, he served as Executive Vice President from
1991 to 1992 and as Senior Vice President and Regional Manager--Brokerage from
1988 to 1991. Mr. Kallis joined the Company in 1977. Mr. Kallis is a member of
the International Council of Shopping Centers and the Urban Land Institute and
is on the Board of Directors of the Los Angeles County Economic Development
Council. Mr. Kallis holds a B.S. degree in Business Administration from the
University of Maryland.
Charles O. McBride. Mr. McBride has been Senior Executive Vice President of
the Company and Chief Operating Officer--Property Management Services since
April 1991. He joined the Company in 1989 as Executive Vice President/Chief
Operating Officer--Property Management Services. Mr. McBride was a senior
officer with PM Realty Group, a national real estate management and services
company, from 1971 to 1989, serving as Executive Vice President from 1981 to
1989. Mr. McBride holds a B.A. degree from the University of Texas.
Jeffrey S. Morgan. Mr. Morgan has been a Senior Vice President of the
Company since 1991 and a Director of the Company since 1995. He joined the
Company in 1978 and is a specialist in industrial properties. He has been
named to the Company's Colbert Coldwell Circle (representing the top three
percent of the Company's sales force) for five of the last nine years. In 1994
he was awarded the William H. McCarthy Award, the highest honor awarded
producing professionals within the Company. Mr. Morgan holds a B.S. degree in
Marketing from California State University (Northridge).
Ronald J. Platisha. Mr. Platisha has been the Company's Executive Vice
President and Principal Accounting Officer since 1992. Mr. Platisha was
promoted to Senior Vice President in 1991, after serving as First Vice
President and Controller from 1982 to 1991. Mr. Platisha joined the Company in
1976. Mr. Platisha holds a B.S. degree from California State University
(Long Beach).
Richard A. Pogue. Mr. Pogue has been the Company's Senior Executive Vice
President--Brokerage since January 1996 and a Director of the Company since
1996. From 1994 to 1995 he was Senior Executive Vice President (Brokerage
Division) of the Company and from 1992 to 1994, he served as the Company's
Senior Vice President--Investment Properties. From 1984 to 1992, he was
Division President of The Koll Company, a real estate investment and
development company. Mr. Pogue originally joined the Company in 1971. Mr.
Pogue is a member of the National Realty Committee and the Urban Land
Institute. Mr. Pogue holds a B.A. degree from the University of Oklahoma.
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Kenneth D. Sandstad. Mr. Sandstad has been the Company's Senior Executive
Vice President--Brokerage Eastern U.S. since 1991. He has also held the
following positions with the Company: Institutional Services Manager from 1994
to 1996, Division Manager (Central Division) from 1990 to 1994 and Regional
Manager (South Central) from 1985 to 1990. Mr. Sandstad was also a Director of
the Company from 1992 to 1994. Mr. Sandstad joined the Company in 1974,
beginning at the Minneapolis office in the brokerage division. He holds a B.A.
degree from St. Olaf College and a J.D. degree from the University of
Minnesota.
Walter V. Stafford. Mr. Stafford has served as Senior Executive Vice
President and General Counsel of the Company since 1995. Mr. Stafford was a
partner at the law firm Pillsbury Madison & Sutro LLP from 1988 to 1995 and
from 1973 to 1982. From 1982 to 1988 he was Senior Vice President and General
Counsel at Diasonics, Inc., a medical device manufacturer, and from 1982 to
1994 he was a director of that company. Mr. Stafford holds a B.A. from the
University of California, Berkeley and an L.L.B. degree from Boalt Hall.
John L. Stanfill. Mr. Stanfill is President of CB Commercial Investment
Properties. Previously, he was Managing Director--Special Investments, a
position he was appointed to when he rejoined the Company in 1990 after
founding a real estate investment banking firm in 1979. From 1976 to 1979, Mr.
Stanfill served as Vice President of Investment Marketing of the Company. He
originally joined the Company in 1971. Mr. Stanfill holds a B.A. in English
Literature from the University of California, Los Angeles.
Richard C. Clotfelter. Mr. Clotfelter was elected Chairman and President,
Westmark Realty Advisors, an indirect wholly-owned subsidiary of the Company
in 1995, and has been a Director of the Company since 1993. Mr. Clotfelter
joined the Company in 1993 as President--Capital Markets, Asset Valuation and
Management Activities. From April 1977 through 1992, he was President of
Prescott, Inc., a real estate development and management company.
Mr. Clotfelter is on the Board of Directors of The Commerce Bancorporation.
Mr. Clotfelter is also a member of the Urban Land Institute, serving on its
Urban Development/Mixed Used Council. Mr. Clotfelter holds a B.A. degree from
Stanford University.
Lawrence J. Melody. Mr. Melody has served as a Director since August 1996.
He is also Chairman of the Board and President of L.J. Melody & Company which
he founded in February 1978. He is a member of the International Council of
Shopping Centers, the Urban Land Institute (a member of the Multifamily
Council), the Pension Real Estate Association, the National Association of
Industrial and Office Parks, the National Multi Housing Council, as well as
other professional organizations. He is a member of Board of Trustees of the
Mortgage Bankers Association of America and past President and Director of the
Texas Mortgage Bankers Association, who awarded him their Distinguished
Service Award in 1995. Mr. Melody holds a B.A. degree from the University of
Notre Dame.
Stanton D. Anderson. Mr. Anderson has been a Director of the Company since
1989. In 1995, he became counsel to the law firm of McDermott, Will & Emery.
Prior to 1995, Mr Anderson was a founding partner in the law firm of Anderson,
Hibey & Blair. He is also a founder of Global USA, Inc. an international
consulting company, where he serves as Chairman and President. He served as
Deputy Director of the Republican Convention in 1980, 1984 and 1988, as
counsel to the Reagan-Bush Campaign in 1980 and as a Director of the 1980
Presidential Transition. Mr. Anderson serves on the Board of Directors of
International Management & Development Group, Ltd. Mr. Anderson holds a B.A.
degree from Westmont College and a J.D. degree from Willamette University
School of Law.
Richard C. Blum. Mr. Blum has been a Director of the Company since 1993. He
is the Chairman and President of Richard C. Blum & Associates, Inc., a
merchant banking firm he founded in 1975. Mr. Blum is a member of the Board of
Directors of National Education Corporation; Sumitomo Bank of California;
Triad Systems Corporation; Northwest Airlines Corporation; and URS
Corporation. Mr. Blum also serves as Vice Chairman of URS Corporation. Mr.
Blum holds a B.A. from the University of California, Berkeley, a graduate
degree from the University of Vienna and an M.B.A. degree from the University
of California, Berkeley.
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Frank C. Carlucci. Mr. Carlucci has been a Director of the Company since
1989. In 1993, Mr. Carlucci became Chairman of The Carlyle Group, a merchant
banking firm where he had served as Vice Chairman since 1989. From 1987 to
1989, Mr. Carlucci served as the Secretary of Defense. From 1986 to 1987, Mr.
Carlucci was Assistant to the President for National Security Affairs. From
1983 to 1986, Mr. Carlucci served as Chairman and Chief Executive Officer of
Sears World Trade. Mr. Carlucci is on the Board of Directors of Ashland Oil,
Inc.; BDM International, Inc.; Bell Atlantic Corporation; General Dynamics
Corporation; Kaman Corporation; Neurogen Corporation; Northern Telecom, Ltd.;
The Quaker Oats Company; Sun Resorts, Ltd., N.V.; Texas Biotechnology
Corporation; Pharmacia & Upjohn, Inc.; and Westinghouse Electric Corporation.
Mr. Carlucci holds an A.B. degree from Princeton University.
Daniel A. D'Aniello. Mr. D'Aniello has been a Director of the Company since
1989. He has served as Managing Director of The Carlyle Group, a merchant
banking firm since May 1987. From August 1986 through April 1987,
Mr. D'Aniello was Vice President--Finance and Development of Marriott Inflite
Services, Inc., a subsidiary of Marriott Corp. Mr. D'Aniello is Chairman of
the Board of Directors of GTS Duratek, Inc. Mr. D'Aniello holds a B.S. degree
from Syracuse University and an M.B.A. from the Harvard University Graduate
School of Business.
Hiroaki Hoshino. Mr. Hoshino has been a Director of the Company since 1992.
Previously, he served as Senior Vice President, Treasurer and Chief Financial
Officer of Kajima International, Inc. from April 1987 to March 1990 and as
Senior Vice President and Chief Financial Officer of that company from April
1990 to March 1991. From April 1991 to March 1993, he served as Executive Vice
President and Chief Financial Officer of Kajima International Inc. Since April
1991, he has served as the Chief Financial Officer and since April 1993 he has
been Executive Vice President and Chief Financial Officer of Kajima U.S.A.,
Inc. From September 1992 to April 1996, he was Executive Vice President, Chief
Financial Officer and Director of Kajima Capital of America, Inc. Since April
1996 he has been President, Chief Executive Officer, Chief Financial Officer
and Director of Kajima Capital of America, Inc. Mr. Hoshino holds a B.A.
degree from Gakushuin University.
Takayuki Kohri. Mr. Kohri has been a Director of the Company since 1989.
Previously, he was Assistant Manager of Sumitomo Real Estate Sales in Japan
from 1984 to August 1988. From August 1988 to July 1993, he was an Executive
Vice President of Sumitomo Real Estate Sales L.A., Inc. Since July 1993, he
has been Deputy Manager of Sumitomo Real Estate Sales Japan, a real estate
sales and development firm. Mr. Kohri holds a B.A. degree in Economics from
Keio University.
Paul C. Leach. Mr. Leach has been a Director of the Company since August
1996. Since its founding in 1991, Mr. Leach has served as president of Paul
Leach & Company, a private investment banking firm in San Francisco which
specializes in international and domestic acquisitions and investments. He is
also Managing Director of The Lone Cypress Company, the owner of Pebble Beach
Company, and Managing Director of Rancho Cielo Company, a developer in Rancho
Santa Fe, California. From 1988 through 1991, Mr. Leach was a senior manager
and partner in the international merger and acquisition group at Deloitte &
Touche. Prior to 1988, he held several positions in San Francisco, including
serving as a partner with both Osterweis Capital Management and Centennial
Petroleum Company and manager of corporate development for Natomas Company.
From 1975 through 1977, Mr. Leach served as associate director of the Domestic
Council Staff at the White House during the Ford Administration. Mr. Leach
holds an A.B. degree from Dartmouth College and M.B.A. and J.D. degrees from
Stanford Graduate School of Business and Stanford Law School, respectively.
Frederic V. Malek. Mr. Malek has been a Director of the Company since 1989.
He has served as Chairman of Thayer Capital Partners, a merchant banking firm
he founded since 1993. He was President of Marriott Hotels and Resorts from
1981 through 1988 and was Executive Vice President of Marriott Corp. from 1978
through 1988. He was Senior Advisor to The Carlyle Group, a merchant banking
firm, from November 1988 through December 1991. From September 1989 through
June 1990, he was President of Northwest Airlines and from June 1990 until
December 1991 he served as Vice Chairman of Northwest Airlines. From December
1991 through November 1992, Mr. Malek served as Campaign Manager for the 1992
Bush/Quayle presidential
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campaign. He also serves on the Board of Directors of American Management
Systems, Inc.; Automatic Data Processing Corp.; Avis, Inc.; FPL Group Inc.;
ICF Kaiser International, Inc.; Intrav, Inc.; Manor Care, Inc.; National
Education Corp.; Northwest Airlines Corporation; and Paine Webber Funds. Mr.
Malek holds a B.S. degree from the United States Military Academy at West
Point and an M.B.A. degree from the Harvard University Graduate School of
Business.
Peter V. Ueberroth. Mr. Ueberroth has been a Director of the Company since
1989. Since 1989, he has been an investor and Managing Director of Contrarian
Group, Inc., a business management company. From 1984 through 1989, he was the
Commissioner of Major League Baseball in the United States. Mr. Ueberroth is a
member of the Board of Directors of The Coca Cola Company; Ambassadors
International, Inc.; Doubletree Hotels Corp; and Transamerica Corporation.
Gary L. Wilson. Mr. Wilson has been a Director of the Company since 1989.
Since 1991, he has been Co-Chairman of Northwest Airlines, Inc., Northwest
Airlines Corporation and NWA, Inc. From 1985 until January 1990, Mr. Wilson
was an Executive Vice President and Chief Financial Officer and Director for
The Walt Disney Company and remains a Director of The Walt Disney Company.
From 1974 until 1985, he was Executive Vice President and Chief Financial
Officer of Marriott Corporation. Mr. Wilson holds a B.A. degree from Duke
University and an M.B.A. from the Wharton Graduate School of Business and
Commerce at the University of Pennsylvania.
All directors are elected to hold office until the next annual meeting of
stockholders of the Company and until their successors have been elected.
Officers serve at the discretion of the Board of Directors. There are no
family relationships among any of the directors or executive officers of the
Company. See "Description of Capital Stock--The Recapitalization."
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Effective upon the closing of the Offering, there will be three committees
of the Board of Directors: a Compensation Committee, an Audit Committee and an
Acquisition/Investment Committee. See "Description of Capital Stock--The
Recapitalization."
The Compensation Committee members are Messrs. Blum, Malek, Ueberroth and
Wilson, who are outside directors of the Company. Currently this committee
determines the salary and incentive compensation, if any, of executive
officers of the Company whose annual base salary exceeds $300,000, may
authorize employment agreements with such officers, and in exceptional
circumstances, may review and approve compensation arrangements with other
employees. Effective upon the closing of the Offering, the Compensation
Committee will determine the salaries of the Chairman and Chief Executive
Officer and, upon the recommendation of the Chief Executive Officer, the
salaries and incentive compensation of the President and the Chief Financial
Officer. The salaries and incentive compensation of all other officers are
determined by the Chief Executive Officer.
The members of the Audit Committee are Messrs. Anderson, Blum, D'Aniello and
Leach, who are outside directors of the Company. The purpose of the Audit
Committee is to recommend a firm of independent public accountants to be
appointed by the Board subject to stockholder ratification, review the
Company's annual consolidated financial statements and consult with the
representatives of the independent public accountant and the Chief Financial
Officer and Principal Accounting Officer with regard to the adequacy of
internal controls.
The Acquisition/Investment Committee members are Messrs. Blum, Malek,
Ueberroth and Wilson. The purpose of the Acquisition/Investment Committee is
to authorize the undertaking by the Company of definitive negotiations with
respect to any acquisition or investment that contemplates the issuance of any
class of the Company's stock or the aggregate cost of which is likely to
exceed $10 million.
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DIRECTOR COMPENSATION
Each of the directors of the Company who is not also an executive officer is
entitled to receive a fee of $2,500 for attendance at each meeting of the
Board of Directors, $2,500 for attendance at each meeting of a board committee
which does not coincide with a Board of Directors meeting and an annual
retainer of $15,000. No director received compensation from the Company for
services as a director in excess of $27,500 in 1995. Non-employee directors
are reimbursed for their expenses for each meeting attended. In 1993, below
market options were granted to certain non-employee directors in partial
payment of directors' fees. See "Employee Benefit Plans." In October 1996, the
Compensation Committee (Messrs. Blum, Ueberroth and Wilson abstaining) granted
each of Messrs. Blum, Ueberroth and Wilson a 10,000 share stock option under
the Company's Service Providers Stock Option Plan exercisable at the initial
public offering price and vesting over three years. The Company is considering
the adoption of a longer term stock option program for its independent
directors.
55
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's nine other most highly compensated
executive officers other than the Chief Executive Officer whose total annual
salary and bonus exceeded $100,000, for services rendered in all capacities to
the Company for each of the fiscal years in the three year period ended
December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- ---------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK STOCK COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS SATION(2) AWARDS(3) OPTIONS SATION(4)
- --------------------------- ---- -------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
James J. Didion............. 1995 $390,000 $279,160 $63,212 -- -- $1,520
Chairman of the Board and 1994 390,000 300,000 94,005 -- -- 1,105
Chief Executive Officer 1993 375,000 250,000 (5) $90,000 -- 978
Gary J. Beban............... 1995 300,000 190,527 (5) -- -- 1,520
President 1994 300,000 236,118 (5) -- 10,000 273
1993 270,000 233,899 (5) 60,000 -- --
Richard C. Clotfelter....... 1995 250,000 174,475 (5) -- -- --
President--Westmark Realty 1994 225,000 123,192 (5) 32,500 20,000 --
Advisors L.L.C. 1993(6) 183,334 106,671 (5) 150,000 40,000 --
David A. Davidson...........
Senior Executive Vice 1995 225,000 109,919 (5) -- -- 1,291
President, Chief Financial 1994 215,000 112,660 (5) -- 20,000 1,105
Officer and Treasurer 1993 185,000 72,730 (5) 60,000 -- 978
Thaddeus W. Jones........... 1995 210,000 173,079 (5) -- -- --
Senior Executive Vice 1994 210,000 177,259 (5) -- 20,000 --
President Senior Executive 1993 210,000 140,514 (5) -- -- --
Director--CBC/Madison
Advisory Group
George J. Kallis............
Senior Executive Vice 1995 200,000 153,538 (5) -- -- --
President--Brokerage 1994 200,000 177,944 (5) 32,500 -- 747
Western U.S. 1993 170,000 140,805 (5) -- -- 876
Charles O. McBride.......... 1995 194,479 134,345 (5) -- -- 1,520
Senior Executive Vice 1994 189,000 137,735 (5) -- -- 1,105
President/Chief Operating 1993 183,750 76,366 (5) -- -- 978
Officer--Property
Management Services
Richard A. Pogue............ 1995 192,000 143,767 (5) -- -- --
Senior Executive Vice 1994 177,708 158,780 (5) 97,500 40,000 --
President--Brokerage 1993 125,000 72,035 (5) -- -- --
Kenneth D. Sandstad.........
Senior Executive Vice 1995 200,000 139,580 (5) -- -- 1,520
President--Brokerage 1994 200,000 162,887 (5) -- -- 1,105
Eastern U.S. 1993 185,000 116,367 (5) -- -- 978
John L. Stanfill............ 1995 197,600 142,581 (5) -- -- --
President--CB Commercial 1994 190,000 146,485 (5) 32,500 -- --
Investment Properties 1993 175,000 120,253 (5) -- -- --
</TABLE>
56
<PAGE>
- --------
(1) Bonus for each year is paid in the first quarter of the following year.
Pursuant to the Company's Deferred Compensation Plan, Mr. Didion elected
to defer his entire bonuses in 1993, 1994 and 1995, and Mr. Davidson and
Mr. Kallis elected to defer all or a substantial portion of their bonuses
in 1994 and 1995. All such amounts were invested in shares of the
Company's Common Stock.
(2) Under the Company's Deferred Compensation Plan beginning in 1994, an
individual who defers an amount payable as bonus in the first 90 days of
1994, 1995 or 1996 for investment in shares of the Company's Common Stock
was credited with such shares based on the appraised value of such shares
at the time the election to defer was made. The amounts shown represent
the difference between the aggregate appraised value of such shares at the
time the bonus was paid and the aggregate appraised value of such shares
at the time the election to defer was made. The amounts shown relate to
bonuses payable in the first quarter of the following year. Amounts shown
also include automobile allowances.
(3) Represents the appraised value of restricted stock awards at the date of
grant. The aggregate number of shares and appraised value of restricted
stock (excluding stock no longer subject to any specified vesting period)
held by the individuals named above as of December 31, 1995 was as
follows: Mr. Didion--15,000 ($149,100); Mr. Beban--10,000 ($99,400); Mr.
Clotfelter--30,000 ($298,200); Mr. Davidson--10,000 ($99,400); Mr. Jones--
0; Mr. Kallis--5,000 ($49,700); Mr. McBride--0; Mr. Pogue--15,000
($149,100); Mr. Sandstad--0; and Mr. Stanfill--5,000 ($49,700). The
holders of shares of restricted stock are entitled to receive dividends on
such shares to the extent dividends are paid on the Common Stock. Does not
include income recognized for income tax purposes upon vesting of
restricted stock awards.
(4) Consists of each individual's allocable share of profit sharing
contributions in the form of shares of Common Stock made by the Company to
the Company's Capital Accumulation Plan, based on the appraised value of
the stock at the time of contribution.
(5) The only form of Other Annual Compensation awarded, earned or paid
consisted of perquisites and personal benefits which did not exceed the
lesser of $50,000 or 10% of the total annual salary and Bonus reported.
(6) Mr. Clotfelter's employment by the Company commenced in February 1993.
AGGREGATED 1995 YEAR-END OPTION VALUES
The following table sets forth certain information as of December 31, 1995
with respect to the number and value of unexercised stock options held by
individuals named in the Summary Compensation Table above. In fiscal 1995,
none of the such individuals either were granted or exercised any options. At
December 31, 1995 all options listed below had exercise prices which exceeded
the value of the underlying stock and, therefore, had no value.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING
UNEXERCISED OPTIONS(1) AT
DECEMBER 31, 1995
-------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
James J. Didion.................................... 75,000 0
Gary J. Beban...................................... 62,500 7,500
Richard C. Clotfelter.............................. 31,667 28,333
David A. Davidson.................................. 45,000 15,000
Thaddeus W. Jones.................................. 25,000 15,000
George J. Kallis................................... 40,000 0
Charles O. McBride................................. 40,000 0
Richard A. Pogue................................... 10,000 30,000
Kenneth D. Sandstad................................ 40,000 0
John L. Stanfill................................... 20,000 0
</TABLE>
- --------
(1) All options have an exercise price of $10.00 per share.
57
<PAGE>
EMPLOYEE BENEFIT PLANS
Omnibus Stock and Incentive Plan. The Company's Omnibus Stock and Incentive
Plan (the "Omnibus Plan") is a restricted stock plan which provides for the
issuance of shares of the Company's Common Stock, subject to vesting
provisions. No shares remain available for issuance under the Omnibus Plan,
but additional shares will become available if forfeited by any of the current
holders.
1990 Stock Option Plan. One million shares have been reserved for issuance
under the Company's 1990 Stock Plan (the "Stock Option Plan"). These options
vest over one to four years. Options exercisable at $10.00 per share for
920,000 shares are outstanding as of August 31, 1996. If options are
forfeited, the underlying shares again become available for grant under the
Stock Option Plan.
Service Providers Stock Option Plan. A total of 600,000 shares of Common
Stock have been reserved for issuance under the Company's 1991 Service
Providers Stock Option Plan. In 1993, 5,922 below-market options were granted
to certain directors in partial payment of director fees. During 1996 and 1995
options to purchase 467 and 4,106 shares, respectively, of Common Stock were
exercised. As of September 30, 1996, options to purchase 36,140 shares of
Common Stock are outstanding. In October 1996, the Compensation Committee
(Messrs. Blum, Ueberroth and Wilson abstaining) granted each of Messrs. Blum,
Ueberroth and Wilson a 10,000 share option under the Service Providers Plan.
Each option is exercisable at the initial public offering price and vests over
a three year period.
1996 Equity Incentive Plan. In November 1995 the Board of Directors
authorized, and in January 1996 the Compensation Committee of the Board
adopted, a restricted stock purchase plan (the "Equity Incentive Plan") for
the purpose of retaining selected executives by offering them an opportunity
to acquire a proprietary interest, or to increase such interest, in the
success of the Company by purchasing shares of the Common Stock. A total of
550,000 shares of Common Stock have been reserved for issuance under the
Equity Incentive Plan. In January 1996, the Compensation Committee awarded ten
senior executives a total of approximately 540,000 shares under the Equity
Incentive Plan, subject to the authority of Chief Executive Officer to reduce
any grants. After reductions a total of 510,906 shares were purchased. The
following amounts of shares were purchased by the individuals named in the
Summary Compensation Table above: James J. Didion--175,027; Gary J. Beban--
53,910; Richard C. Clotfelter--33,750; George J. Kallis--42,750; Richard A.
Pogue--35,750; Kenneth D. Sandstad--44,586; and John L. Stanfill--54,383. The
shares may be issued to senior executives for a purchase price equal to the
greater of $10.00 per share or fair market value, and the shares previously
acquired were purchased at $10.00 per share. The purchase price for shares
under this plan must be paid either in cash or by delivery of a full recourse
promissory note. Any shares purchased vest at the rate of 5% per quarter.
Bonuses. The Company has bonus programs covering certain employees,
including senior management. Awards are based on the position and performance
of the employee and the achievement of pre-established financial, operating
and strategic objectives. Although bonuses are generally paid in cash, the
Company retains the discretion to pay any bonus in shares of the Company's
Common Stock.
Capital Accumulation Plan. The Company's Capital Accumulation Plan (the "Cap
Plan") is a defined contribution profit sharing plan under Section 401(k) of
the Internal Revenue Code and is the Company's only such plan. Under the Cap
Plan, each participating employee may elect to defer a portion of his or her
earnings and the Company may make additional contributions from the Company's
current or accumulated net profits to the Cap Plan in such amounts as
determined by the Board of Directors. During each year that the Cap Plan has
been in existence except 1991, the Company has made an additional contribution
of stock having a fair market value equal to 2 1/2% of the Company's operating
income for the year for which such contribution was made. Each such
contribution has been allocated among the participating employees in
proportion to their respective contributions to the Cap Plan during the year
for which such contribution was made. At September 30, 1996, Cap Plan held
2,842,775 shares of the Company's Common Stock.
58
<PAGE>
Deferred Compensation Plan. In 1993, the Company's Board of Directors
approved the adoption and implementation of a Deferred Compensation Plan (the
"DCP") effective January 1, 1994. Under the DCP, a select group of management
and highly-compensated employees are permitted to defer the payment of all or
a portion of their compensation (including any bonus). The DCP permits
participating employees to make an irrevocable election at the beginning of
each year to receive amounts deferred at a future date either in cash, which
accrues at a rate of interest determined in accordance with the DCP, or in
newly-issued shares of Common Stock of the Company. For the year ended
December 31, 1995, approximately $698,000 (including interest) and $1.1
million were deferred in cash and stock, respectively. The accumulated
deferrals as of September 30, 1996 are approximately $1.5 million in cash
(including interest) and $2.8 million in stock for a total of $4.3 million.
L.J. Melody Stock Option Acquisition Plan. A total of 90,750 shares of Class
B-2 Common Stock have been reserved for issuance under the L.J. Melody
Acquisition Stock Option Plan, which was adopted by the Board of Directors in
September 1996. Options for all of such shares have been issued at an exercise
price of $10.00 per share and vest over a period of five years at the rate of
5% per quarter. Options for 90,750 were outstanding as of September 30, 1996.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
In connection with the Offering and Recapitalization, the Company's Third
Restated Certificate of Incorporation will be amended and restated as the
Fourth Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"). See "Description of Capital Stock--The Recapitalization." The
Certificate of Incorporation will include provisions that limit the liability
of its directors for monetary damages for breach of their fiduciary duty as
directors, except for liability that cannot be limited under the Delaware
General Corporation Law ("Delaware Law"). Delaware Law provides that a
corporation may eliminate or limit the personal liability of a director to the
corporation or its stockholders, for monetary damages for breach of their
fiduciary duty as directors, except for liability (i) for any breach of their
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividend or unlawful stock
repurchase or redemption, as provided Section 174 of the Delaware Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation also provides that the Company
shall indemnify its directors and officers to the fullest extent permitted by
the Delaware Law. The Company has entered into separate indemnification
agreements with its directors that could require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. The Company believes that the limitation of liability provision
in its Certificate of Incorporation and the indemnification agreements will
facilitate the Company's ability to continue to attract and retain qualified
individuals to serve as directors and officers of the Company.
CERTAIN TRANSACTIONS
Mr. Clotfelter, a director of the Company and president of Westmark, owns
85% of the stock of Prescott, Inc. ("Prescott"), a property management company
based in Seattle, Washington. In 1994, the Company completed the acquisition
of certain assets of Prescott, which consisted of property management
agreements, for an aggregate purchase price of $175,000. In connection with
the acquisition of assets from Prescott, in 1994 Mr. Clotfelter incurred
indebtedness to the Company in an aggregate principal amount of $106,000. The
indebtedness bore interest at nine percent, which was determined under the
Company's policies for employee loans, and the largest amount outstanding at
any time (including principal and interest) was $109,000. The loan was repaid
in full as of March 20, 1996.
59
<PAGE>
In February 1995, the Company retained the law firm of McDermott, Will &
Emery, to which Mr. Anderson, a director of the Company, is counsel, to
provide services to the Company consisting of legal counsel in connection with
the Company's activities with certain federal agencies.
On June 30, 1995, the Company, through a general partnership (the
"Acquisition Partnership") in which it directly or indirectly owns all of the
partnership interests, acquired Westmark. The purchase price was funded in
part by a $10 million senior subordinated loan (the "Senior Subordinated
Loan") from 399 Venture Partners, Inc., which owns 427,750 shares of the
Company's common stock, to the Acquisition Partnership. See "Principal
Stockholders." In November 1996, the terms of the Senior Subordinated Loan
were amended to provide for interest to be payable quarterly on a current
basis at a rate of 11%, effective June 30, 1995, and to provide for quarterly
amortization payments by the Company of $500,000. As amended, interest will
accrue on the Senior Subordinated Loan at the original interest rate of 20%,
but interest in excess of 11% will be forgiven upon the payment of the Senior
Subordinated Loan in full. If the Company defaults on its payment obligations
under the loan at any time, such excess interest will not be forgiven and the
Senior Subordinated Loan will bear interest at the rate of 20% from June 30,
1995. The terms of the Senior Subordinated Loan originally provided for the
interest to be deferred until the debt payable to the Westmark sellers was
paid or cash collateralized in full.
Pursuant to the terms of his employment arrangements, in each of 1991, 1992
and 1993 the Company paid Mr. Stanfill $50,000 as an interest free advance
against future bonuses. Mr. Stanfill's maximum obligation pursuant to such
advances was $133,463.50 and his current obligation is $33,363.50 which is
scheduled to be repaid in February of 1997.
In connection with the Company's acquisition of L.J. Melody the Company
entered into an Employment Agreement, dated as of July 1, 1996 ("Melody
Employment Agreement"), pursuant to which the Company agreed to employ Mr.
Melody as President and Chief Executive Officer of L.J. Melody through
June 30, 2001. Pursuant to the Melody Employment Agreement, Mr. Melody is
entitled to receive (a) a base salary of $26,000 per month and (b) certain
"incentive compensation," based on L.J. Melody's profits.
Under certain conditions, Mr. Melody is entitled to severance benefits from
L.J. Melody if the Melody Employment Agreement is terminated. If the
termination occurs prior to July 1, 1997, the severance benefit is $43,750 per
month multiplied by 36 less the number of months elapsed since June 30, 1996.
If the termination occurs on or after July 1, 1997, the severance benefit is
equal to approximately two years of salary and two years of incentive
compensation. In addition, in connection with the acquisition, the Company
granted Mr. Melody an option to purchase 30,250 shares of the Company's Class
B-2 common stock. See "Management--Principal Stockholders."
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting capital stock as of September 30, 1996,
assuming the completion of the Recapitalization and the conversion of the
Class C-1 common stock assuming an initial public offering price per share of
$22.50 and as adjusted to reflect the sale by the Company of the shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of each class of the Company's voting stock, (ii) each of the
Company's directors, (iii) each of the Company's executive officers named
under "Management--Summary Compensation Table," and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
TITLE OF CLASS THE OFFERING THE OFFERING
-------------------------- ----------------------- ------------
NUMBER PERCENT PERCENT
------------ ---------- ------------
<S> <C> <C> <C> <C>
Kajima U.S.A., Inc.
Park Avenue Plaza
55 East 52nd Street
32nd Floor
New York, NY 10055.... Series A-1 Preferred Stock 1,000,000 100% 100%
Common 2,609(1) * *
Fukoku Mutual Life
Insurance Company
2-2, Uchisaiwaicho 2-
chome
Chiyoda-ku, Tokyo 100
Japan.................. Series A-2 Preferred Stock 1,000,000 50% 50%
S.R.E.S.--Fifth Avenue,
Inc.
666 Fifth Avenue
New York, NY 10103..... Series A-2 Preferred Stock 1,000,000 50% 50%
Common 4,106(2) * *
Entities Associated with
BK Capital Partners (3)
909 Montgomery Street
Suite 400
San Francisco, CA
94133.................. Common 437,500 4.91% 3.30%
Entities associated with
Mellon Family Invest-
ment Company V (4)
Mill Street Extension
Laughlintown, PA 15655. Common 466,300 5.23% 3.51%
399 Venture Partners,
Inc.
399 Park Avenue
New York, NY 10043..... Common 427,750 4.80% 3.22%
Gary J. Beban (7)....... Common 193,959 2.16% 1.45%
Richard C. Clotfelter
(5)(7)................. Common 113,835 1.27% *
David A. Davidson
(5)(7)................. Common 93,055 1.04% *
James J. Didion
(5)(6)(7).............. Common 403,067 4.48% 3.02%
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
------------------- ------------
TITLE OF CLASS NUMBER PERCENT PERCENT
-------------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Thaddeus Jones (7)........... Common 77,233 * *
George J. Kallis (5)......... Common 114,864 1.28% *
Charles O. McBride (5)(7).... Common 56,631 * *
Lawrence J. Melody (7)....... Common 1,513 * *
Richard A. Pogue (5)(7)...... Common 71,468 * *
Kenneth D. Sandstad (5)(7)... Common 117,756 1.31% *
John L. Stanfill (7)......... Common 94,822 1.06% *
Stanton D. Anderson (7)...... Common 27,779 * *
Richard C. Blum (7)(8)....... Common 437,500 4.91% 3.30%
Frank C. Carlucci (7)........ Common 2,287 * *
Daniel A. D'Aniello (7)(9)... Common 309,795 3.47% 2.34%
Hiroaki Hoshino (10)......... Common -- -- --
Takayuki Kohri (11).......... Common -- -- --
Paul C. Leach................ -- -- -- --
Frederic V. Malek (7)(12).... Common 322,634 3.61% 2.43%
Jeffrey S. Morgan............ Common 9,837 * *
Peter V. Ueberroth........... Common 10,000 * *
Gary L. Wilson............... -- -- -- --
All directors and executive
officers as a group
(25 persons) (13)........... Common 2,548,110 27.21% 18.58%
</TABLE>
- --------
* Less than 1%.
(1) Represents options to purchase 2,609 shares of Common Stock exercisable
on or before November 30, 1996 issued to Kajima U.S.A., Inc. in respect
of services rendered as a director by Mr. Hoshino.
(2) Represents 4,106 shares of Common Stock issued upon exercise of options
issued to S.R.E.S.-Fifth Avenue, Inc. in respect of services rendered as
a director by Mr. Kohri.
(3) Includes 287,500 shares of Common Stock issued in the name of BK Capital
Partners II.
(4) Includes 225,000 shares of Common Stock issued in the name of Richard
King Mellon Foundation.
(5) Does not include shares of Common Stock issued in the name of the Company
in respect of Common Stock units credited to the following persons in the
following amounts under the Company's Deferred Compensation Plan but
which are not beneficially owned by such persons: Clotfelter--1,895;
Davidson-- 23,598; Didion--121,970; Kallis--10,991; McBride--6,087;
Pogue--3,592; and Sandstad 1,506.
(6) Includes 6,000 shares held by a trust for the benefit of three members of
Mr. Didion's immediate family.
(7) Represents number of shares of Common Stock which the named individual
beneficially owns as well as those which the individual has options to
acquire that are exercisable on or before November 30, 1996, which
options have not been exercised. The respective numbers shown in the
table include the following number of option shares for the following
individuals: Anderson--4,235; Beban--65,000; Carlucci--2,287;
Clotfelter--50,000; D'Aniello--4,235 (options issued to Carlyle);
Davidson--50,000; Didion--75,000;
62
<PAGE>
Jones--30,000; Kallis--40,000; Malek--5,934; McBride--40,000; Melody--
1,513; Pogue--20,000; Sandstad--40,000; and Stanfill--20,000. Such shares
do not include options for 2,609 shares of Common Stock issued to Kajima
U.S.A., Inc. in respect of services rendered as a director by Mr. Hoshino.
(8) Represents 437,500 shares owned by BK Capital Partners and BK Capital
Partners II, limited partnerships of which Richard C. Blum & Associates,
L.P. is the general partner. Mr. Blum holds the majority of the interests
in Richard C. Blum & Associates, L.P.
(9) Includes 4,235 shares of Common Stock subject to outstanding options
exercisable on or before November 30, 1996 issued in the name of the
Carlyle Group, L.P., which, by virtue of Mr. D'Aniello's interest in the
general partner of the Carlyle Group, L.P., and investment control over
such shares, may be deemed to be beneficially owned by Mr. D'Aniello.
Includes shares of Class C-1 common stock which will convert into 168,360
shares of Common Stock upon the consummation of the Offering (assuming an
initial public offering price of $22.50 per share).
(10) Mr. Hoshino is a Director of Kajima U.S.A., Inc., which together with an
affiliate owns 2,000,000 shares of the Company's Preferred Stock,
1,000,000 of which are voting securities, and 2,609 shares of Common
Stock. Mr. Hoshino disclaims beneficial ownership of such shares.
(11) Mr. Kohri is Deputy Manager of Sumitomo Real Estate Sales Japan, an
affiliate of S.R.E.S.--Fifth Avenue, Inc., which owns 1,000,000 shares of
the Company's Preferred Stock and 4,106 shares of the Company's Common
Stock. Mr. Kohri disclaims beneficial ownership of such shares.
(12) Includes shares of C-1 common stock which will convert into 210,450 shares
of Common Stock upon the consummation of the Offering (assuming an initial
public offering price of $22.50 per share).
(13) Includes 448,204 shares of Common Stock subject to outstanding options
exercisable on or before November 30, 1996.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Certificate of Incorporation and Bylaws that will be in effect upon
the completion of the Recapitalization, which will occur concurrently with the
closing of the Offering. Such summary does not purport to be complete, and is
qualified in its entirety by all of the provisions of the Certificate of
Incorporation and Bylaws. Copies of the Certificate of Incorporation and
Bylaws are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. Upon the closing of the Offering, the authorized
capital stock of the Company, after giving effect to the Recapitalization,
will consist of 100,000,000 shares of Common Stock, $.01 par value ("Common
Stock"), and 8,000,000 shares of preferred stock, $.01 par value ("Preferred
Stock").
COMMON STOCK
Assuming the completion of the Recapitalization and the conversion of the
Class C-1 common stock (assuming an initial public offering price per share of
$22.50), as of September 30, 1996, there were 8,919,171 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders,
including the election of directors, and do not have cumulative voting rights.
Accordingly, the holders of shares of Common Stock and Preferred Stock with a
majority of the votes entitled to vote in any election of directors can elect
all of the directors standing for election, if they so choose. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Upon a liquidation, dissolution or
winding up of the Company, subject to the payment of any amounts which holders
of Preferred Stock are entitled to receive in preference to holders of Common
Stock, to the extent any assets of the Company remain available for
distribution to stockholders, the holders of Common Stock and Preferred Stock
are entitled to receive $10.00 per share, reduced by any prior payments to
such holder in connection with any liquidation, dissolution or winding up of
the Company (not including accrued and unpaid dividends and accrued interest
thereon). The holders of Common Stock will be entitled to share in the
remaining assets of the Company legally available for distribution. Holders of
Common Stock have no preemptive or conversion rights or other subscription
rights and there are no redemption or sinking funds provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
of Common Stock to be outstanding upon completion of the Offering will be,
fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock consists of a single class of 8,000,000 shares, of which
three series will be outstanding: (a) 1,000,000 shares of Series A-1 Preferred
Stock ("Series A-1 Preferred Stock"), (b) 2,000,000 shares of Series A-2
Preferred Stock ("Series A-2 Preferred Stock") and (c) 1,000,000 shares of
Series A-3 Preferred Stock ("Series A-3 Preferred Stock"). The authorized
shares of Preferred Stock not included in such series may be issued from time
to time in one or more series upon authorization by the Board of Directors. In
addition, upon conversion of any of the Series A-1 Preferred Stock, Series A-2
Preferred Stock or Series A-3 Preferred Stock (collectively, "Preferred
Stock"), the shares converted will be available for issuance in one or more
series from time to time. Subject to certain limitations set forth in the
Certificate of Incorporation, the Board of Directors may determine the
designation and number of shares of any such series of Preferred Stock and the
designation, preferences and relative participating, optional or other special
rights and the qualifications, limitations and restrictions thereon.
Effective upon the completion of the Recapitalization, holders of Preferred
Stock are entitled to dividends ("Preference Dividend") at the rate of $.25
per quarter on each share of Preferred Stock, payable out of funds legally
available therefor. The accrual of such dividend will be retroactive to
October 1, 1996. Until the Company has completed its acquisition program, it
does not intend to pay the dividend on the Preferred Stock. As a consequence,
such dividend will accumulate and bear interest which will be paid on a
current basis, and the
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Company will be prohibited from pre-paying long-term debt until such
accumulated dividend and interest have been paid in full.
In the event the Preference Dividend is not declared and paid within one
year after the last day of the quarter to which it relates, it will bear
compound annual interest at (i) a fixed rate of 8% annually with respect to
the Series A-1 and A-3 Preferred Stock or (ii) an annual rate equal to the
six-month rate offered to The Sumitomo Bank, Limited in the London interbank
market with respect to the Series A-2 Preferred Stock in amounts comparable to
the amount of any unpaid dividend plus 2 1/2%, as determined by each preferred
stockholder. Pursuant to an agreement between the Company and the existing
preferred stockholders, the holders of 3,000,000 shares of Preferred Stock
have elected the 8% fixed rate annually and the holder of the remaining
1,000,000 shares has elected the variable rate option. Until all accrued and
unpaid Preference Dividends are paid, no shares of Common Stock will be
redeemed by the Company (other than in connection with the Recapitalization
and other than shares issued pursuant to stock option, stock purchase or
similar plans), and no dividends will be paid on any shares of Preferred Stock
(other than the Series A-1, Series A-2 and Series A-3 Preferred Stock) or
Common Stock.
The Preference Dividend will not be paid and no interest will accrue or be
paid thereon if applicable law restricts or prohibits the declaration or
payment of the Preference Dividend. The Preference Dividend will also not be
required to be declared or paid to the extent it would violate any contractual
restrictions in a credit agreement of the Company. The Company has agreed that
it will not enter into any contractual prohibition with respect to the
accumulation of dividends or the accrual and payment of interest on any unpaid
dividends with respect to the Preferred Stock.
In addition to the Preference Dividend and any interest payable thereon,
each share of Preferred Stock is entitled to receive dividends in the amount
of sixty percent (60%) of the amount received by each share of Common Stock.
Upon any liquidation, dissolution or winding up of the Company, holders of
Preferred Stock and Common Stock will be entitled to share in the remaining
assets of the Company after payment of liabilities and any accrued and unpaid
Preference Dividend, including any interest thereon, subject to prior
distribution rights of other preferred stock, if any, then outstanding, as
follows: (i) each holder of Preferred Stock and Common Stock will be entitled
to receive an amount, reduced by any prior payments to such holder pursuant to
such liquidation, dissolution or winding up of the Company, other than the
Preference Dividend and any interest therein, equal to $10.00 per share and
(ii) each holder of Preferred Stock will be entitled to share ratably in all
remaining assets of the Company to the extent of sixty percent (60%) of the
distribution, with respect to each share of Common Stock in excess of $10.00.
The holders of shares of Series A-1 Preferred Stock will have two (2) votes
per share of Series A-1 Preferred Stock on all matters submitted to a vote of
the stockholders of the Company and, except as provided by law, will vote
together with the holders of shares of Series A-2 Preferred Stock and the
holders of Common Stock as one class on all matters submitted to a vote of
stockholders of the Company. The holders of Series A-3 Preferred Stock will
not be entitled to vote on any matters, except as may be required by law.
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The Preferred Stock is convertible into shares of Common Stock at the option
of the holder at a ratio ranging from .60 to .78 shares of Common Stock for
each share of Preferred Stock, depending on the Market Price (as defined
below) of the Common Stock at the time of conversion as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK FOR EACH
"MARKET PRICE" OF SHARE OF PREFERRED
COMMON STOCK STOCK
----------------- -----------------------
<S> <C>
Under $10.00 No conversion permitted
$10.00 - $21.99 0.78
22.00 - 22.99 0.76
23.00 - 23.99 0.74
24.00 - 24.99 0.72
25.00 - 25.99 0.70
26.00 - 26.99 0.68
27.00 - 27.99 0.66
28.00 - 28.99 0.64
29.00 - 29.99 0.62
$30.00 or more 0.60
</TABLE>
The term "Market Price" means (i) during the first 20 consecutive days in
which the Common Stock is traded after the closing of the Offering, the
initial public offering price and (ii) thereafter, the average closing price
for a share of Common Stock as reported by The Wall Street Journal (West Coast
Edition) for 20 consecutive trading days immediately preceding the date as of
which conversion occurs.
Upon consummation of the Offering, 4,000,000 shares of undesignated
preferred stock will be authorized. The Board of Directors has the authority,
subject to certain rights of the Series A-1, Series A-2 and Series A-3
Preferred Stock and without further action by the stockholders, to issue
shares of preferred stock from time to time in one or more series and to fix
the number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and purchase funds and other matters. The
issuance of additional preferred stock could decrease the amount of earnings
and assets available for distribution to holders of Common Stock or adversely
affect the rights and powers, including voting rights, of the holders of
Common Stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of preferred stock other than in connection with the Recapitalization.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement between the Company and the
holders of the Preferred Stock (the "Registration Rights Agreement"), until
expiration of the Rule 144 Period (as defined below), if the Company proposes
to register any of its securities, it will use its best efforts to include in
such registration Common Stock acquired by the holders of Preferred Stock upon
conversion of the Preferred Stock. The registration rights granted to the
holders of Preferred Stock do not apply to certain transactions, including the
Offering, registrations relating solely to employee benefit plans, a corporate
reorganization, reclassification, merger, consolidation or acquisition or a
registration that does not permit secondary sales. The "Rule 144 Period" means
the period beginning at the date of this Prospectus and continuing until the
Common Stock acquired on conversion of the Preferred Stock is no longer
subject to the volume limitation provisions of Rule 144 of the Securities Act,
either pursuant to the provisions of the Registration Rights Agreement or by
operation of law.
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THE RECAPITALIZATION
The Company has obtained stockholder approval for the Recapitalization
pursuant to which, among other things, the Company's Certificate of
Incorporation and Bylaws will be amended. The Company's Certificate of
Incorporation which was in effect prior to the Offering will be amended to
effect the following changes, among others: (i) change the name of the Company
from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group,
Inc., (ii) provide for (A) the automatic conversion, concurrently with the
consummation of the Offering, of the Class B-1 common stock and Class B-2
common stock (which will be replaced on a one-for-one basis with Common
Stock), the Class C-1 common stock (which will be replaced with Common Stock
determined according to the formula set forth below) and each existing series
of preferred stock (which will be replaced on a one-for-one basis with
corresponding new series of preferred stock, respectively), and (B) the Common
Stock as the only class of common stock of the Company following the closing
of the Offering, (iii) provide for the elimination of Class C-R common stock
and Class J common stock (the outstanding shares of which will be repurchased
for $0.01 per share or an aggregate of $8,000), (iv) provide for an increase
in the total number of shares of capital stock which the Company is authorized
to issue from 27,200,002 to 108,000,000 and an increase in the number of
shares of common stock (which will be comprised of the Common Stock) which the
Company is authorized to issue from 19,200,002 to 100,000,000, (v) provide
that the Common Stock and the Series A-1 and Series A-2 Preferred Stock will
vote together as a class for directors and on other matters, except where a
separate class vote is required by law and except with respect to any changes
in any of the rights, preferences or privileges of the Preferred Stock (for
which the holders of a majority of all series of Preferred Stock voting as a
single class is required), and (vi) eliminate super majority and cumulative
voting by stockholders. Each share of C-1 common stock will be converted into
a number of shares of Common Stock equal to (i) the greater of the initial
public offering price per share and $22.00, minus $10.00 divided by (ii) the
greater of the initial public offering price per share and $22.00.
Also as part of the Recapitalization, the Company's By-Laws will be amended
to, among other things, (i) eliminate the requirement of supermajority
stockholder approval to amend or repeal existing ByLaws, so that the ByLaws
may be amended by a majority vote of the directors or a majority vote of the
stockholders entitled to vote and (ii) eliminate the Operating Committee (the
powers and authority of which were not clearly delineated) and grant to the
Executive Committee and other committees of the Board of Directors the power
to take such actions as may be authorized by resolution of the Board of
Directors, consistent with the limitations of the Delaware Law, and (iii)
modify certain requirements for the calling of meetings of the Board of
Directors.
DELAWARE ANTI-TAKEOVER LAW
Following the consummation of the Offering, the Company will be subject to
the "business combination" statute of the Delaware General Corporation Law
(Section 203). In general, such statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) such
transaction is approved by the board of directors prior to the date the
interested stockholder obtains such status, (ii) upon consummation of such
transaction, the "interested stockholder" beneficially owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" includes mergers, asset sales and other
transactions resulting in financial benefit to the "interested stockholder."
An "interested stockholder" is a person who together with affiliates and
associates owns (or within three years, did own) beneficially 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
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THE COMPANY'S CREDIT AGREEMENTS
Senior Secured Debt Repayment and Amendments
After the consummation of the Offering, approximately $70.5 million of
indebtedness ("Term Debt"), including $18 million of indebtedness secured by
certain mortgages (the "Mortgage Debt"), will be outstanding under the
Company's Senior Secured Credit Agreement. The Senior Secured Credit Agreement
also provides for a $20 million revolving credit facility ("Revolving Credit
Facility A") and an additional $10 million revolving credit facility
("Revolving Credit Facility B"). No indebtedness is expected to be outstanding
under Revolving Credit Facility A or Revolving Credit Facility B immediately
after completion of the Offering. The Company has reached an agreement in
principle to amend and restate the Senior Secured Credit Agreement. It is
anticipated that, pursuant to such amendment the terms and conditions of the
Senior Secured Credit Agreement will be substantially as described below. All
indebtedness outstanding under the Senior Secured Credit Agreement other than
that outstanding under Revolving Credit Facility B will bear interest at a
rate equal to, at the Company's option, LIBOR plus 250 basis points or the
prime rate plus 150 basis points. Amounts outstanding on Revolving Credit
Facility B will bear interest at a rate equal to, at the Company's option,
LIBOR plus 300 basis points or the prime rate plus 200 basis points. Principal
payments of $2.625 million each will be due quarterly, commencing March 31,
1997, with final payment of $2.8 million on March 31, 2001. The availability
period of Revolving Credit Facility A ends December 31, 2001.As proposed,
effective upon completion of the Offering, Revolving Credit Facility B will be
converted into a facility for acquisitions. As proposed, principal payments on
amounts outstanding under such facility will be paid quarterly at the rate of
5% of the outstanding balance. All amounts of principal which are prepaid may
be reborrowed until the December 31, 1999 expiration date of the facility. The
Company has begun discussions to increase Revolving Credit Facility B from $10
million to $20 million sometime in 1997 and to extend the due date until
December 31, 2001.
Subject to certain exceptions and limitations, the Company will be obligated
to make prepayments in respect of indebtedness outstanding under the Senior
Secured Credit Agreement equal to (a) 100% of the net cash proceeds from any
sale or other disposition of assets resulting in aggregate consideration in
excess of $1 million in any twelve-month period, or (b) 25% of the net cash
proceeds from a sale of the Company's capital stock. In general, prepayments
are applied first to Term Debt (other than the Mortgage Debt) and then to
indebtedness outstanding under Revolving Credit Facility A and Revolving
Credit Facility B, pro rata according to the respective principal amounts then
outstanding thereunder, and then to the Mortgage Debt. A prepayment required
to be made as a result of the sale of real property which secures the Mortgage
Debt is applied, first, to Mortgage Debt, next to other Term Debt, and,
finally, to indebtedness outstanding under Revolving Credit Facility A and
Revolving Credit Facility B, pro rata according to the respective principal
amounts then outstanding thereunder. All of the foregoing prepayments in
respect of Revolving Credit Facility A and Revolving Credit Facility B
permanently reduce the amount available under the respective revolving credit
facility by the amount of the prepayment.
The obligations of the Company under the Senior Secured Credit Agreement are
secured by substantially all of the assets of the Company and its
subsidiaries, including cash, accounts receivable, equipment, intellectual
property, and real property.
The Senior Secured Credit Agreement, as amended, will contain certain
financial tests which the Company is obligated to satisfy. These tests include
a leverage ratio, an interest coverage ratio, a fixed charges coverage ratio,
and a senior loan debt service coverage ratio. The Senior Secured Credit
Agreement will also contain a number of affirmative and negative covenants
covering such matters as maintenance of corporate existence, payment of taxes,
maintenance of properties, maintenance of insurance, the granting or existence
of certain liens, incurrence of additional indebtedness, payment of dividends,
investments, capital expenditures, sales or other dispositions of property,
payments in respect of subordinated debt, and compliance with ERISA.
The financial and other covenants in the Senior Secured Credit Agreement may
prevent the Company from carrying out a transaction or taking other action
otherwise determined by the Board of Directors to be in the
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<PAGE>
Company's best interests. For example, the covenant regarding limitations on
incurrence of indebtedness or regarding limitations on liens may preclude the
Company and its subsidiaries from making an acquisition (whether by merger or
in some other form). Although the Company would intend to seek a waiver or
modification of these covenants under appropriate circumstances, there can be
no assurance that the Company will be able to obtain such a waiver or
modification upon terms and conditions acceptable to the Company on a timely
basis, or at all. As a result, the covenants in the Senior Secured Credit
Agreement may effectively preclude the Company from pursuing its strategy of
growth through acquisitions or delay the Company's ability to carry out that
strategy.
The Senior Secured Credit Agreement will contain a number of events of
default (each an "Event of Default"), including, without limitation, failure
to make required payments or prepayments of principal or interest, breach of
covenant, breach of a representation or warranty in a material respect,
default in respect of other indebtedness in excess of $500,000, insolvency of
the Company or any of its subsidiaries, failure to discharge or pay or obtain
a stay in respect of a judgment in excess of $100,000, certain events relating
to ERISA involving a liability or payment in excess of $100,000, a change of
control, as defined below, and a material adverse change in the business,
assets, prospects, results of operation or the financial condition of the
Company or of the Company and its subsidiaries taken as a whole. Change of
control is defined under the Senior Secured Credit Agreement as (i) the
acquisition, by any person (other than the Company's Capital Accumulation
Plan), of more than 25% of the total voting power of all classes of the
Company's equity securities (excluding the acquisition by the Underwriters of
Common Stock in the Offering) or (ii) a change in the board of directors of
the Company such that board members at the beginning of any one year period no
longer constitute a majority of the board at the end of such period, or (iii)
the Company ceases to own 100% of the outstanding common stock of the
Company's primary operating subsidiary. Upon the occurrence of an Event of
Default (other than an Event of Default relating to insolvency), the lenders
under the Senior Secured Credit Agreement have the right, in addition to other
available remedies, to terminate the revolving credit facilities, to declare
all indebtedness outstanding thereunder immediately due and payable, and to
thereafter pursue applicable remedies against any and all collateral securing
payment of such indebtedness.
Senior Subordinated Debt Amendments
After the consummation of the Offering, approximately $62.0 million of
indebtedness will be outstanding under the Company's Senior Subordinated
Credit Agreement. The Company has reached an agreement in principle to amend
and restate the Senior Subordinated Credit Agreement and anticipates that as
so amended such credit agreement will contain financial and other covenants no
more restrictive than those under the Senior Secured Credit Agreement.
Interest on the senior subordinated debt, will be LIBOR plus 125 basis points
from the Offering through December 31, 1998, LIBOR plus 200 basis points
during 1999, LIBOR plus 300 basis points during 2000 and LIBOR plus 400 basis
points during 2001 and beyond. Interest in excess of LIBOR plus 125 basis
points will be deferred and added to principal until the final maturity date.
The principal outstanding under the Senior Subordinated Credit Agreement will
be due and payable in full on July 23, 2002 and may not be prepaid while any
amount is unpaid under the Senior Secured Credit Agreement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no active public market for the Common
Stock of the Company. Although the Common Stock has been approved for listing
on the Nasdaq National Market, no predictions can be made regarding the
effect, if any, that market sales of shares or the availability of shares for
sale will have on the market price prevailing from time to time. As described
below, only a limited number of shares will be
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<PAGE>
available for sale shortly after the Offering due to certain contractual and
legal restrictions on resale. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price.
Upon consummation of the Offering, the Company will have outstanding
13,266,171 shares of Common Stock, of which 6,667,264 shares of Common Stock
will be freely tradable without restriction.
The Company's directors, executive officers and certain stockholders, who
collectively hold an aggregate of 7,057,948 shares of Common Stock (including
shares represented by exercisable stock options), have agreed subject to
certain exceptions that they will not directly or indirectly (i) sell, grant
any option to purchase or otherwise transfer or dispose of any Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock or
file a registration statement under the Securities Act with respect to the
foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated for a period of 180 days from the date of this
Prospectus (the "Lockup Period"). Following the expiration of the Lockup
Period, approximately 2,256,152 shares of Common Stock, including shares
issuable upon the exercise of certain options, will be available for sale in
the public market subject to compliance with Rule 144, including approximately
2,299,017 shares eligible for the sale under Rule 144(k). See "Underwriting."
Holders of the Company's 4,000,000 shares of outstanding Preferred Stock
have the right to convert such shares into Common Stock after the date of the
Offering at a conversion ratio ranging from .60 to .78 shares of Common Stock
for each share of Preferred Stock, depending on the market price of the Common
Stock. The holders of the Preferred Stock have agreed not to sell Preferred
Stock or any shares of Common Stock they acquire upon such conversion for 180
days from the date of this Prospectus without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. Thereafter, for an
additional six months, such holders are contractually bound to sell such
shares only within the volume limitations of Rule 144 for sales made at a
price per share below the initial public offering price unless such sales are
pursuant to block trades which do not involve a broker's transaction executed
on any exchange or in the over-the-counter market. See "Description of Capital
Stock--Preferred Stock".
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a holder of Restricted Shares who beneficially owns shares that
were not acquired from the Company or an affiliate of the Company within the
previous two years, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 133,000 shares immediately
after the Offering, assuming no exercise of the Underwriters' over-allotment
option) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are subject
to certain requirements relating to manner of sale, notice and availability of
current public information about the Company. However, a person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of
the Company at any time during the 90 days immediately preceding the sale and
who owns beneficially Restricted Shares is entitled to sell such shares under
Rule 144(k) without regard to the limitations described above, provided that
at least three years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company. The Securities
and Exchange Commission has recently proposed reducing the initial Rule 144
holding period from two years to one year and the Rule 144(k) holding period
from three years to two years. There can be no assurance as to when or whether
such rule changes will be enacted. The foregoing is a summary of Rule 144 and
is not intended to be a complete description of it.
Pursuant to the Registration Rights Agreement, until expiration of the Rule
144 Period (as defined below), if the Company proposes to register any of its
securities, it will use its best efforts to include in such registration
Common Stock acquired by the holders of the Preferred Stock upon conversion of
the Preferred Stock. The registration rights granted to the holders of the
Preferred Stock do not apply to the Offering, registrations at the
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request of stockholders granted registration rights by the Company,
registrations relating to solely employee benefit plans, a corporate
reorganization, reclassification, merger, consolidation or acquisition or a
registration that does not permit secondary sales. The "Rule 144 Period" means
the period beginning at the date of this Prospectus and continuing until the
Common Stock acquired on conversion of the Preferred Stock is no longer
subject to the volume limitation provisions of Rule 144 of the Securities Act,
either pursuant to the provisions of the Registration Rights Agreement or
operation of law.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and each of the Underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters agreed to purchase from the
Company, the number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Montgomery Securities.............................................
---------
Total........................................................ 4,347,000
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery Securities
are acting as representatives (the "Representatives") of the Underwriters.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, a discount
not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price, concession and discount
may be changed.
The Company has granted the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to an aggregate of
652,050 additional shares of Common Stock to cover over-allotments, if any, at
the initial public offering price set forth on the cover of this Prospectus
less the underwriting discount. If the Underwriters exercise this option, each
of the Underwriters will be obligated, subject to certain conditions, to
purchase the number of shares of Common Stock proportionate to such
Underwriter's initial amount reflected in the foregoing table.
The Company's executive officers, directors and certain other stockholders
of the Company, who collectively hold in the aggregate approximately 7,057,948
shares of Common Stock (including shares represented by exercisable stock
options and shares issuable upon conversion of the Preferred Stock), and the
Company have agreed, subject to certain exceptions, not to, directly or
indirectly, (i) sell, grant any option to purchase or otherwise transfer or
dispose of any Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock or file a registration statement under the
Securities Act with respect to the foregoing or (ii) enter into any swap or
other agreement or transaction that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock, for a period of 180
days from the date of this Prospectus.
Prior to the Offering, there has been no established public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations by and among the Representatives and the
Company. Among the factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, will be the
Company's historical performance, capital structure, estimates of the business
potential and earnings prospects of the Company, an assessment of the
Company's management, and the consideration of the above factors in relation
to market valuations of companies in related businesses.
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<PAGE>
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison &
Sutro LLP, San Francisco, California and for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements and related schedules of (i) the
Company as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995 and (ii) L.J. Melody as of December 31,
1995 and for the year then ended and L.J. Melody & Company of California as of
December 31, 1995 and for year then ended, in each case included in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The financial statements and related schedules of Westmark Realty Advisors
L.L.C. (formerly Westmark Realty Advisors, a partnership) as of December 31,
1994 and 1993, included in this Prospectus have been audited by KPMG Peat
Marwick LLP.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect
to the Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete; with respect to each such contract or document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the Commission.
Additionally, the Company is subject to the public reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and thus
files with the Commission periodic reports pursuant to Section 13(d) and proxy
statements pursuant to Section 14 of the Exchange Act. These filings may also
be inspected at or obtained from the Commission. In addition, the Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission through the
Electronic Data Gathering, Analysis and Retrieval System.
The Company furnishes its stockholders with annual reports containing
financial statements audited by independent certified public accountants and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
73
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma balance sheet as of June 30, 1996 and
statements of operations for the nine months ended September 30, 1996 and for
the year ended December 31, 1995 ("the pro forma financial statements") give
effect to (i) the acquisitions of Westmark Realty Advisors L.L.C., a Delaware
limited liability company ("Westmark"), L.J. Melody & Company, a Texas
corporation, and L.J. Melody & Company of California, a Texas corporation
(together, "L.J. Melody"), by CB Commercial Holdings, Inc. and Subsidiaries
("CB Commercial") (together with Westmark and L.J. Melody, the "Company") and
the Offering and the Recapitalization as if all transactions occurred as of
January 1, 1995 in the pro forma combined statement of operations and (ii) the
Offering and the Recapitalization as if they occurred as of September 30, 1996
in the pro forma combined balance sheet. See "Description of Capital Stock--
The Recapitalization." The pro forma financial statements also reflect the
effects of the financing obtained to conclude the acquisitions, as well as
certain other related assumptions.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes are reasonable. The
acquisitions have been accounted for by the Company as purchases. The
adjustments included in the pro forma financial statements represent the
effects of the Company's preliminary determination and allocation of the
purchase price to the fair value of the assets and liabilities acquired, based
upon currently available information. There can be no assurance that the
actual effects will not differ significantly from the pro forma adjustments
reflected in the pro forma financial statements.
The pro forma financial statements are not necessarily indicative of either
future results of operations or results that might have been achieved if the
transactions had been consummated as of the dates indicated. The pro forma
financial statements should be read in conjunction with the historical
consolidated financial statements and footnotes of CB Commercial, Westmark,
and L.J. Melody.
P-1
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CB COMMERCIAL ADJUSTMENTS OFFERING
------------- ----------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............. $ 24,903 $ 1,599 (c) $ 26,502
Receivables, net...................... 30,741 -- 30,741
Deferred taxes........................ 3,983 -- 3,983
Prepaid expense and other............. 7,498 -- 7,498
--------- -------- ---------
Total current assets................ 67,125 1,599 68,724
Property and equipment, net............. 41,795 -- 41,795
Other intangibles, net.................. 12,138 (1,639)(a) 10,499
Goodwill, net........................... 62,999 -- 62,999
Inventoried property.................... 7,355 -- 7,355
Deferred tax asset...................... 34,562 16,300 (b) 50,862
Other assets, net....................... 6,601 -- 6,601
--------- -------- ---------
Total assets........................ $ 232,575 $ 16,260 $ 248,835
========= ======== =========
Current Liabilities:
Compensation and employee benefits.... $ 28,489 $ -- $ 28,489
Accounts payable and accrued expenses. 17,931 -- 17,931
Senior revolving credit lines......... 8,000 -- 8,000
Reserve for bonus and profit sharing.. 11,292 -- 11,292
Current maturities of long-term debt.. 16,541 -- 16,541
Current portion of capital lease obli-
gations.............................. 2,669 -- 2,669
--------- -------- ---------
Total current liabilities........... 84,922 -- 84,922
--------- -------- ---------
Long-term debt, less current maturities
Senior term loans..................... 142,101 (79,911)(c) 62,190
Senior subordinated term loans........ 78,462 (8,962)(c) 69,500
Inventoried property loan............. 7,470 -- 7,470
Other long-term debt.................. 3,953 -- 3,953
--------- -------- ---------
Total long-term debt................ 231,986 (88,873) 143,113
--------- -------- ---------
Other long-term liabilities............. 22,561 -- 22,561
--------- -------- ---------
Total liabilities................... 339,469 (88,873) 250,596
--------- -------- ---------
Stockholders' Equity (Deficit)
Preferred stock, $.01 par value....... 40 -- 40
Common stock, $.01 par value.......... 101 32 (c) 133
Common stock options outstanding...... 259 -- 259
Additional paid-in capital............ 117,567 90,440 (c) 208,007
Notes receivable from sale of stock... (5,109) -- (5,109)
Accumulated deficit................... (219,752) 16,300 (b) (205,091)
(1,639)(a)
--------- -------- ---------
Total stockholders' equity (defi-
cit)............................... (106,894) 105,133 (1,761)
--------- -------- ---------
Total liabilities and stockholders'
equity (deficit)................... $ 232,575 $ 16,260 $ 248,835
========= ======== =========
</TABLE>
- -------
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(a) Reflects pro-rata write-off of unamortized debt costs related to the
portion of debt to be extinguished.
(b) Reflects deferred tax asset that will be recognized as a result of the
Offering due to reduced interest expense as a result of the repayment, in
part, of the Company's senior secured indebtedness.
(c) Reflects the Offering, net of estimated underwriting discount and Offering
expenses, and use of proceeds from the Offering to repay, in part, the
Company's senior secured indebtedness.
P-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
L.J.
MELODY
CB COMMERCIAL SIX MONTHS PRO FORMA PRO FORMA
NINE MONTHS ENDED ENDED ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
SEPTEMBER 30, JUNE 30, ----------- ACQUISITION ----------- ACQUISITION
1996 1996 ACQUISITION ONLY OFFERING AND OFFERING
----------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 390,863 $ 3,417 $ -- $ 394,280 $ -- $ 394,280
Costs and Expenses:
Commissions, fees and
other incentives ..... 195,465 3,612 (1,070)(a) 198,240 -- 198,240
233 (b)
Operating,
administrative and
other................. 159,196 1,545 -- 160,741 -- 160,741
Depreciation and amor-
tization ............. 9,749 163 355 (c) 10,267 10,267
---------- ------- ------- ---------- ------- ----------
Operating income (loss). 26,453 (1,903) 482 25,032 -- 25,032
Interest income......... 1,035 145 -- 1,180 -- 1,180
Interest expense........ 17,883 -- 216 (d) 18,099 (5,126)(f) 13,672
(479)(g)
1,178 (h)
---------- ------- ------- ---------- ------- ----------
Income (loss) before
provision (benefit) for
income tax............. 9,605 (1,758) 266 8,113 4,427 12,540
---------- ------- ------- ---------- ------- ----------
Provision (benefit) for
income tax ............ 4,610 -- (287)(e) 4,323 1,771 (i) 6,094
Reduction of valuation
allowances............. (40,400) -- -- (40,400) -- (40,400)
---------- ------- ------- ---------- ------- ----------
Net provision (benefit)
for income tax......... (35,790) -- (287) (36,077) 1,771 (34,306)
---------- ------- ------- ---------- ------- ----------
Net income (loss)....... $ 45,395 $(1,758) $ 553 $ 44,190 $ 2,656 $ 46,846
========== ======= ======= ========== ======= ==========
Per share data:
Net income per common
and common equivalent
share outstanding..... $ 3.29 $ 3.20 $ 3.37
========== ========== ==========
Weighted average common
and common equivalent
shares outstanding
(j)................... 13,815,434 13,815,434 13,006,876
========== ========== ==========
</TABLE>
- -------
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
ACQUISITION:
(a) Reflects the reversal of an accrual for a one-time acquisition related
bonus to L.J. Melody employees prior to the acquisition.
(b) Reflects additional compensation expense attributable to Lawrence J.
Melody's employment.
(c) Reflects the amortization of net $9.0 million in intangible assets and
goodwill. Amortization period is 30 years.
(d) Reflects interest on acquisition financing.
(e) Reflects deferred tax benefit of certain pro forma adjustments relating to
L.J. Melody purchase accounting entries, consisting of additional
compensation expense, interest expense and amortization of intangible
assets.
OFFERING:
(f) Reflects interest expense savings resulting from the repayment of $88.9
million of the total indebtedness, bearing interest estimated at 8.2% for
senior secured debt and 6.2% for senior subordinated debt. Debt paydown
results from the net proceeds of the Offering.
(g) Represents reduction in amortization expense for portion of unamortized
debt costs written off.
(h) Reflects the additional interest expense resulting from the higher interest
rate on senior subordinated indebtedness after the Offering.
(i) Represents tax effect of income and expenses from Offering adjustments.
P-3
<PAGE>
(j) Reflects the effect of the Recapitalization as follows:
<TABLE>
<S> <C>
Weighted average common and common equivalent shares--histori-
cal........................................................... 13,815,434
Remove the Preferred Stock which will not be a common stock
equivalent after the Offering................................. (4,000,000)
Net reduction in shares of common stock resulting from the con-
version of Class C-1 stock.................................... (355,556)
Reduction in shares of common stock resulting from the repur-
chase of Class C-R and Class J stock.......................... (800,002)
Shares issued in the Offering.................................. 4,347,000
----------
Weighted average common and common equivalent shares--pro
forma......................................................... 13,006,876
==========
</TABLE>
P-4
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
WESTMARK
CB COMMERCIAL SIX MONTHS L.J. MELODY PRO FORMA PRO FORMA
YEAR ENDED ENDED YEAR ENDED ADJUSTMENTS-- ADJUSTMENTS--
DECEMBER 31, JUNE 30, DECEMBER 31, ------------- PRO FORMA ------------- PRO FORMA
1995 1995 1995 ACQUISITIONS ACQUISITIONS OFFERING COMBINED
------------- ---------- ------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 468,460 $10,887 $10,337 $ -- $ 489,684 $ -- $ 489,684
Costs and Expenses:
Commissions, fees and
other incentives...... 239,018 -- 6,546 -- 245,564 -- 245,564
Operating,
administrative and
other................. 187,968 9,285 2,393 50 (a) 200,341 -- 200,341
178 (b)
467 (c)
Depreciation and
amortization.......... 11,631 163 438 17 (d) 14,502 14,502
2,253 (e)
----------- ------- ------- ------- ----------- ------- -----------
Operating income........ 29,843 1,439 960 (2,965) 29,277 -- 29,277
Interest income......... 1,674 36 216 -- 1,926 -- 1,926
Interest expense........ 23,267 19 -- 2,794 (f) 26,080 (6,834)(i) 20,177
1,570 (j)
(639)(k)
----------- ------- ------- ------- ----------- ------- -----------
Income (loss) before
provision (benefit) for
income tax............. 8,250 1,456 1,176 (5,759) 5,123 5,903 11,026
Provision (benefit) for
income tax............. 841 -- -- 2 (g) 220 2,361 (l) 2,581
(623)(h)
----------- ------- ------- ------- ----------- ------- -----------
Net income (loss)....... $ 7,409 $ 1,456 $ 1,176 $(5,138) $ 4,903 $ 3,542 $ 8,445
=========== ======= ======= ======= =========== ======= ===========
Per share data:
Net income per common
and common equivalent
share outstanding..... $ 0.56 $ 0.37 $ 0.35
=========== =========== ===========
Weighted average common
and common equivalent
shares outstanding.... 13,168,975 13,168,975 12,605,879(m)
=========== =========== ===========
</TABLE>
- -------
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
ACQUISITIONS:
(a) Reflects elimination of Westmark's historical amortization of deferred
leasing concessions (free rent).
(b) Reflects increased compensation resulting from new employment agreements
with certain Westmark executives, and the straight-lining of rents from
the date of the Westmark acquisition.
(c) Reflects additional compensation expense relating to Lawrence J. Melody's
employment.
(d) Reflects increase in depreciation expense associated with reducing the
useful life of Westmark's computers from 5 to 3 years.
(e) Reflects the amortization of $41.4 million (Westmark) and net $9.0 million
(L.J. Melody) in intangible assets and goodwill. Amortization expense is
$1.5 million for Westmark and $0.7 million for L.J. Melody.
(f) Reflects interest on acquisition financing ($2.3 million for Westmark and
$0.5 million for L.J. Melody).
(g) Reflects the additional minimum tax resulting from combined operations of
Westmark.
(h) Reflects deferred tax benefit of certain pro forma adjustments relating to
L.J. Melody purchase accounting entries, consisting of additional
compensation expense, interest expense and amortization of intangible
assets.
P-5
<PAGE>
OFFERING:
(i) Reflects interest expense savings resulting from the repayment of $88.9
million of the total indebtedness, bearing interest estimated at 8.2% for
the senior secured debt and 6.2% for senior subordinated debt, from
Offering proceeds.
(j) Reflects additional interest expense resulting from the higher interest
rate on senior subordinated indebtedness after the Offering.
(k) Represents reduction in amortization expense for portion of unamortized
debt costs written off.
(l) Represents tax effect of income and expenses from Offering adjustments.
(m) Reflects the effect of the Recapitalization as follows:
<TABLE>
<S> <C>
Weighted average common and common equivalent shares--histori-
cal........................................................... 13,414,437
Remove the Preferred Stock which will not be a common stock
equivalent after the Offering................................. (4,000,000)
Net reduction in shares of common stock resulting from the con-
version of
Class C-1 stock............................................... (355,556)
Reduction in shares of common stock resulting from the repur-
chase of
Class C-R stock and Class J stock............................. (800,002)
Shares issued in the Offering.................................. 4,347,000
----------
Weighted average common and common equivalent shares--pro
forma......................................................... 12,605,879
==========
</TABLE>
P-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES (TO BE RENAMED CB COMMERCIAL
REAL ESTATE SERVICES GROUP, INC. EFFECTIVE UPON THE CONSUMMATION OF THE
OFFERING)
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of September 30, 1996 (Unaudited), Decem-
ber 31, 1995 and 1994.................................................. F-4
Consolidated Statements of Operations for the nine months ended
September 30, 1996 and 1995
(Unaudited) and for the years ended December 31, 1995, 1994 and 1993... F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 (Unaudited) and for the years ended
December 31, 1995, 1994 and 1993....................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the nine
months ended
September 30, 1996 and for the years ended December 31, 1995, 1994 and
1993................................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
WESTMARK REALTY ADVISORS
JUNE 30, 1995 AND 1994 (UNAUDITED)
Statements of Income for the six months ended June 30, 1995 and 1994.... F-24
Statements of Changes in Owners' Equity (Deficit) for the six months
ended June 30, 1995 and 1994........................................... F-25
Statements of Cash Flows for the six months ended June 30, 1995 and
1994................................................................... F-26
Notes to Financial Statements........................................... F-27
DECEMBER 31, 1994 AND 1993
Independent Auditors' Report............................................ F-29
Balance Sheets as of December 31, 1994 and 1993......................... F-30
Statements of Income for the years ended December 31, 1994 and 1993..... F-31
Statements of Changes in Partners' Capital for the years ended December
31, 1994 and 1993...................................................... F-32
Statements of Cash Flows for the years ended December 31, 1994 and 1993. F-33
Notes to Financial Statements........................................... F-34
L.J. MELODY & COMPANY
JUNE 30, 1996 (UNAUDITED)
Consolidated Balance Sheet as of June 30, 1996.......................... F-37
Consolidated Statement of Operations and Retained Earnings for the six
months ended June 30, 1996............................................. F-38
Consolidated Statement of Cash Flows for the six months ended June 30,
1996................................................................... F-39
Notes to Consolidated Financial Statements.............................. F-40
DECEMBER 31, 1995
Report of Independent Public Accountants................................ F-44
Consolidated Balance Sheet as of December 31, 1995...................... F-45
Consolidated Statement of Operations and Retained Earnings for the year
ended December 31, 1995................................................ F-46
Consolidated Statement of Cash Flows for the year ended December 31,
1995................................................................... F-47
Notes to Consolidated Financial Statements.............................. F-48
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
L.J. MELODY & COMPANY OF CALIFORNIA
JUNE 30, 1996 (UNAUDITED)
Balance Sheet as of June 30, 1996...................................... F-52
Statement of Operations for the six months ended June 30, 1996......... F-53
Statement of Shareholders' Equity for the six months ended June 30,
1996.................................................................. F-54
Statement of Cash Flows for the six months ended June 30, 1996......... F-55
Notes to Financial Statements.......................................... F-56
DECEMBER 31, 1995
Report of Independent Public Accountants............................... F-59
Balance Sheet as of December 31, 1995.................................. F-60
Statement of Operations for the year ended December 31, 1995........... F-61
Statement of Shareholders' Equity for the year ended December 31, 1995. F-62
Statement of Cash Flows for the year ended December 31, 1995........... F-63
Notes to Financial Statements.......................................... F-64
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CB Commercial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of CB
Commercial Holdings, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995, and 1994, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CB Commercial Holdings,
Inc. and subsidiaries as of December 31, 1995, and 1994, and the results of
their operations and their cash flows for the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Los Angeles, California Arthur Andersen LLP
January 31, 1996 (Except with respect to
the matters discussed in Notes 1, 2
and 13, as to which the date is November 1, 1996)
F-3
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................. $ 24,903 $ 23,045 $ 28,770
Receivables, less allowance of $3,959,
$4,400 and $4,544 for doubtful accounts
at September 30, 1996, December 31, 1995
and 1994, respectively................... 30,741 28,322 23,723
Deferred taxes............................ 3,983 765 --
Prepaid expenses and other................ 7,498 4,889 3,682
--------- --------- ---------
Total current assets..................... 67,125 57,021 56,175
Property and equipment, net................ 41,795 44,500 47,140
Goodwill, net of accumulated amortization
of $6,949, $5,194 and $3,672 at September
30, 1996, December 31, 1995 and 1994...... 62,999 59,491 22,251
Other intangible assets, net of accumulated
amortization of $251,690, $249,726 and
$245,722 at September 30, 1995 and 1994... 12,138 10,783 6,192
Inventoried property....................... 7,355 7,355 7,355
Deferred taxes............................. 34,562 -- --
Other assets, net.......................... 6,601 11,804 10,987
--------- --------- ---------
Total assets............................. $ 232,575 $ 190,954 $ 150,100
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Compensation and employee benefits........ $ 28,489 $ 28,324 $ 26,989
Accounts payable and accrued expenses..... 17,931 19,245 19,429
Senior revolving credit lines............. 8,000 -- --
Reserve for bonus and profit sharing...... 11,292 12,997 11,573
Current maturities of long-term debt...... 16,541 8,250 4,500
Current portion of capital lease obliga-
tions.................................... 2,669 2,592 1,493
--------- --------- ---------
Total current liabilities................ 84,922 71,408 63,984
--------- --------- ---------
Long-term debt, less current maturities:
Senior term loans......................... 142,101 160,394 160,390
Senior subordinated term loans............ 78,462 78,963 63,694
Inventoried property loan................. 7,470 7,470 7,470
Other long-term debt...................... 3,953 3,315 2,017
--------- --------- ---------
Total long-term debt..................... 231,986 250,142 233,571
--------- --------- ---------
Other long-term liabilities................ 22,561 24,092 17,093
--------- --------- ---------
Total liabilities........................ 339,469 345,642 314,648
--------- --------- ---------
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value........... 40 40 40
Common stock, $.01 par value.............. 101 93 89
Common stock options outstanding.......... 259 263 294
Additional paid-in capital................ 117,567 110,063 107,708
Notes receivable from sale of stock....... (5,109) -- --
Accumulated deficit....................... (219,752) (265,147) (272,679)
--------- --------- ---------
Total stockholders' equity (deficit)..... (106,894) (154,688) (164,548)
--------- --------- ---------
Total liabilities and stockholders' eq-
uity (deficit).......................... $ 232,575 $ 190,954 $ 150,100
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................. $ 390,863 $ 324,890 $ 468,460 $ 428,988 $ 392,037
Costs and Expenses:
Commissions, fees and
other incentives...... 195,465 167,569 239,018 225,085 206,070
Operating, administra-
tive and other........ 159,196 134,839 187,968 170,234 160,073
Depreciation and amor-
tization.............. 9,749 8,173 11,631 8,091 49,606
---------- ---------- ---------- ---------- ----------
Operating income (loss). 26,453 14,309 29,843 25,578 (23,712)
Interest income......... 1,035 1,228 1,674 1,109 915
Interest expense........ 17,883 16,944 23,267 17,362 14,240
---------- ---------- ---------- ---------- ----------
Income (loss) before
provision for income
tax.................... 9,605 (1,407) 8,250 9,325 (37,037)
Provision for income tax
....................... 4,610 238 841 152 112
Reduction of valuation
allowances............. (40,400) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net provision (benefit)
for income tax......... (35,790) 238 841 152 112
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 45,395 $ (1,645) $ 7,409 $ 9,173 $ (37,149)
========== ========== ========== ========== ==========
Per share data:
Net income (loss) per
common and common
equivalent share
outstanding........... $ 3.29 $ (0.14) $ 0.55 $ 0.70 $ (3.26)
========== ========== ========== ========== ==========
Weighted average common
and common equivalent
shares outstanding.... 13,815,434 11,732,012 13,414,437 13,179,014 11,378,540
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------
1996 1995 1995 1994 1993
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ 45,395 $ (1,645) $ 7,409 $ 9,173 $(37,149)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and amorti-
zation excluding de-
ferred financing fees... 9,749 8,173 11,631 8,091 49,606
Amortization of deferred
financing costs......... 1,065 1,018 1,392 1,551 1,784
Equity interest in (earn-
ings) loss of unconsoli-
dated subsidiaries...... -- -- 180 (44) (35)
Provision for (reversal
of) doubtful accounts... (44) 71 306 696 3,525
Deferred interest........ 6,515 4,946 7,738 2,338 --
Deferred compensation.... 1,672 1,286 1,762 877 --
Deferred taxes........... (36,906) -- -- -- --
(Decrease) increase in re-
ceivables................ (2,242) (1,110) (1,778) 1,534 (6,319)
Decrease (increase) in
prepaid expenses and
other assets............. (158) 236 396 (885) 1,179
(Decrease) increase in
compensation and employee
benefits payable......... (147) (5,537) 3,276 7,222 5,841
(Decrease) increase in
other operating liabili-
ties..................... (729) (6,887) (1,680) 865 1,177
--------- --------- -------- -------- --------
Net cash provided by
(used in) operating ac-
tivities................ 24,170 551 30,632 31,418 19,609
--------- --------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment................ (2,302) (1,798) (2,143) (4,250) (4,841)
Proceeds from collections
on notes receivable...... 2,721 205 215 445 121
Disposition of property
and equipment............ 10 94 128 195 107
Acquisitions of businesses
including net assets ac-
quired, intangibles and
goodwill................. (8,625) (20,049) (22,376) -- --
Other investing activi-
ties, net................ (1,321) (412) (712) (255) (1,016)
--------- --------- -------- -------- --------
Net cash used in invest-
ing activities.......... (9,517) (21,960) (24,888) (3,865) (5,629)
--------- --------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from senior re-
volving credit line...... 21,000 14,000 14,000 11,000 9,038
Repayment of senior re-
volving credit line...... (13,000) (4,000) (14,000) (11,000) (23,038)
Repayment of senior term
loans.................... (18,233) (14,797) (18,997) (4,100) --
Proceeds from inventoried
property loan............ -- -- -- -- 270
Repayment of capital
leases................... (2,167) (1,524) (2,167) -- --
Proceeds from senior sub-
ordinated loan........... -- 10,000 10,000 -- --
Other financing activi-
ties, net................ (395) (198) (305) (823) (932)
--------- --------- -------- -------- --------
Net cash provided by
(used in) financing ac-
tivities................ (12,795) 3,481 (11,469) (4,923) (14,662)
--------- --------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents. 1,858 (17,928) (5,725) 22,630 (682)
Cash and cash equivalents,
at beginning of period.... 23,045 28,770 28,770 6,140 6,822
--------- --------- -------- -------- --------
Cash and cash equivalents,
at end of period.......... $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140
========= ========= ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the pe-
riod for:
Interest (none capital-
ized)................... $ 11,677 $ 9,585 $ 14,410 $ 12,172 $ 12,610
Federal and state income
taxes................... $ 622 $ 364 $ 497 $ 152 $ 162
Non-cash investing and fi-
nancing activities:
Portion of Westmark ac-
quisition financed by
notes payable........... $ -- $ 20,283 $ 20,283 $ -- $ --
Portion of Melody acqui-
sition financed by notes
payable................. $ 3,667 $ -- $ -- $ -- $ --
Equipment acquired under
capital leases.......... $ 1,255 $ 2,658 $ 3,347 $ 4,569 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
PREFERRED COMMON OPTIONS PAID-IN FROM SALE ACCUMULATED
STOCK STOCK OUTSTANDING CAPITAL OF STOCK DEFICIT TOTAL
--------- ------ ------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... $ 40 $ 86 $260 $105,945 $ -- $(244,687) $(138,356)
Net loss............... -- -- -- -- -- (37,149) (37,149)
Common stock issued for
bonus and profit
sharing............... -- 2 -- 668 -- -- 670
Common stock options
granted............... -- -- 34 -- -- -- 34
Foreign currency
translation
adjustment............ -- -- -- -- -- (59) (59)
---- ---- ---- -------- ------- --------- ---------
Balance, December 31,
1993................... 40 88 294 106,613 -- (281,895) (174,860)
Net income............. -- -- -- -- -- 9,173 9,173
Common stock issued for
deferred compensation,
bonuses and profit
sharing............... -- 1 -- 1,095 -- -- 1,096
Foreign currency
translation
adjustment............ -- -- -- -- -- 43 43
---- ---- ---- -------- ------- --------- ---------
Balance, December 31,
1994................... 40 89 294 107,708 -- (272,679) (164,548)
Net income............. -- -- -- -- -- 7,409 7,409
Common stock issued for
deferred compensation. -- 4 -- 2,322 -- -- 2,326
Common stock options
exercised............. -- -- (31) 33 -- -- 2
Foreign currency
translation
adjustment............ -- -- -- -- -- 123 123
---- ---- ---- -------- ------- --------- ---------
Balance, December 31,
1995................... 40 93 263 110,063 -- (265,147) (154,688)
Net income (unaudited). -- -- -- -- -- 45,395 45,395
Common stock issued for
deferred compensation,
bonuses and profit
sharing (unaudited)... -- 8 -- 7,404 -- -- 7,412
Common stock options
exercised............. -- -- (4) 100 -- -- 96
Notes receivable from
sale of stock......... -- -- -- -- (5,109) -- (5,109)
---- ---- ---- -------- ------- --------- ---------
Balance, September 30,
1996
(unaudited)............ $ 40 $101 $259 $117,567 $(5,109) $(219,752) $(106,894)
==== ==== ==== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
1. ORGANIZATION AND ACQUISITIONS
ORGANIZATION. CB Commercial Holdings, Inc. ("CB Holdings") was organized to
acquire Coldwell Banker Commercial Group, Inc. and had no operations prior
to the acquisition on April 19, 1989 (the "Acquisition"). In 1991 Coldwell
Banker Commercial Group, Inc. was renamed CB Commercial Real Estate Group,
Inc. CB Holdings is a holding company that conducts its operations solely
through CB Commercial Real Estate Group, Inc. and its subsidiaries
(collectively, the "Company"). Concurrently with the closing of the
Offering (as defined), CB Holdings will be renamed CB Commercial Real
Estate Services Group, Inc. (see Note 13). The results of operations for
interim periods are not necessarily indicative of results for a full year.
NATURE OF OPERATIONS. The Company provides a full range of services to
commercial real estate tenants, owners, and investors including: (i)
brokerage (facilitating sales and leases), investment properties
(acquisitions and sales), corporate services, property management, and real
estate market research (collectively, "Property and User Services"), and
(ii) mortgage banking (loan origination and servicing), investment
management and advisory services and valuation and appraisal services
(collectively, "Investor Services"). The Company's diverse client base
includes local, national and multinational corporations, financial
institutions, pension funds and other tax exempt entities, local, state and
national governmental entities, and individuals.
ACQUISITIONS. On June 30, 1995, CB Commercial Real Estate Group, Inc.,
through a general partnership ("WREAP") in which it directly or indirectly
owns all of the partnership interests, acquired Westmark Realty Advisors
L.L.C. ("Westmark"). Westmark is a realty advisory business headquartered
in Los Angeles. The purchase price consisted of an aggregate initial
purchase price of $37.5 million plus $2.9 million in net liabilities
assumed and an additional $1 million in costs related to the Westmark
acquisition. Approximately $20.0 million of the $37.5 million is payable to
the sellers ("Westmark Senior Notes") over periods ranging from one to five
years. The sellers may also be entitled to a supplemental purchase price
based on the operating results of Westmark payable over a period of six
years and subject to a maximum aggregate payment of $18.0 million. The
supplemental purchase price will be recorded as additional goodwill, if and
when earned. As of December 31, 1995, approximately $0.9 million was earned
and was paid to the sellers on March 31, 1996. Approximately $17.5 million
of the purchase price was paid in cash using $7.5 million contributed to
WREAP by CB Commercial Real Estate Group, Inc. and $10.0 million of
proceeds from a senior subordinated loan ("Westmark Senior Subordinated
Loan") bearing interest at 20% per annum issued to WREAP, which is
nonrecourse to CB Commercial Real Estate Group, Inc. (except for a portion
of the interest payable). The interest is deferred until the Westmark
Senior Notes are paid or cash collateralized in full and is, therefore,
reflected as an increase in principal amounts.
The acquisition was accounted for as a purchase. The Company has allocated
approximately $6.9 million of the total purchase price of $41.4 million to
identifiable intangible assets acquired, consisting of asset management
contracts, employment agreements, and trade name and the remaining $34.5
million was recorded as goodwill. The intangibles will be amortized over
their estimated useful lives of 6 years, 5 years, and 10 years,
respectively. Based on the nature of the business, Westmark's market
position, its workforce and other factors, management estimates that the
goodwill resulting from this acquisition has a useful life of approximately
thirty years and will be amortized on a straight line basis over this
period. Based upon future experience, this useful life could be decreased.
In that event, the charge for intangibles and goodwill would be increased
and earnings decreased. (See Note 6).
F-8
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
On April 11, 1995, the Company acquired certain assets of Langdon Rieder, a
tenant advisory business. The purchase price consisted of a closing payment
of $1.5 million cash and a deferred payment of $1.9 million payable over
three years ($633,333 payable on each of January 2, 1997, 1998 and 1999),
plus interest on the entire outstanding portion of the deferred payment at
an annual rate of 8%. The deferred payment is subject to forfeiture under
certain circumstances. The purchase price has largely been allocated to
intangibles and goodwill, which will be amortized on a straight line basis
over their useful lives ranging from three to seven years.
The assets and liabilities of the acquired companies, along with the
related goodwill, intangibles and indebtedness, are reflected in the
accompanying consolidated financial statements as of December 31, 1995. The
results of operations of the acquired companies are included in the
consolidated results from the dates they were acquired, and were not
material to the Company's results for the year ended December 31, 1995. The
pro forma results of operations of the Company for the six months ended
June 30, 1995 and for the years ended December 31, 1995 and 1994, assuming
the acquisitions had occurred on January 1, 1994, would have been as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------
1995 1995 1994
----------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues.......................... $337,041 $ 481,057 $ 452,284
Net income (loss)................. (5,681) 4,824 4,092
Net income (loss) per common and
common equivalent share
outstanding...................... (.49) .37 .32
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements as of
September 30, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles and the requirements of Regulation S-X for
interim financial information. Accordingly, they do not include all of the
information required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation, have been included. Operating results for the nine
months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. The
Company provides for income taxes during interim periods based on the
estimated annual effective tax rate.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with an original maturity of less than three months.
F-9
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
INTANGIBLE ASSETS AND GOODWILL
The Company had approximately $214.0 million of intangible assets (other
than goodwill) arising from the Acquisition, comprised of a covenant not to
compete, a trademark, deferred financing costs and other items, which had
been substantially amortized through December 31, 1993 partly through
shortening of their estimated lives. The change in useful lives resulted in
a $16.5 million increase in depreciation and amortization in 1993. Of the
remaining intangibles of approximately $10.8 million at December 31, 1995,
approximately $4.8 million relates to deferred financing costs, and $6.0
million are intangibles stemming from the Westmark and Langdon Rieder
acquisitions. (See Note 1) Other intangible assets at September 30, 1996
include approximately $3.7 million of deferred financing costs and $8.5
million of intangibles stemming from the Westmark, Langdon Rieder and L.J.
Melody acquisitions.
Goodwill of $63.0 million and $59.5 million at September 30, 1996 and
December 31, 1995, respectively, consists of $21.1 million and $21.6
million, respectively, related to the Acquisition and $41.9 million and
$37.9 million, respectively, related to Westmark and other acquisitions.
Goodwill related to the Acquisition is being amortized over an estimated
useful life of 40 years. Goodwill related to the Westmark and other
acquisitions is being amortized over a useful life of 30 years.
The Company periodically evaluates the recoverability of the carrying
amounts of goodwill and other intangible assets. In this assessment the
Company considers the expected useful lives of its goodwill and intangibles
and the estimated future cash flows associated with these assets. If any of
the significant assumptions inherent in the estimated future cash flows
change in a material way due to market, economic and/or other factors, the
recoverability is assessed based on the revised assumptions, and any
resulting impairment would be recorded in the period such changes occur.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in unconsolidated subsidiaries in which the Company does not
have majority control are accounted for under the equity method. (See Note
4)
INCOME RECOGNITION
Real estate commissions on sales are recorded as income upon close of
escrow or upon transfer of title. Real estate commissions on leases are
generally recorded as income upon date of occupancy. Realty advisor
incentive fees are recognized when earned under the provisions of the
related advisory agreements. Other commissions and fees are recorded as
income at the time the related services have been performed unless
significant future contingencies exist.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities at the date of the financial statements and the reported
amounts of certain revenues and expenses during the reporting period.
Actual results could differ from those estimates. Management believes that
these estimates provide a reasonable basis for the fair presentation of its
financial condition and results of operations.
F-10
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
CERTAIN SIGNIFICANT ESTIMATES
DEFERRED TAXES. The Company has net deferred tax assets of approximately
$87.5 million at December 31, 1995 all of which has been reserved through a
valuation allowance. The valuation allowance is based on management's
conclusion regarding the realizability of this asset on a more likely than
not basis, as defined in SFAS No. 109. In reaching this conclusion
management considered the Company's past operating results, the current
year events and trends, including the impact if any, of the acquisitions
that were concluded during the year and other factors. Management will
continue to evaluate the appropriateness of all or part of this valuation
allowance on a periodic basis and if its conclusions change with respect to
realizability, any necessary adjustments will be made at that time. The
impact of these adjustments, if any, could be material to the Company's
financial statements. (See Note 9)
PER SHARE INFORMATION
Earnings per share is calculated based on weighted average common shares
and dilutive stock options outstanding. When the Company is in a net loss
position for a particular reporting period, the Class C-1 and Class C-R
shares, as well as the stock options outstanding, are excluded as they are
anti-dilutive. This may result in variations in the weighted average number
of shares outstanding between periods.
Weighted average common and common equivalent shares outstanding are
comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Preferred stock:
Series A-1............. 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Series A-2............. 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
Series A-3............. 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Common stock:
Class B-1.............. 1,854,113 1,850,000 1,850,034 1,850,000 1,850,000
Class B-2.............. 6,079,259 5,636,550 5,678,262 5,442,839 5,283,078
Class C-1.............. 800,000 -- 800,000 800,000 --
Class C-R.............. 800,000 -- 800,000 800,000 --
Promotional shares...... 245,462 245,462 245,462 245,462 245,462
Stock options:
Service Providers Plan. 36,600 -- 40,679 40,713 --
---------- ---------- ---------- ---------- ----------
13,815,434 11,732,012 13,414,437 13,179,014 11,378,540
========== ========== ========== ========== ==========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("'SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," SFAS No. 122, "Accounting for Mortgage
Servicing Rights" and SFAS No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996. These statements did not have a material
impact on the financial statements.
In June 1996 the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This
F-11
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
statement is required to be adopted by the Company in 1997. Management of
the Company has not yet determined the impact, if any, that the adoption of
this statement will have on the Company's financial position or results of
operations.
RESTATEMENT
Certain reclassifications, which do not have any effect on net income, have
been made to the 1994 and 1993 financial statements to conform to the 1995
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Land..................................................... $ 11,843 $ 11,843
Buildings and improvements............................... 26,553 26,646
Furniture and equipment.................................. 35,828 34,057
Equipment under capital leases........................... 7,916 4,569
-------- --------
82,140 77,115
Accumulated depreciation and amortization................ (37,640) (29,975)
-------- --------
Property and equipment, net.............................. $ 44,500 $ 47,140
======== ========
</TABLE>
The Company capitalizes expenditures that materially increase the life of
the related assets and charges the costs of maintenance and repairs to
expense. Upon sale or retirement, the costs and related accumulated
depreciation or amortization are eliminated from the respective accounts,
and the resulting gain or loss is included in income.
Depreciation is computed primarily using the straight-line method over
estimated useful lives ranging from 3 to 45 years. Leasehold improvements
are amortized over the term of the leases, excluding options to renew.
Equipment under capital leases is depreciated over the related term of the
leases.
4. OTHER ASSETS
Included in other assets at December 31, 1995 and 1994 are $1.7 million and
$2.4 million, respectively, of investments in limited partnerships managed
for a fee for institutional investors. The Company has a 1% general partner
interest in each of the limited partnerships which is accounted for under
the equity method. Although the Company is the general partner of each
limited partnership, it does not have majority control over investment
decisions in any of the limited partnerships. Management fee income from
the partnerships was approximately $11.0 million, $4.8 million and $5.7
million for the years ended December 31, 1995, 1994, and 1993,
respectively. The limited partnerships' total assets were approximately
$1.27 billion and $259.6 million and total liabilities were approximately
$162.4 million and $19.3 million as of December 31, 1995 and 1994,
respectively. The partnerships' net income (loss) for the years ended
December 31, 1995, 1994, and 1993 was approximately $22.0 million, $(18.3)
million and $2.5 million, respectively.
The general partner capital contributions for four of the partnerships are
in the form of unsecured notes payable totaling approximately $3.2 million
and $2.0 million at December 31, 1995 and 1994, respectively. (See Note 6)
F-12
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Also included in other assets are investments in four and five
unconsolidated commercial real estate broker subsidiaries as of December
31, 1995 and 1994, respectively: 25% interest in CB Commercial Real Estate
Group Canada Inc.; 40% interest in CB Comercial de Mexico, S.A. de C.V.;
19% interest in DTZ Leung Pte Ltd.; and 50% interest in CB
Commercial/Hampshire L.L.C. On August 31, 1995, the Company increased its
interest in CB Commercial Real Estate Group of Hawaii, Inc., from 35.04% to
76%, thus making it a consolidated subsidiary. Investments in and advances
to (from) unconsolidated subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
<S> <C> <C>
CB Commercial Real Estate Group Canada Inc................... $1,604 $1,523
CB Comercial de Mexico, S.A. de C.V.......................... (294) (221)
DTZ Leung Pte Ltd............................................ 210 --
CB Commercial/Hampshire L.L.C................................ 22 --
</TABLE>
Equity interest in earnings (losses) of the unconsolidated subsidiaries of
$180,000, $(44,000) and $35,000 for the years ended December 31, 1995, 1994
and 1993, respectively, have been included in "Operating, administrative
and other" on the Consolidated Statements of Operations.
In addition, included in other assets were notes receivable aggregating
$5.0 million and $5.2 million at December 31, 1995 and 1994, respectively.
During the second quarter of 1996, payment in full on the 9.0% note
totaling $2.7 million was received. The remaining 9.5% note has been
reclassified to current and is secured by a first mortgage lien on hotel
properties. Unpaid principal is due at maturity in July 1997.
5. EMPLOYEE BENEFIT PLANS
OPTION PLANS. One million shares of Class B-2 stock have been reserved for
issuance under the CB Commercial Holdings, Inc. 1990 Stock Option Plan.
Options for 1,000,000 shares, at an exercise price of $10 per share, were
granted pursuant to the plan and vest over one to four year periods,
expiring April 1999. Options for 960,000 Class B-2 shares were outstanding
as of December 31, 1995. Options for 920,000 Class B-2 shares were
outstanding as of September 30, 1996.
A total of 600,000 shares of Class B-1 stock have been reserved for
issuance under the CB Commercial Holdings, Inc. 1991 Service Providers
Stock Option Plan to enable the Company to pay certain service providers
with options to purchase shares of the Company's common stock instead of
with cash. In 1993 below market options were granted to certain directors
in partial payment of director fees. All options vested at grant date and
expire at various dates through October 2003. During 1995 options to
purchase 4,106 shares of Class B-1 stock were exercised. As of December 31,
1995, options to purchase 36,607 shares of Class B-1 stock are outstanding
at $262,500. As of September 30, 1996, options to purchase 36,140 shares of
Class B-1 stock are outstanding at $258,750.
A total of 90,750 shares of Class B-2 Common Stock have been reserved for
issuance under the L.J. Melody Acquisition Stock Option Plan, which was
adopted by the Board of Directors in September 1996. Options for all of
such shares have been issued at an exercise price of $10 per share and vest
over a period of five years at the rate of five percent per quarter.
Options for 90,750 shares of Class B-2 Common Stock are outstanding as of
September 30, 1996.
F-13
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STOCK PURCHASE PLAN. The Company has a restricted stock purchase plan
covering certain key employees including senior management. A total of
550,000 shares of Class B-2 stock have been reserved for issuance under the
1996 Equity Incentive Plan of CB Holdings. The shares may be issued to
senior executives for a purchase price equal to the greater of $10 per
share or fair market value. The purchase price for shares under this plan
must be paid either in cash or by delivery of a full recourse promissory
note. As of September 30, 1996, the Company issued 510,906 shares of Class
B-2 stock to certain key employees at $10 per share and received promissory
notes.
BONUSES. The Company has bonus programs covering certain key employees,
including senior management. Awards are based on the position and
performance of the employee and the achievement of pre-established
financial, operating and strategic objectives. The amounts charged to
expense for bonuses were $10.2 million, $10.3 million and $8.7 million for
the years ended December 31, 1995, 1994, and 1993, respectively.
CAPITAL ACCUMULATION PLAN (THE "CAP PLAN"). The Cap Plan is a defined
contribution profit sharing plan under Section 401(k) of the Internal
Revenue Code and is the Company's only such plan. Under the Cap Plan, each
participating employee may elect to defer a portion of his or her earnings
and the Company may make additional contributions from the Company's
current or accumulated net profits to the Cap Plan in such amounts as
determined by the Board of Directors. The Company expensed, in connection
with the Cap Plan, $1.0 million, $1.0 million and $0.9 million for the
years ended December 31, 1995, 1994, and 1993, respectively. (See Note 8)
DEFERRED COMPENSATION PLAN (THE "DCP"). In the last quarter of 1993, the
Company's Board of Directors approved the adoption and implementation of
the DCP effective January 1, 1994. Under the DCP, a select group of
management and highly compensated employees can defer the payment of all or
a portion of their compensation (including any bonus). The DCP permits
participating employees to make an irrevocable election at the beginning of
each year to receive amounts deferred at a future date either in cash,
which accrues at a rate of interest determined in accordance with the DCP
and is an unsecured long term liability of the Company, or in newly issued
shares of Class B-2 stock of the Company which elections are recorded as
additions to Stockholders' Equity. For the year ended December 31, 1995
approximately $0.7 million (including interest) and $1.1 million has been
deferred in cash and stock, respectively, all of which was charged to
expense in 1995. The accumulated deferrals as of December 31, 1995 were
approximately $1.0 million in cash (including interest) and $1.6 million in
stock for a total of $2.6 million. The accumulated deferrals at September
30, 1996 were approximately $1.5 million in cash (including interest) and
$2.8 million in stock, for a total of $4.3 million. Of the $2.8 million
deferred in stock, all but approximately $16,000, which will be issued in
the fourth quarter of 1996, have been issued in Class B-2 stock. (See Note
8)
F-14
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Senior Term Loans, with interest at variable rates based
on LIBOR plus 2.5% (7% and 6.98% weighted average at
December 31, 1995 and 1994, respectively)
Senior Term Loan due in quarterly installments of $1,500
commencing June 30, 1995, $2,250 commencing June 30,
1996, and $2,750 commencing June 30, 1997, with the
remaining balance due March 31, 1999................... $130,021 $146,820
Mortgage Term Loan due in full March 31, 1999............ 18,340 18,070
Westmark Senior Notes, with interest at 12%, $1 million
due January 2, 1997, $5,722 million due June 30, 1998,
with the remaining balance due June 30, 2000............ 20,283 --
Senior Subordinated Term Loan, with interest at LIBOR
plus .25% (6% and 6.5625% at December 31, 1995 and 1994,
respectively) due in full on July 23, 2000.............. 67,896 63,694
Westmark Senior Subordinated Loan, with interest at 20%,
due in full July 31, 2001............................... 11,067 --
Inventoried Property Loan, secured by inventoried
property, with interest at short-term commercial paper
borrowing rate plus 3.5% (9.37% and 8.5% at
December 31, 1995 and 1994, respectively) due in full
April 30, 1997.......................................... 7,470 7,470
Other Loans, secured by computer equipment with interest
at the prime rate plus .5% (9.25% at December 31, 1995). 164 --
Unsecured Notes Payable, with fixed interest ranging from
6% to 13% and variable interest at the higher of the
Applicable Federal Rate or Consumer Price Index plus 6%
(Note 4)................................................ 3,151 2,017
-------- --------
Total................................................... 258,392 238,071
Less current maturities................................. 8,250 4,500
-------- --------
$250,142 $233,571
======== ========
</TABLE>
Annual aggregate maturities of long-term debt as of December 31, 1995 are
as follows (in thousands): 1996--$8,250; 1997--$18,970; 1998--$16,722;
1999--$124,671; 2000--$75,561; and $14,218 thereafter.
The Company has two Senior Revolving Credit Lines of $10.0 million and
$20.0 million expiring in December 1996 and March 1999, respectively.
Commitment fees of 0.5% and 0.375% per annum are payable quarterly in
arrears on the unused portion of the lines. As of December 31, 1995, there
were no amounts outstanding under the lines. Up to $10.0 million of the
Senior Revolving Credit Lines may be used to secure letters of credit. As
of December 31, 1995, $1.0 million of letters of credit have been issued.
During 1994, the terms of the Senior Term Loans and Senior Subordinated
Term Loan were modified. Under the modified terms, the Company has the
right to invest a portion of its excess cash flow discretionarily and is
required to apply a portion of excess cash flow not available for
investments to the prepayment of principal. The other key provisions of the
debt modifications include: 1) lower scheduled principal payments on the
senior debt consisting of $1.5 million per quarter for four quarters,
commencing June 1995, increasing to $2.25 million for four quarters and
then increasing to $2.75 million per quarter until maturity; and 2)
interest on the senior secured indebtedness of LIBOR plus 2.5% and on the
senior
F-15
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
subordinated indebtedness of LIBOR plus 0.25%. A portion of the interest
payments on the Senior Term Loans is deferred until maturity. All of the
interest on the Senior Subordinated Term Loan is deferred until repayment
of the Senior Term Loans. Deferred interest amounts are included in the
reported outstanding principal balances. These interest rates are effective
through the maturity of both the senior and the subordinated debt, in 1999
and 2000, respectively.
The Senior Term Loans, Mortgage Term Loan and the Senior Revolving Credit
Lines are secured by substantially all of the personal and real property
assets of CB Commercial Real Estate Group, Inc. and its subsidiaries.
Collectively these loans are guaranteed by CB Commercial Real Estate Group,
Inc. and all the common stock of CB Commercial Real Estate Group, Inc. is
pledged to secure the guarantee. The Senior Subordinated Term Loan is
secured by a second priority lien on the common stock of CB Commercial Real
Estate Group, Inc.
The Senior Term Loan agreement contains numerous restrictive covenants
that, among other things, limit the Company's ability to incur or repay
other indebtedness, make advances or loans to subsidiaries and other
entities, make capital expenditures, incur liens, enter into mergers or
effect other fundamental corporate transactions, sell its assets, or
declare dividends. As of December 31, 1995, the Company did not have any
dividend payment capacity based on the terms of its loan covenants. In
addition, the Company is required to meet certain ratios relating to its
adjusted net worth, level of indebtedness, fixed charges and interest
coverage. The Company is in compliance with all covenants as of December
31, 1995.
The Company had an interest rate swap agreement on $50.0 million of its
Senior Subordinated Term Loan for the period from December 27, 1990 to
December 27, 1994 under which the Company made payments at the fixed rate
of 12.35% and received payments at a variable rate of LIBOR plus 4.0%.
During 1994, the net effect was to increase interest expense by
approximately 4.1 percentage points.
See Note 1 for indebtedness regarding the Westmark acquisition and Note 13
for contemplated amendments to the Company's long-term debt.
7. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. Management
believes that any liability that may result from disposition of these
lawsuits will not have a material effect on the consolidated financial
position or results of operations of the Company.
Future minimum rental commitments for noncancelable operating leases at
December 31, 1995 are as follows (in thousands): 1996--$18,767; 1997--
$15,781; 1998--$13,505; 1999--$10,822; 2000--$8,448; and $14,430
thereafter.
Future minimum lease commitments for noncancelable capital leases at
December 31, 1995 are as follows (in thousands): 1996--$2,820; 1997--
$2,044; 1998--$482; 1999--$30; and $0 thereafter. The interest portion of
these payments totals $362. Capital lease payments due within one year are
classified as current liabilities.
Substantially all leases require the Company to pay maintenance, insurance
and property taxes, and generally may be renewed for five year periods.
Total rental expense under noncancelable operating leases was $22.5
million, $21.3 million and $22.2 million for the years December 31, 1995,
1994, and 1993, respectively.
F-16
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
8. STOCKHOLDERS' EQUITY
Stockholders' equity by class of stock as of December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
VOTES SHARES ORIGINAL PURCHASE
PER SHARES ISSUED AND PRICE OF SHARES
SHARE AUTHORIZED OUTSTANDING OUTSTANDING
----- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Preferred stock:
Series A-1................... 2 2,000,000 1,000,000 $10,000,000
Series A-2................... 1 4,000,000 2,000,000 20,000,000
Series A-3................... -- 2,000,000 1,000,000 10,000,000
---------- --------- -----------
8,000,000 4,000,000 $40,000,000
========== ========= ===========
Common stock:
Class B-1.................... 1 4,000,000 1,854,106 $18,532,892
Class B-2.................... 1 12,000,000 5,836,142 55,483,519
Class C-1.................... -- 1,600,000 800,000 8,000
Class C-R.................... -- 1,600,000 800,000 8,000
Class J...................... -- 2 2 --
---------- --------- -----------
19,200,002 9,290,250 $74,032,411
========== ========= ===========
DECEMBER 31, 1994
Preferred stock:
Series A-1................... 2 2,000,000 1,000,000 $10,000,000
Series A-2................... 1 4,000,000 2,000,000 20,000,000
Series A-3................... -- 2,000,000 1,000,000 10,000,000
---------- --------- -----------
8,000,000 4,000,000 $40,000,000
========== ========= ===========
Common stock:
Class B-1.................... 1 4,000,000 1,850,000 $18,500,000
Class B-2.................... 1 12,000,000 5,480,235 53,055,852
Class C-1.................... -- 1,600,000 800,000 8,000
Class C-R.................... -- 1,600,000 800,000 8,000
Class J...................... -- 2 2 --
---------- --------- -----------
19,200,002 8,930,237 $71,571,852
========== ========= ===========
</TABLE>
The preferred stock has a 10% preferential dividend which became cumulative
upon the earlier of the date on which certain thresholds were met or
January 2, 1992. Unpaid dividends were to bear interest at 12% if such
thresholds were met. Effective January 1, 1991 the Preferred Stockholders
waived their rights to dividends and agreed that no dividends would accrue
until such time as all amounts under the Senior Term Loans and Senior
Subordinated Term Loan are paid in full. (See Note 13)
Extraordinary distributions to stockholders, if any, and any proceeds
available to stockholders from any sale of all or substantially all of the
Company's assets, or a merger or liquidation of the Company, will be
applied first to pay accumulated but unpaid preference dividends, should
they exist, and thereafter to the return of the original purchase price of
the shares outstanding to all stockholders on a pro rata basis, regardless
of class or series. After payment in full of the original purchase price,
additional distributions, if any, will be made on a share-for-share basis,
but each share of preferred stock will be counted as 60% of a share.
F-17
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
The Company's Class J stock does not participate in any dividends or
liquidation proceeds and has no voting rights except for the nomination and
election of Class J Directors or as required by law.
The Class C-1 and C-R shares are non-voting (other than as required by law)
and upon liquidation do not share in the return of the first $10 of capital
to stockholders to the extent of their par value of $.01 per share but
participate fully in proceeds in excess of $10 per share and in all
dividends declared on common stock.
In 1996 the Company issued 125,389 shares of its Class B-2 stock with a
stated value of approximately $1.0 million to the Cap Plan for the year
ended December 31, 1995, 8,501 shares to sales professionals who elected to
receive a portion of their annual premium on earnings payments in stock
rather than cash and 96,917 shares in connection with the DCP (including
bonuses deferred in stock). In 1995 the Company issued 159,432 shares of
its Class B-2 stock to the Cap Plan in connection with the profit sharing
contribution, 33,636 shares to sales professionals who elected to receive a
portion of their annual premium on earnings payments in stock rather than
cash and 162,839 shares in connection with the DCP, for a total of 355,907
Class B-2 shares issued in 1995. In 1994 the Company issued 134,270 shares
of its Class B-2 stock in connection with the profit sharing contribution.
(See Note 5)
As of September 30, 1996, 6,620,154 shares of Class B-2 stock were
outstanding.
9. INCOME TAXES
The regular federal tax return loss carryforward is $202.5 million as of
September 30, 1996, expiring in the years 2004 through 2008 as follows:
$11.6 million--2004; $61.9 million--2005; $76.2 million--2006;
38.0 million--2007; and $14.8 million--2008. Use of the federal tax loss
carryforward is limited to the lesser of 90.0% of the year's alternative
minimum taxable income or the remaining alternative minimum tax loss
carryforward. The loss carryforward for federal alternative tax purposes is
$196.0 million as of September 30, 1996 due to depreciation differences.
The current federal tax includes alternative minimum tax paid, for which
credit carryforwards are available, totaling $0.6 million as of September
30, 1996. Loss carryforwards for state income tax purposes expire in
various states beginning in 1995.
The tax provision for the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994 1993
-------------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal:
Current......................... $ 388 $ 503 $ 47 $ --
Deferred tax.................... 3,549 1,231 (3,563) 7,758
Reduction of valuation allow-
ances.......................... (40,400) (1,231) 3,563 (7,758)
-------- ------- ------- -------
$(36,463) $ 503 $ 47 $ --
State:
Current......................... 419 338 105 112
Deferred........................ 254 209 (773) 1,683
Reduction of valuation allow-
ances.......................... -- (209) 773 (1,683)
-------- ------- ------- -------
673 338 105 112
-------- ------- ------- -------
$(35,790) $ 841 $ 152 $ 112
======== ======= ======= =======
</TABLE>
F-18
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
The following is a reconciliation, stated as a percentage of pre-tax
income, of the U.S. statutory federal income tax rate to the Company's
effective tax rate on income (loss) from operations:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER
ENDED 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
Federal statutory tax rate......... 35 % 34 % 35 % (35)%
Permanent differences, including
goodwill, meals and entertainment. 8 14 9 1
State taxes, net of federal bene-
fit............................... 5 3 6 (4)
Utilization of previously unrecog-
nized net operating losses........ -- (41) (48) --
Valuation allowance for net operat-
ing losses and other deferred tax
assets............................ (421) -- -- 38
---- ------ ------ ------
Effective tax rate................. (373)% 10 % 2 % 0 %
==== ====== ====== ======
</TABLE>
Beginning in 1992 the Company implemented Statement of Financial Accounting
Standards No. 109, the modified liability method of accounting for income
taxes. Until the third quarter of 1996, the resulting net deferred tax
asset had been fully reserved except for utilization against earnings as
realized. Such asset was being recognized to the extent of the tax effect
of current taxable earnings. Cumulative tax effects of temporary
differences are shown below as of December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1994
------------- -------- --------
<S> <C> <C> <C>
ASSET (LIABILITY)
Property and equipment.................... $ 2,823 $ 1,289 $ 1,655
Reserves for bad debts, building write
down, legal expenses..................... 3,785 3,860 3,628
Intangible amortization................... 75 1,213 4,211
Bonus, unexercised restricted stock, de-
ferred compensation...................... 2,047 1,901 1,819
Partnership income........................ 608 608 705
Debt modification......................... 1,599 1,549 1,470
Net operating loss carryforwards.......... 71,169 77,600 79,832
------- -------- --------
Total deferred tax assets............... 82,106 88,020 93,320
Unconsolidated affiliates............... (218) (218) (218)
All other, net.......................... 1,448 (273) (200)
------- -------- --------
Total deferred tax assets liabilities..... 1,230 (491) (418)
------- -------- --------
Net deferred tax assets................... 83,336 87,529 92,902
Valuation allowances...................... (44,513) (87,529) (92,902)
------- -------- --------
$38,545 $ -- $ --
======= ======== ========
</TABLE>
Management evaluated the appropriateness of all or part of this valuation
allowance on a periodic basis and if the Company concludes there is a
change with respect to realizability, any necessary adjustments are made at
that time. As of September 30, 1996, the Company has experienced continuing
profitability due to a variety of reasons, including the strength of the
commercial real estate markets. In addition, the Company has operated
Westmark for one full year since acquiring Westmark in June 1995, and as a
result has concluded that Westmark should make a positive contribution to
the Company's consolidated taxable
F-19
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
income. Finally, the acquisition of L.J. Melody in July 1996 should make a
positive contribution to the Company's consolidated taxable income. As a
result of these factors, management has determined that it now has
sufficient reliable information to conclude that part of the Company's NOLs
are realizable on a more likely than not basis. During the third quarter of
1996, the Company projected, on a more likely than not basis, that a
portion of the net operating loss carryforwards ("NOL") would be realizable
in future periods and, accordingly, reduced its existing deferred tax asset
valuation allowances by $45.7 million of which $5.3 million has been
allocated to the purchase price of L.J. Melody based on its estimated
future potential to generate taxable income, and the remaining
$40.4 million has been recorded as a tax benefit (a reduction in income tax
provision). With the recognition of deferred tax assets, the current period
and the future periods provisions for income tax will be recorded at the
full effective tax rate. For the nine months ended September 30, 1996, a
$4.6 million provision for income taxes has been recorded. Net income for
the nine months ended September 30, 1996 was $45.4 million ($3.29 per share
of common stock), which includes the $40.4 million tax benefit ($2.92 per
share of common stock). The $40.4 million recognized tax benefit has a
material effect on the reported net income for the nine months ended
September 30, 1996.
The ability of the Company to utilize NOLs may also be limited in the
future if an "ownership change" within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended, were deemed to occur. Such an
ownership change may be deemed to occur if the Company engages in certain
transactions involving the issuance of shares of Common Stock, including
the issuance of shares of Common Stock in connection with an acquisition or
otherwise or by reason of a sale of capital stock by an existing
shareholder. If an ownership change were to occur, Section 382 would impose
an annual limit on the amount of NOLs the Company could utilize. The
Company believes that the Offering and Recapitalization will not result in
an ownership change. An ownership change may not be within the control of
the Company, however, and therefore there is no assurance that an ownership
change will not occur in the future. The availability of NOLs is, in any
event, subject to uncertainty since their validity is not reviewed by the
Internal Revenue Service until such time as they are utilized to offset
income.
10. FIDUCIARY FUNDS
The consolidated balance sheets do not include the net assets of escrow,
agency and fiduciary funds, which amounted to $28.4 million and $24.2
million as of December 31, 1995 and 1994, respectively.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTES RECEIVABLE. The Company has determined that it is not practicable to
estimate the fair value of the notes receivable due to the cost involved in
developing the information as such notes are not publicly traded.
LONG-TERM DEBT. The Senior Term Loans, the Senior Subordinated Term Loan,
the Senior Revolving Credit Lines and the Westmark Senior Notes are
discussed in Note 6. Estimated fair values for these liabilities are not
presented because the Company determined it was impracticable to incur the
costs to engage an investment banker to perform a fair value analysis of
these liabilities.
The fair value of the Inventoried Property Loan discussed in Note 6 is not
materially different from the carrying value of the debt.
The Unsecured Notes Payable discussed in Note 6, which represent the
Company's share of unfunded equity participation, are not considered
financial instruments.
F-20
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
12. INDUSTRY SEGMENTS
The Company operates in two business segments--Property and User Services
and Investor Services. Property Services including brokerage (facilitating
sales and leases), investment properties (acquisitions and sales on behalf
of investors), corporate services, property management and real estate
market research. Investor Services includes mortgage banking (loan
origination and servicing), investment management and advisory services,
and valuation and appraisal services.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue
Property and User Services..................... $422,833 $400,250 $364,172
Investor Services.............................. 45,627 28,738 27,865
-------- -------- --------
$468,460 $428,988 $392,037
======== ======== ========
Operating income (loss)
Property and User Services..................... $ 26,142 $ 25,118 $(19,915)
Investor Services.............................. 3,701 460 (3,797)
-------- -------- --------
29,843 25,578 (23,712)
Interest income................................. 1,674 1,109 915
Interest expense................................ 23,267 17,362 14,240
-------- -------- --------
Income (loss) before provision for income taxes. $ 8,250 $ 9,325 $(37,037)
======== ======== ========
Depreciation and amortization
Property and User Services..................... $ 8,889 $ 7,485 $ 44,268
Investor Services.............................. 2,742 606 5,338
-------- -------- --------
$ 11,631 $ 8,091 $ 49,606
======== ======== ========
Capital expenditures (purchases)
Property and User Services..................... $ 1,987 $ 3,984 $ 4,509
Investor Services.............................. 156 266 332
-------- -------- --------
$ 2,143 $ 4,250 $ 4,841
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Identifiable assets
Property and User Services................................ $ 85,182 $ 89,011
Investor Services......................................... 58,800 10,682
Corporate................................................. 46,972 50,407
-------- --------
$190,954 $150,100
======== ========
</TABLE>
Identifiable assets by industry segment are those assets used in the
Company operations in each segment. Corporate identified assets are
principally made up of cash and cash equivalents, inventoried property,
general prepaids and deferred taxes.
F-21
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
13. SUBSEQUENT EVENTS
ACQUISITION. Effective July 1, 1996, CB Commercial Mortgage Company, Inc.
("CB Mortgage"), a wholly-owned subsidiary of the Company, acquired all of
the outstanding capital stock of L.J. Melody & Company, a Texas
corporation, and L.J. Melody & Company of California, a Texas corporation
("LJMCal"). On July 9, 1996, CB Mortgage merged into L.J. Melody & Company.
As a result, LJMCal is a wholly-owned subsidiary of L.J. Melody & Company.
L.J. Melody & Company and LJMCal (collectively "L.J. Melody") are
commercial mortgage banking firms engaged in loan origination and loan
servicing. L.J. Melody is headquartered in Houston, Texas.
The purchase consideration for L.J. Melody was $15.0 million, including a
$2.3 million note to the principal seller bearing 10.0% interest with
principal payments starting in 1998, $9.0 million in cash and $3.7 million
in additional notes. The notes bear interest of 10.0% per annum, with
maturities through June 2001. The $2.3 million note will be accounted for
as compensation over the term of the note. The payment of this note is
contingent upon the principal seller's continued employment with the
Company.
The acquisition was accounted for as a purchase. The Company allocated
approximately $3.7 million of the total purchase price to identifiable
intangible assets acquired, consisting of loan servicing and asset
management contracts, trade name, a covenant not to compete and other
intangibles. The remaining $9.0 million and a $1.5 million deferred tax
liability on identifiable intangibles were recorded to goodwill. The
intangibles are being amortized over their estimated useful lives or the
lives of the underlying contracts, as applicable, over periods ranging from
three to 13 years. Goodwill is being amortized on a straight line basis
over 30 years.
STOCK OFFERING. During August 1996 the Company announced its intent to
provide liquidity to its common stockholders by publicly registering its
common stock and to raise additional capital in an initial public offering
("IPO"). The proceeds from the IPO will be used to repay a portion of the
Company's senior secured indebtedness. The Company also announced a
recapitalization which will be contingent upon and executed in conjunction
with the IPO. The following summarizes the terms of the recapitalization:
. Class B-1 and B-2 stock of the Company will be converted into the common
stock to be issued in the IPO ("Common Stock") on a one-for-one basis;
. Class C-1 stock of the Company will be converted into the IPO Common
Stock at a conversion ratio based on the initial public offering price
per share;
. The Company will acquire all issued and outstanding shares of the Class
C-R and Class J stock at $.01 per share;
. The Preferred Stock is convertible into Common Stock at the holder's
option after the completion of this Offering at a ratio based upon the
per share market price of the Common Stock, ranging from .60 shares of
Common Stock per share of Preferred Stock at a market price of $30.00 or
more per share of Common Stock to .78 shares of Common Stock per share
of Preferred Stock at a market price of $10.00 to $21.99 per share of
Common Stock. No conversion of the Preferred Stock is permitted when the
market price of the Common Stock is below $10.00 per share.
DEBT MODIFICATIONS. In connection with the IPO, the Company's senior
secured lenders have agreed to amend the terms of the senior secured
indebtedness effective upon consummation of the IPO.
F-22
<PAGE>
CB COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
As amended, the senior secured indebtedness will bear interest at the rate
of LIBOR plus 2.5%, all of which interest will be payable currently, will
have a final maturity date of December 31, 2001 and will provide for
quarterly principal repayments of $2.625 million with a final payment of
$9.5 million on December 31, 2001.
The terms of the Company's senior subordinated indebtedness will also be
amended effective upon consummation of the IPO. As amended, from January 1,
1997 through December 31, 1998, the senior subordinated indebtedness will
bear interest at a rate of LIBOR plus 1.25%, all of which interest will be
payable currently. The interest rate will increase to LIBOR plus 2.0%
during 1999, LIBOR plus 3.0% during 2000 and LIBOR plus 4.0% during 2001
and subsequent periods. Interest in excess of LIBOR plus 1.25% would be
deferred and added to the principal balance of the senior subordinated
indebtedness until the final maturity of the senior subordinated
indebtedness. The senior subordinated indebtedness will have a final
maturity date of July 23, 2002. The senior subordinated indebtedness may be
prepaid at any time without penalty.
F-23
<PAGE>
WESTMARK REALTY ADVISORS L.L.C.
STATEMENTS OF INCOME
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Fee income (note 2)................................... $10,873,613 $10,922,274
Other................................................. 44,225 51,714
----------- -----------
10,917,838 10,973,988
----------- -----------
Expenses:
Salaries and related expenses......................... 7,034,219 7,076,791
General and administrative expenses
(including interest expense of $61,088 in 1995 and
$21,979 in 1994)..................................... 1,324,877 1,085,573
Occupancy expense (note 4)............................ 569,546 676,671
Business promotion, travel and advertising expense.... 406,509 365,728
Office expense........................................ 269,447 298,679
----------- -----------
9,604,598 9,503,442
----------- -----------
Net income........................................... $ 1,313,240 $ 1,470,546
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
WESTMARK REALTY ADVISORS L.L.C.
STATEMENTS OF CHANGES IN OWNERS' EQUITY (DEFICIT)
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Owners' equity at beginning of six-month periods
ended June 30...................................... $ 2,108,326 $ 1,875,446
Net income.......................................... 1,313,240 1,470,546
Cash distributions.................................. (2,550,000) (1,055,000)
Noncash distribution................................ (2,177,244) --
------------ -----------
Owners' equity (deficit) at end of six-month periods
ended June 30...................................... $ (1,305,678) $ 2,290,992
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
WESTMARK REALTY ADVISORS L.L.C.
STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 1,313,240 $1,470,546
----------- ----------
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization....................... 162,692 173,359
Distributions of income from TCW Realty Funds VB and
VIB................................................ 13,289 30,503
Decrease in fee income receivable................... 247,144 646,819
Increase in other assets............................ 65,959 51,326
Increase in accounts payable and other liabilities.. 634,208 800,456
Decrease in deferred leasing concessions............ (56,539) (56,539)
----------- ----------
Total adjustments................................. 1,066,753 1,645,924
----------- ----------
Net cash provided by operating activities......... 2,379,993 3,116,470
----------- ----------
Cash flows from investing activities--acquisition of
property and equipment............................... (148,268) (10,083)
----------- ----------
Net cash used in investing activities............. (148,268) (10,083)
----------- ----------
Cash flows from financing activities:
Repayments of notes payable to bank.................. (69,437) (81,480)
Distributions to owners.............................. (2,550,000) (1,055,000)
----------- ----------
Net cash used in financing activities............. (2,619,437) (1,136,480)
----------- ----------
Net (decrease) increase in cash................... (387,712) 1,969,907
Cash at beginning of six-month period ended June 30... 492,039 105,044
----------- ----------
Cash at end of six-month period ended June 30......... $ 104,327 $2,074,951
=========== ==========
Supplemental disclosures of cash flow information--in-
terest paid.......................................... $ 21,088 $ 21,979
=========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
As of the close of business on June 30, 1995, the Company was acquired by CB
Commercial Real Estate Group, Inc. In connection with such acquisition, a
distribution totaling $2,177,244 to the former owners was declared. Such amount
was paid by the Company subsequent to June 30, 1995.
See accompanying notes to financial statements.
F-26
<PAGE>
WESTMARK REALTY ADVISORS L.L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Westmark Realty Advisors, a California general partnership, was formed on
January 7, 1982 under the laws of the state of California and effective
January 1, 1995 became a limited liability company known as Westmark Realty
Advisors L.L.C. (hereinafter referred to as Westmark). The primary purpose
of Westmark is to provide real estate investment and property management
services. Effective as of the close of business on June 30, 1995, CB
Commercial Real Estate Group, Inc. acquired ownership of Westmark Realty
Advisors L.L.C.
INVESTMENT IN TCW REALTY FUNDS VB AND VIB
The equity method of accounting is used for Westmark's general partnership
interests in TCW Realty Fund VB, a limited partnership, and TCW Realty Fund
VIB, a limited partnership, as Westmark has significant influence as one of
the two general partners of these limited partnerships.
FEE INCOME
Fee income is recorded in the period in which it is earned.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation
and amortization.
Depreciation of furniture and equipment is calculated using the straight-
line method over the estimated useful lives (five years) of the assets.
Amortization of leasehold improvements is calculated using the straight-
line method over the shorter of the asset or remaining lease life.
INCOME TAXES
No income taxes are provided by Westmark since the owners' proportionate
shares of Westmark's operating results are includable in the owner's
respective income tax returns.
(2) FEE INCOME AND RECEIVABLE
Westmark has an agreement with Trust Company of the West (TCW) to form real
estate investment funds and to provide for the sale of participating
interests to qualified pension and profit sharing trusts or other permitted
investors for the purpose of investing in real estate or interests therein.
TCW serves as trustee of the various real estate investment funds. In
addition to providing real estate services to real estate investment funds,
TCW and Westmark provide similar services to individual pension plans that
invest in real estate.
Westmark has been engaged by TCW to provide administrative services and act
as investment consultant and portfolio manager. For these services,
Westmark is paid consulting fees up to a maximum of 85% of the fees
received by TCW from the real estate investment funds and pension plans.
F-27
<PAGE>
WESTMARK REALTY ADVISORS L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995 AND 1996
(UNAUDITED)
(3) INVESTMENT IN TCW REALTY FUNDS VB AND VIB AND NOTES PAYABLE TO TCW REALTY
FUND VB
Westmark and an affiliate of TCW are general partners in TCW Realty Fund
VB, a limited partnership (Fund VB), and TCW Realty Fund VIB, a limited
partnership (Fund VIB). Westmark's percentage interest is .85% for Fund VB
and Fund VIB.
(4) LEASES
In December 1991, Westmark moved its headquarters and the new landlord
granted leasing concessions to Westmark, including assumption of all of
Westmark obligations under the old lease and payment of a move-in bonus to
Westmark. These amounts have been deferred as leasing concessions and will
be amortized over the term of the lease.
Rental expense related to Westmark's office leases totaled $672,530 and
$779,655 for the six months ended June 30, 1995 and 1994, respectively, and
income related to space subleased by Westmark to other tenants totaled
$102,984 for the six months ended June 30, 1995 and June 30, 1994. Future
minimum rental commitments, net of minimum sublease payments for office
leases, are as follows:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
RENTAL SUBLEASE
PAYMENTS PAYMENTS NET
----------- -------- -----------
<S> <C> <C> <C>
Year ending June 30:
July through December 1995................ $ 656,503 $131,820 $ 524,683
1996...................................... 1,539,150 167,332 1,371,818
1997...................................... 1,539,150 157,152 1,381,998
1998...................................... 1,501,278 161,079 1,340,199
1999...................................... 1,540,524 172,860 1,367,664
2000...................................... 1,540,524 72,025 1,468,499
Thereafter................................ 6,289,998 -- 6,289,998
----------- -------- -----------
$14,607,127 $862,268 $13,744,859
=========== ======== ===========
</TABLE>
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, RECEIVABLES AND ACCOUNTS PAYABLE
The fair value of these financial instruments is approximately equal to the
carrying value due to the short-term nature of the instruments.
NOTES PAYABLE
The fair value of the notes payable is approximately equal to the carrying
value as the interest rates on the notes payable to banks are variable
rates that are considered to be market rates, and the interest rates on the
notes payable to Fund VB are considered to be approximately equal to
current market rates for similar debt.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of
Westmark Realty Advisors L.L.C.
(formerly Westmark Realty Advisors, a partnership):
We have audited the accompanying balance sheets of Westmark Realty Advisors
(a partnership) as of December 31, 1994 and 1993 and the related statements of
income, changes in partners' capital and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Westmark Realty Advisors
as of December 31, 1994 and 1993 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
February 25, 1995
F-29
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 492,039 $ 105,044
Fee income receivable (note 2)............................ 3,102,515 3,325,074
Property and equipment (note 3)........................... 623,311 788,333
Investment in TCW Realty Funds VB and VIB (note 4)........ 1,446,127 1,457,991
Other assets.............................................. 180,089 153,470
---------- ----------
$5,844,081 $5,829,912
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable to bank (note 5)............................ $ 381,430 $ 531,813
Notes payable to TCW Realty Fund VB (note 4).............. 952,172 952,172
Accounts payable and other liabilities.................... 1,046,117 1,001,442
---------- ----------
Total liabilities........................................ 2,379,719 2,485,427
Deferred leasing concessions (note 6)..................... 1,356,036 1,469,039
Partners' capital......................................... 2,108,326 1,875,446
---------- ----------
$5,844,081 $5,829,912
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Revenues:
Fee income (note 2)................................... $22,035,883 $22,944,148
Other................................................. 151,293 378,683
----------- -----------
22,187,176 23,322,831
----------- -----------
Expenses:
Salaries and related expenses......................... 13,884,136 14,233,320
General and administrative expenses (including inter-
est expense of
$120,762 in 1994 and $95,688 in 1993)................ 2,259,390 2,857,709
Occupancy expense (note 6)............................ 1,369,230 1,507,359
Business promotion, travel and advertising expense.... 813,143 978,012
Office expense........................................ 553,397 670,858
----------- -----------
18,879,296 20,247,258
----------- -----------
Net income............................................ $ 3,307,880 $ 3,075,573
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Balance at beginning of year.......................... $ 1,875,446 $ 2,042,274
Net income............................................ 3,307,880 3,075,573
Cash distributions.................................... (3,075,000) (3,242,401)
----------- -----------
Balance at end of year................................ $ 2,108,326 $ 1,875,446
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 3,307,880 $ 3,075,573
----------- -----------
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization...................... 335,632 444,647
Equity in income from TCW Realty Funds VB and VIB.. (54,136) (20,824)
Distributions of income from TCW Realty Funds VB
and VIB........................................... 66,000 17,000
Decrease (increase) in fee income receivable....... 222,559 (256,124)
Increase in other assets........................... (26,619) (51,396)
Increase in accounts payable and other liabilities. 44,675 183,637
Decrease in deferred leasing concessions........... (113,003) (113,003)
----------- -----------
Total adjustments................................ 475,108 203,937
----------- -----------
Net cash provided by operating activities........ 3,782,988 3,279,510
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment............... (170,610) (214,751)
Investment in TCW Realty Fund VIB................... -- (75,000)
----------- -----------
Net cash used in investing activities............ (170,610) (289,751)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to bank................. -- 400,000
Repayments of notes payable to bank................. (150,383) (84,626)
Distributions to partners........................... (3,075,000) (3,242,401)
----------- -----------
Net cash used in financing activities............ (3,225,383) (2,927,027)
----------- -----------
Net increase in cash............................. 386,995 62,732
Cash at beginning of year............................ 105,044 42,312
----------- -----------
Cash at end of year.................................. $ 492,039 $ 105,044
=========== ===========
Supplemental disclosures of cash flow information--
interest paid....................................... $ 38,000 $ 23,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Westmark Realty Advisors, a California general partnership, was formed on
January 7, 1982 under the laws of the state of California and effective
January 1, 1995 became a limited liability company known as Westmark Realty
Advisors, L.L.C. (hereinafter referred to as Westmark). The primary purpose
of Westmark is to provide real estate investment and property management
services.
INVESTMENT IN TCW REALTY FUNDS VB AND VIB
The equity method of accounting is used for Westmark's general partnership
interests in TCW Realty Fund VB, a limited partnership, and TCW Realty Fund
VIB, a limited partnership, as Westmark has significant influence as one of
the two general partners of these limited partnerships.
FEE INCOME
Fee income is recorded in the period in which it is earned.
ALLOCATION OF INCOME AND LOSSES
Net income and losses are allocated to the partners in accordance with the
partnership agreement, in proportion to their respective ownership
percentages.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation
and amortization.
Depreciation of furniture and equipment is calculated using the straight-
line method over the estimated useful lives (five years) of the assets.
Amortization of leasehold improvements is calculated using the straight-
line method over the shorter of the asset or remaining lease life.
INCOME TAXES
No income taxes are provided by Westmark since the partners' proportionate
shares of Westmark's operating results are includable in their respective
income tax returns.
(2) FEE INCOME AND RECEIVABLE
Westmark has an agreement with Trust Company of the West (TCW) to form real
estate investment funds and to provide for the sale of participating
interests to qualified pension and profit sharing trusts or other permitted
investors for the purpose of investing in real estate or interests therein.
TCW serves as trustee of the various real estate investment funds. In
addition to providing real estate services to real estate investment funds,
TCW and Westmark provide similar services to individual pension plans that
invest in real estate.
Westmark has been engaged by TCW to provide administrative services and act
as investment consultant and portfolio manager. For these services,
Westmark is paid consulting fees up to a maximum of 85% of the fees
received by TCW from the real estate investment funds and pension plans.
F-34
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(3) PROPERTY AND EQUIPMENT
Property and equipment as of December 31 is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Furniture and equipment............................ $ 2,980,926 $ 2,853,643
Leasehold improvements............................. 72,467 96,623
----------- -----------
Total cost........................................ 3,053,393 2,950,266
Less accumulated depreciation and amortization..... (2,430,082) (2,161,933)
----------- -----------
$ 623,311 $ 788,333
=========== ===========
</TABLE>
(4) INVESTMENT IN TCW REALTY FUNDS VB AND VIB AND NOTES PAYABLE TO TCW REALTY
FUND VB
Westmark and an affiliate of TCW are general partners in TCW Realty Fund
VB, a limited partnership (Fund VB), and TCW Realty Fund VIB, a limited
partnership (Fund VIB). Westmark's percentage interest is .85% for Fund VB
and Fund VIB. The general partner capital contributions for Fund VB are in
the form of notes payable. As of December 31, 1994 and 1993, Westmark has
21 notes payable outstanding totaling $952,172 with interest rates ranging
from 8.25% to 9.01%. The interest, and then the principal, will be paid as
Westmark receives cash distributions of operating cash flow from Fund VB.
Any unpaid interest and principal will be due on December 31, 1997.
(5) NOTES PAYABLE TO BANK
Notes payable to bank as of December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Principal of $6,667, payable monthly, and remaining
principal balance due on December 1, 1998. Interest
payable monthly at the prime rate (8.5% and 6.0% at
December 31, 1994 and 1993, respectively) plus .5%.... $321,222 $400,000
Principal of $6,021, payable monthly, and remaining
principal balance due on November 1, 1995. Interest
payable monthly at the prime rate (8.5% and 6.0% at
December 31, 1994 and 1993, respectively) plus 1%..... 60,208 131,813
-------- --------
$381,430 $531,813
======== ========
</TABLE>
Principal payments are as follows:
<TABLE>
<S> <C>
1995............................................................ $140,208
1996............................................................ 80,000
1997............................................................ 80,000
1998............................................................ 81,222
--------
Total......................................................... $381,430
========
</TABLE>
F-35
<PAGE>
WESTMARK REALTY ADVISORS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(6) LEASES
In December 1991, Westmark moved its headquarters and the new landlord
granted leasing concessions to Westmark, including assumption of all of
Westmark obligations under the old lease and payments of a move-in bonus to
Westmark. These amounts have been deferred as leasing concessions and will
be amortized over the term of the lease.
Rental expense related to Westmark's office leases totaled $1,568,698 and
$1,575,241 for the years ended December 31, 1994 and 1993, respectively,
and income related to space subleased by Westmark to other tenants totaled
$199,468 and $68,508 for the years ended December 31, 1994 and 1993,
respectively. Future minimum rental commitments, net of minimum sublease
payments for office leases, are as follows:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
RENTAL SUBLEASE
PAYMENTS PAYMENTS NET
----------- -------- -----------
<S> <C> <C> <C>
Year ending December 31:
1995...................................... $ 1,313,007 $206,016 $ 1,106,991
1996...................................... 1,539,150 167,332 1,371,818
1997...................................... 1,539,150 157,152 1,381,998
1998...................................... 1,501,278 161,079 1,340,199
1999...................................... 1,540,524 172,860 1,367,664
Thereafter................................ 7,830,522 72,025 7,758,497
----------- -------- -----------
$15,263,631 $936,464 $14,327,167
=========== ======== ===========
</TABLE>
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH RECEIVABLES AND ACCOUNTS PAYABLE
The fair value of these financial instruments is approximately equal to the
carrying value due to the short-term nature of the instruments.
NOTES PAYABLE
The fair value of the notes payable is approximately equal to the carrying
value as the interest rates on the notes payable to banks are variable
rates that are considered to be market rates, and the interest rates on
the notes payable to Fund VB are considered to be approximately equal to
current market rates for similar debt.
F-36
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 375,706
Investment in mutual funds, at fair value......................... 2,403,590
Accounts receivable and other current assets...................... 480,178
Short-term investment in note receivable.......................... --
----------
Total current assets............................................. 3,259,474
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.......................... 147,590
NOTES RECEIVABLE FROM OFFICER...................................... --
OTHER ASSETS, net.................................................. 44,856
----------
TOTAL ASSETS..................................................... $3,451,920
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued employee benefits......................................... $ 159,735
Accounts payable and accrued expenses............................. 127,575
Warehouse credit line............................................. --
----------
Total current liabilities........................................ 287,310
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $100 per share, 3,000 shares authorized,
1,350 shares issued and outstanding.............................. 135,000
Unrealized depreciation on investment in mutual funds............. (75,021)
Retained earnings................................................. 3,104,631
----------
3,164,610
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................... $3,451,920
==========
</TABLE>
F-37
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
REVENUES:
Loan placement and brokerage...................................... $ 958,096
Loan servicing and asset management............................... 987,016
Other income...................................................... 350,846
-----------
2,295,958
EXPENSES:
Salaries and other compensation................................... 2,536,662
General and administrative........................................ 920,922
Depreciation and amortization..................................... 35,711
-----------
3,493,295
NET LOSS........................................................... (1,197,337)
RETAINED EARNING AT BEGINNING OF PERIOD............................ 4,766,968
DISTRIBUTIONS TO SHAREHOLDERS...................................... (465,000)
-----------
RETAINED EARNINGS AT END OF PERIOD................................. $ 3,104,631
===========
</TABLE>
F-38
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (1,197,337)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.................................. 35,711
Equity in loss of joint venture................................ 22,187
Loss on disposal of equipment.................................. 148,877
Reinvestment of dividends on investment in mutual funds........ (62,375)
Origination of multifamily mortgage loans for sale............. (20,550,000)
Proceeds from sales of multifamily mortgage loans.............. 27,950,000
Changes in operating assets and liabilities--
Accounts receivable and other current assets................... 244,998
Accrued employee benefits...................................... (344,335)
Accounts payable and accrued expenses.......................... (473,141)
------------
Net cash provided by (used in) operating activities............. 5,774,585
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment........................................... --
Payments received on notes receivable from officers............. 361,749
Purchase of other assets........................................ (4,092)
------------
Net cash provided by (used in) investing activities............. 357,657
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders................................... (465,000)
Payment of dividends............................................ --
Advances on warehouse line...................................... 20,550,000
Payments on warehouse line...................................... (27,950,000)
------------
Net cash provided by (used in) financing activities............. (7,865,000)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................ (1,732,758)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 2,108,464
------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 375,706
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest........................ $ 218,967
Cash paid during the period for state income taxes.............. $ 43,192
</TABLE>
F-39
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING MATTERS:
L.J. Melody & Company (the Company) is a commercial mortgage banker and is
registered with the Securities and Exchange Commission as an investment
adviser. The Company services commercial mortgages and manages real estate
investments for institutional clients. As of June 30, 1996, the Company was
servicing loans for others with principal balances aggregating
approximately $1.9 billion. During the six-month period ended June 30,
1996, approximately 25 percent of loan servicing and asset management fees
and 40 percent of loan placement and brokerage fees were earned from one of
the Company's clients. In addition, approximately 45 percent of loan
servicing and asset management fees and 10 percent of loan placement and
brokerage fees were earned from two separate clients. The Company primarily
operates in the southwestern United States; however, it pursues mortgage
banking operations in other areas of the country as they arise. L.J. Melody
Investments, Inc., a majority-owned subsidiary, operates as a commercial
mortgage broker doing business in Colorado. The following is a summary of
significant accounting matters.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary. Minority interest amounts relating to
such subsidiary are not material to the financial statements. All
significant intercompany transactions and balances have been eliminated
upon consolidation. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of
financial position and results of operation.
The consolidated financial statements for the interim period have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information not misleading.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights." Effective January 1, 1996, the Company adopted
SFAS No. 121 and 122. The adoption of these standards did not have a
material effect on the Company's financial position or results of
operations.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement is required to be adopted
F-40
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
(UNAUDITED)
by the Company in 1997. Management of the Company has not yet determined
the impact, if any, that the adoption of this statement will have on the
Company's financial position or results of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market mutual funds,
the fair value of which approximates cost. The Company considers all
investments with an original maturity of less than three months to be cash
equivalents.
INVESTMENTS IN MUTUAL FUNDS
The Company accounts for its investments in mutual funds in accordance with
SFAS No. 115, "Accounting for Investments in Debt and Equity Securities,"
whereby investments classified as "available for sale" are reported at fair
value, with unrealized appreciation and depreciation excluded from earnings
and reported as a separate component of shareholders' equity. During the
six months ended June 30, 1996, interest received on the Company's
investments of $62,375 was reinvested in the mutual funds. Additionally,
unrealized appreciation/depreciation on investments reflected as a separate
component of shareholders' equity decreased $101,711 during the six months
ended June 30, 1996.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Direct costs
incurred in connection with software development for internal use are
capitalized. Depreciation and amortization are computed using the straight-
line or double-declining methods over the assets' estimated useful lives,
which range from three to ten years.
LOAN PLACEMENT AND BROKERAGE REVENUES
Revenue from loan placement and brokerage is recognized at the time that a
noncontingent commitment is obtained and the Company has no significant
remaining obligations for performance in connection with the transaction.
Loan placement and brokerage expenses are charged to income as incurred.
LOAN SERVICING AND ASSET MANAGEMENT REVENUES
Loan servicing revenue represents a participation in interest collections
on loans serviced for investors, normally based upon a stipulated
percentage of the outstanding monthly principal balance of such loans.
These revenues are credited to income as monthly principal and interest
payments are collected from mortgagors, and expenses of loan servicing are
charged to income as incurred.
F-41
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
(UNAUDITED)
FEDERAL INCOME TAXES
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to federal income tax. The shareholders
include the Company's taxable income or loss in their individual tax
returns.
2. INVESTMENT IN JOINT VENTURE:
In June 1994 the Company entered into a joint venture with W. L. Case
Holding Company (Case), an Ohio corporation, to form WLC Real Estate
Finance L.L.C. (WLC), a Delaware limited liability company. WLC was formed
for the purpose of developing and originating mortgage loans under programs
developed by certain lenders. The Company and Case each contributed
$100,000 for 50 percent interests in WLC. Case applied to Freddie Mac and
received approval as a Multifamily Program Plus Seller/Servicer. In
connection therewith, the Company signed an agreement effectively
guaranteeing the performance of Case to Freddie Mac of any and all
obligations, as defined, up to a maximum amount of $1,000,000. WLC has
entered into an exclusive mortgage correspondent agreement dated December
1, 1994, whereby WLC will serve as Case's exclusive mortgage correspondent
in connection with the origination, underwriting and closing of commercial
and multifamily mortgage loans for certain lenders.
WLC is jointly managed by Case and the Company and, accordingly, is
accounted for under the equity method of accounting. During the six months
ended June 30, 1996, the Company recorded equity in losses of WLC of
approximately $22,000, representing its pro rata share of WLC's net loss.
Such amount has been included as a component of other income on the
accompanying consolidated statements of operations while the Company's net
investment in the joint venture of approximately $13,000 at June 30, 1996,
has been included as a component of other assets in the accompanying
consolidated balance sheet.
3. WAREHOUSE CREDIT LINE:
During 1994, the Company entered into a warehouse credit line (the Line)
with a bank to provide funding for 99 percent of the principal balance of
multifamily loans originated and warehoused for sale to Freddie Mac. Under
the terms of the Line, interest is paid on outstanding borrowings at the
Freddie Mac-required net yield as specified in the Freddie Mac purchase
contract issued to the Company and borrowings are repaid upon purchase of
the notes receivable from Freddie Mac. The Line includes covenants which
require the Company to meet certain ratios and levels of tangible net worth
and debt coverage and maintain a minimum loan servicing portfolio. As of
June 30, 1996, the Company was in compliance with the covenants contained
in the Line. At June 30, 1996, no amount was outstanding under the line.
4. RELATED-PARTY TRANSACTIONS:
At June 30, 1995, the Company had unsecured notes receivable from two
officers (who are also shareholders of the Company) in the amounts of
$363,245 and $16,622. The outstanding borrowings have maturity dates
ranging from December 31, 1995, to December 31, 1999, and bear interest
ranging from 7.5 percent to 9 percent payable annually in arrears. The
Company recognized $14,622 of interest income on these notes for the six
months ended June 30, 1996. In May 1996 the notes, including accrued
interest, were repaid in full.
L.J. Melody & Company of California (LJMCal) is owned 99 percent by one of
the shareholders of the Company. The Company provides loan servicing on
certain loans obtained by LJMCal for which services
F-42
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
(UNAUDITED)
the Company earned $130,608 during the six months ended June 30, 1996. The
Company also provides accounting and other administrative services for
LJMCal for which the Company received $36,000 during the six months ended
June 30, 1996.
5. REGULATORY REQUIREMENTS:
The Company is a Department of Housing and Urban Development (HUD) approved
Title II mortgagee as well as a Freddie Mac-approved Multifamily Program
Plus Seller/Servicer. The Company is subject to the minimum net worth
requirements of HUD and Freddie Mac. At June 30, 1996, the Company's net
worth, as calculated in accordance with HUD and Freddie Mac guidelines, was
in excess of the minimum required net worth. Additionally, as of June 30,
1996, the Company carried errors and omission insurance coverage of
$5,000,000 and fidelity bond insurance coverage of $4,000,000, which are in
excess of the minimum required insurance coverage of each program.
As a Freddie Mac Multifamily Program Plus Seller/Servicer, the Company is
obligated to advance funds to ensure the timely payment of insurance and
taxes on loans serviced on behalf of Freddie Mac. Advances are recovered
through subsequent collections from the borrower or from Freddie Mac in the
event of default by the borrower. At June 30, 1996, no amount was
outstanding for advances made by the Company for insurance and taxes on
behalf of Freddie Mac.
6. SUBSEQUENT EVENT:
Effective July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage),
a wholly owned subsidiary of CB Commercial Real Estate Group, Inc.,
acquired all of the outstanding capital stock of the Company and of LJMCal.
Concurrent with this transaction the Company distributed approximately
$3.9 million of assets to its shareholders. On July 9, 1996, CB Mortgage
merged into the Company, with the Company surviving the merger. As a result
of the merger, LJMCal became a wholly owned subsidiary of the Company, and
it is intended that at the end of 1996 LJMCal will be merged into the
Company.
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
L.J. Melody & Company:
We have audited the accompanying consolidated balance sheet of L.J. Melody &
Company (a Texas corporation) and subsidiary as of December 31, 1995, and the
related consolidated statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of L.J. Melody & Company and
subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Houston, Texas Arthur Andersen LLP
March 18, 1996 (except with
respect to the matter discussed
in Note 10, as to which the date
is July 12, 1996)
F-44
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 2,108,464
Investment in mutual funds, at fair value......................... 2,442,926
Accounts receivable and other current assets...................... 725,176
Short-term investment in notes receivable......................... 7,400,000
-----------
Total current assets............................................. 12,676,566
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture and fixtures............................................ 558,879
Computer hardware and software.................................... 750,672
Leasehold improvements............................................ 229,404
-----------
1,538,955
Less--Accumulated depreciation and amortization................... (1,206,777)
-----------
332,178
NOTES RECEIVABLE FROM OFFICER...................................... 361,749
OTHER ASSETS, net.................................................. 62,951
-----------
Total assets..................................................... $13,433,444
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued employee benefits......................................... $ 504,070
Accounts payable and accrued expenses............................. 600,716
Warehouse credit line............................................. 7,400,000
-----------
Total current liabilities........................................ 8,504,786
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, par value $100 per share, 3,000 shares authorized,
1,350 shares issued and outstanding.............................. 135,000
Unrealized appreciation on investment in mutual funds............. 26,690
Retained earnings................................................. 4,766,968
-----------
4,928,658
-----------
Total liabilities and shareholders' equity....................... $13,433,444
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES:
Loan placement and brokerage....................................... $4,395,956
Loan servicing and asset management................................ 2,035,147
Other income....................................................... 643,002
----------
7,074,105
EXPENSES:
Salaries and other compensation.................................... 4,453,309
General and administrative......................................... 1,416,630
Depreciation and amortization...................................... 164,897
----------
6,034,836
NET INCOME.......................................................... $1,039,269
==========
RETAINED EARNINGS AT BEGINNING OF YEAR.............................. $4,254,490
DISTRIBUTIONS TO SHAREHOLDERS....................................... (526,791)
NET INCOME.......................................................... 1,039,269
----------
RETAINED EARNINGS AT END OF YEAR.................................... $4,766,968
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
L.J. MELODY & COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 1,039,269
Adjustments to reconcile net income to net cash used in operating
activities--
Depreciation and amortization.................................. 164,897
Equity in loss of joint venture................................ 37,403
Reinvestment of dividends on investment in mutual funds........ (128,474)
Origination of multifamily mortgage loans for sale............. (33,169,500)
Proceeds from sales of multifamily mortgage loans.............. 25,769,500
Changes in operating assets and liabilities--
Accounts receivable and other current assets.................. 133,598
Accrued employee benefits..................................... 192,229
Accounts payable and accrued expenses......................... (196,138)
-----------
Net cash used in operating activities........................ (6,157,216)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment............................................ (103,747)
Payments received on notes receivable from officers.............. 18,118
Purchase of other assets......................................... (13,499)
-----------
Net cash used in investing activities........................ (99,128)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders.................................... (526,791)
Advances on warehouse line....................................... 33,169,500
Payments on warehouse line....................................... (25,769,500)
-----------
Net cash provided by financing activities.................... 6,873,209
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 616,865
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 1,491,599
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 2,108,464
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest........................... $ 247,425
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING MATTERS:
L.J. Melody & Company (the Company) is a commercial mortgage banker and is
registered with the Securities and Exchange Commission as an investment
adviser. The Company services commercial mortgages and manages real estate
investments for institutional clients. As of December 31, 1995, the Company
was servicing loans for others with principal balances aggregating
approximately $2.1 billion. Approximately 28 percent of loan servicing and
asset management fees and 41 percent of loan placement and brokerage fees
were earned from one of the Company's clients. In addition, approximately
44 percent of loan servicing fees and asset management fees and
approximately 11 percent of loan placement and brokerage fees were earned
from two separate clients. The Company primarily operates in the
southwestern United States; however, it pursues mortgage banking operations
in other areas of the country as they arise. L.J. Melody Investments, Inc.,
a majority-owned subsidiary, operates as a commercial mortgage broker doing
business in Colorado. The following is a summary of significant accounting
matters.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary. Minority interest amounts relating to
such subsidiary are not material to the financial statements. All
significant intercompany transactions and balances have been eliminated
upon consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement established the recognition and measurement standards
related to the impairment of long-lived assets. Effective January 1, 1996,
the Company adopted SFAS No. 121. The adoption of this standard did not
have a material effect on the Company's financial position or results of
operations.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." This statement requires that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired.
This statement is required to be adopted by the Company in 1996. Management
of the Company has not yet determined the impact, if any, that the adoption
of this statement will have on the Company's financial position or results
of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market mutual funds,
the fair value of which approximates cost.
F-48
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
INVESTMENTS IN MUTUAL FUNDS
The Company accounts for its investments in mutual funds in accordance with
SFAS No. 115, "Accounting for Investments in Debt and Equity Securities,"
whereby investments classified as "available for sale" are reported at fair
value, with unrealized appreciation and depreciation excluded from earnings
and reported as a separate component of shareholders' equity. During the
year ended December 31, 1995, interest received on the Company's
investments of $128,474 was reinvested in the mutual funds. Additionally,
unrealized appreciation/depreciation on investments reflected as a separate
component of shareholders' equity increased $216,874 during the year ended
December 31, 1995.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Direct costs
incurred in connection with software development for internal use are
capitalized. Depreciation and amortization are computed using the straight-
line or double-declining methods over the assets' estimated useful lives,
which range from three to ten years.
LOAN PLACEMENT AND BROKERAGE REVENUES
Revenue from loan placement and brokerage is recognized at the time that a
noncontingent commitment is obtained and the Company has no significant
remaining obligations for performance in connection with the transaction.
Loan placement and brokerage expenses are charged to income as incurred.
LOAN SERVICING AND ASSET MANAGEMENT REVENUES
Loan servicing revenue represents a participation in interest collections
on loans serviced for investors, normally based upon a stipulated
percentage of the outstanding monthly principal balance of such loans.
These revenues are credited to income as monthly principal and interest
payments are collected from mortgagors, and expenses of loan servicing are
charged to income as incurred. Also included in loan servicing are fees
earned under asset management contracts. At December 31, 1995, escrow funds
of $38,297,945, held in connection with servicing activities, were on
deposit in bank accounts held in trust for investors and are not included
in the accompanying balance sheet.
FEDERAL INCOME TAXES
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to federal income tax. The shareholders
include the Company's taxable income or loss in their individual tax
returns.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are either carried at fair value or
cost. The carrying amounts of financial instruments reported at cost
approximate their fair values because of the short maturity, short lapse of
time between their issuance and year-end, and market interest rates, as
applicable, of those instruments.
F-49
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
2. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS:
The components of accounts receivable and other current assets at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Loan placement and brokerage fees receivable....................... $512,529
Asset management fees receivable................................... 29,222
Other receivables.................................................. 170,087
Other current assets............................................... 13,338
--------
$725,176
========
</TABLE>
3. SHORT-TERM INVESTMENT IN NOTES RECEIVABLE:
On December 20, 1995, the Company originated and funded two notes
receivable for $2,300,000 and $5,100,000, respectively, through advances on
its warehouse credit line (see Note 4). The Company had received purchase
commitments from the Federal Home Loan Mortgage Corporation (Freddie Mac)
as of the date of origination and subsequently sold the notes receivable to
Freddie Mac on January 19, 1996, and February 28, 1996, respectively.
4. INVESTMENT IN JOINT VENTURE:
In June 1994, the Company entered into a joint venture with W. L. Case
Holding Company (Case), an Ohio corporation, to form WLC Real Estate
Finance L.L.C. (WLC), a Delaware limited liability company. WLC was formed
for the purpose of developing and originating mortgage loans under programs
developed by certain lenders. The Company and Case each contributed
$100,000 for 50 percent interests in WLC. Case applied to Freddie Mac and
received approval as a Multifamily Program Plus Seller/Servicer. In
connection therewith, the Company signed an agreement effectively
guaranteeing the performance of Case to Freddie Mac of any and all
obligations, as defined, up to a maximum amount of $1,000,000. WLC has
entered into an exclusive mortgage correspondent agreement dated December
1, 1994, whereby WLC will serve as Case's exclusive mortgage correspondent
in connection with the origination, underwriting and closing of commercial
and multifamily mortgage loans for certain lenders.
WLC is jointly managed by Case and the Company and, accordingly, is
accounted for under the equity method of accounting. During the period
ended December 31, 1995, the Company recorded equity in losses of WLC of
approximately $37,000 representing its pro rata share of WLC's net loss.
Such amount has been included as a component of other income on the
accompanying consolidated statement of operations while the Company's net
investment in the joint venture of approximately $36,000 at December 31,
1995, has been included as a component of other assets in the accompanying
consolidated balance sheet.
5. WAREHOUSE CREDIT LINE:
During 1994, the Company entered into a warehouse credit line (the Line)
with a bank to provide funding for 99 percent of the principal balance of
multifamily loans originated and warehoused for sale to Freddie Mac. Under
the terms of the Line, interest is paid on outstanding borrowings at the
Freddie Mac-required net yield as specified in the Freddie Mac purchase
contract issued to the Company and borrowings are repaid upon purchase of
the notes receivable from Freddie Mac (see Note 2). The Line includes
covenants which require the Company to meet certain ratios and levels of
tangible net worth and debt coverage and maintain a minimum loan servicing
portfolio. As of December 31, 1995, the Company was in compliance with the
covenants contained in the Line. At December 31, 1995, $7,400,000 was
outstanding under the line.
F-50
<PAGE>
L.J. MELODY & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
6. PROFIT-SHARING PLANS:
The Company has a 401(k) profit-sharing plan under which all employees of
the Company and its affiliates are eligible for participation after
completing six months of service. Participating employees can elect to make
contributions to the plan on a pretax salary deduction basis in accordance
with the provisions of Section 401(k) of the Internal Revenue Code. Under
the provisions of the plan, the Company may make discretionary matching
contributions. The Company's contribution to the plan in 1995 was $94,300.
7. RELATED-PARTY TRANSACTIONS:
At December 31, 1995, the Company had unsecured notes receivable from one
officer (who is also a shareholder) in the amounts of $31,749 and $330,000.
The outstanding borrowings have a maturity date of December 31, 1999, and
bear interest ranging from 7.5 percent to 9 percent payable annually in
arrears. The Company recognized $27,742 of interest income on these notes
in 1995.
L.J. Melody & Company of California (LJMCal) is owned 99 percent by one of
the shareholders of the Company. The Company provides loan servicing on
certain loans obtained by LJMCal for which services the Company earned
$261,246 during 1995. The Company also provides accounting and other
administrative services for LJMCal for which the Company received $72,000
during 1995.
8. LEASES:
Future minimum lease payments for noncancelable operating leases for office
space and equipment approximate $304,000, $49,000, $48,000, $19,000 and $0
for the years ended December 31, 1996 through 2000, respectively. Rent
expense under these operating leases aggregated approximately $327,000 for
the year ended December 31, 1995.
9. REGULATORY REQUIREMENTS:
The Company is a Department of Housing and Urban Development (HUD) approved
Title II mortgagee as well as a Freddie Mac-approved Multifamily Program
Plus Seller/Servicer. The Company is subject to the minimum net worth
requirements of HUD and Freddie Mac. At December 31, 1995, the Company's
net worth, as calculated in accordance with HUD and Freddie Mac guidelines,
was in excess of the minimum required net worth. Additionally, as of
December 31, 1995, the Company carried errors and omission insurance
coverage of $5,000,000 and fidelity bond insurance coverage of $4,000,000,
which are in excess of the minimum required insurance coverage of each
program.
As a Freddie Mac Multifamily Program Plus Seller/Servicer, the Company is
obligated to advance funds to ensure the timely payment of insurance and
taxes on loans serviced on behalf of Freddie Mac. Advances are recovered
through subsequent collections from the borrower or from Freddie Mac in the
event of default by the borrower. At December 31, 1995, there were no
advances outstanding for insurance and taxes.
10. SUBSEQUENT EVENT:
On July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a
wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired
all of the outstanding capital stock of the Company and of LJMCal.
Concurrent with this transaction the Company distributed approximately $3.1
million of assets to its shareholders. On July 9, 1996, CB Mortgage merged
into the Company, with the Company surviving the merger. As a result of the
merger, LJMCal became a wholly owned subsidiary of the Company, and it is
intended that, at the end of 1996, LJMCal will be merged into the Company.
F-51
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 257,892
Accounts receivable and other current assets...................... 78,753
----------
Total current assets............................................. 336,645
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.......................... 169,060
OTHER ASSETS:
Employment agreements and covenants not to compete, net........... 63,787
Purchased loan servicing rights and related assets, net........... 372,135
----------
TOTAL ASSETS..................................................... $ 941,627
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued employee benefits......................................... $ 197,491
Accounts payable and accrued expenses............................. 69,755
----------
TOTAL CURRENT LIABILITIES........................................ 267,246
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Voting common stock, par value $1 per share, 3,000 shares autho-
rized, $1,000 shares issued and outstanding...................... 1,000
Non-voting common stock, par value $1 per share, 1,000 shares au-
thorized, 1 share issued and held in treasury.................... --
Additional paid-in capital........................................ 1,179,974
Retained earnings................................................. (506,593)
----------
674,381
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................... $ 941,627
==========
</TABLE>
F-52
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
----------
<S> <C>
REVENUES:
Loan placement and brokerage....................................... $ 942,981
Loan servicing..................................................... 326,798
Other income (loss)................................................ (3,350)
----------
1,266,429
EXPENSES:
Salaries and other compensation.................................... 1,074,529
General and administrative......................................... 624,358
Depreciation and amortization...................................... 128,382
----------
1,827,269
NET LOSS.......................................................... $ (560,840)
==========
</TABLE>
F-53
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VOTING ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........... $1,000 $1,407,247 $ 54,247 $1,462,494
Distributions to or on behalf of
shareholders........................ -- (227,273) -- (227,273)
Net loss............................. -- -- (560,840) (560,840)
------ ---------- --------- ----------
Balance, June 30, 1996............... $1,000 $1,179,974 $(506,593) $ 674,381
====== ========== ========= ==========
</TABLE>
F-54
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
---------
<S> <C>
OPERATING ACTIVITIES:
Net Loss........................................................... $(560,840)
Adjustments to reconcile net loss to net cash used in operating
activties--
Depreciation and amortization..................................... 128,382
Loss on disposal on equipment..................................... 28,626
Changes in operating assets and liabilities--
Accounts receivable and other current assets..................... 1,089,436
Accrued employee benefits........................................ (227,116)
Accounts payable and accrued expenses............................ (60,860)
---------
Net cash provided by (used in) operating activities................ 397,628
INVESTING ACTIVITIES:
Purchase of other assets........................................... --
Purchase of equipment.............................................. (93,863)
---------
Net cash used in investing activities.............................. (93,863)
FINANCING ACTIVITIES:
Repurchase of non-voting common stock.............................. --
Distributions to shareholders...................................... (227,273)
---------
Net cash used in financing activities.............................. (227,273)
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 76,492
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 181,400
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 257,892
=========
</TABLE>
F-55
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING MATTERS:
L.J. Melody & Company of California (the Company) is a commercial mortgage
banker and servicer of commercial mortgages. As of June 30, 1996, the
Company was servicing loans for others with principal balances aggregating
approximately $1.6 billion. Approximately 50 percent of loan placement and
brokerage revenue and 70 percent of loan servicing revenue were earned from
one client. In addition, approximately 10 percent of loan placement and
brokerage revenue and 25 percent of loan servicing revenue were earned from
two separate clients. The Company primarily operates in southern California
and Arizona; however, it pursues mortgage banking operations in other areas
of the country as they arise. The following is a summary of the Company's
significant accounting matters.
BASIS OF PRESENTATION
The financial statements for the interim period have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement established the recognition and measurement
standards related to the impairment of long-lived assets. In May 1995, the
FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights."
Effective January 1, 1996, the Company adopted SFAS No. 121 and 122. The
adoption of these standards did not have a material effect on the Company's
financial position or results of operations.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement is required to be adopted by the Company in 1997. Management of
the Company has not yet determined the impact, if any, that the adoption of
this statement will have on the Company's financial position or results of
operations.
F-56
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
(UNAUDITED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market mutual funds.
Cash equivalents are carried at cost, which approximates fair value. The
Company considers all investments with an original maturity of less than
three months to be cash equivalents.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Depreciation and
amortization are computed using the straight-line or double declining
balance methods over the assets' estimated useful lives, which range from
three to ten years.
PURCHASED LOAN SERVICING RIGHTS
The cost of purchased loan servicing rights is being amortized in
proportion to and over the period of estimated servicing income and on a
straight-line basis. Adjustments are made for unexpected loan prepayments
as they occur.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
Capitalized costs relating to employment agreements and covenants not to
compete are amortized on a straight-line basis over the term of the related
agreement.
LOAN PLACEMENT AND BROKERAGE
Revenue from loan placement and brokerage is recognized at the time that a
noncontingent commitment is obtained and the Company has no significant
remaining obligations for performance in connection with the transaction.
Related expenses are charged to income as incurred.
LOAN SERVICING
Loan servicing revenue represents a participation in interest collections
on loans serviced for investors, normally based upon a stipulated
percentage of the outstanding monthly principal balance of such loans.
These revenues are credited to income as monthly principal and interest
payments are collected from mortgagors, and expenses of loan servicing are
charged to income as incurred.
INCOME TAXES
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to federal income tax. The shareholders
include the Company's taxable income or loss in their individual tax
returns. For California state income tax purposes, the Company is taxed
under Subchapter S status.
2. RELATED-PARTY TRANSACTIONS:
L.J. Melody & Company provides loan servicing on certain loans obtained by
the Company and also provides administrative services for which the Company
paid $130,608 during the six months ended June 30, 1996.
F-57
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
(UNAUDITED)
3. SUBSEQUENT EVENT:
Effective July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage),
a wholly owned subsidiary of CB Commercial Real Estate Group, Inc.,
acquired all of the outstanding capital stock of the Company and of L.J.
Melody & Company (LJMCo), an affiliate of the Company. Concurrent with this
transaction the Company distributed approximately $66,000 of assets to its
shareholders. On July 9, 1996, CB Mortgage merged into LJMCo, with the
LJMCo surviving the merger. As a result of the merger, the Company became a
wholly owned subsidiary of LJMCo, and it is intended that at the end of
1996 the Company will be merged into LJMCo.
F-58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
L.J. Melody & Company of California:
We have audited the accompanying balance sheet of L.J. Melody & Company of
California (a Texas corporation) as of December 31, 1995, and the related
statements of operations, changes in shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of L.J. Melody & Company of
California as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Houston, Texas
March 18, 1996 (except with Arthur Andersen LLP
respect to the matter discussed
in Note 6, as to which the date
is July 12, 1996)
F-59
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 181,400
Accounts receivable and other current assets....................... 1,168,189
----------
Total current assets.............................................. 1,349,589
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture and fixtures............................................. 135,796
Computer hardware and software..................................... 23,744
Leasehold improvements............................................. 65,665
----------
225,205
Less--Accumulated depreciation and amortization.................... (103,625)
----------
121,580
OTHER ASSETS:
Employment agreements and covenants not to compete,
net of accumulated amortization of $427,816....................... 111,624
Purchased loan servicing rights and related assets,
net of accumulated amortization of $540,490....................... 434,923
----------
Total assets...................................................... $2,017,716
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued employee benefits.......................................... $ 424,607
Accounts payable and accrued expenses.............................. 130,615
----------
Total current liabilities......................................... 555,222
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Voting common stock, par value $1 per share, 3,000 shares
authorized, 1,000 shares issued and outstanding................... 1,000
Nonvoting common stock, par value $1 per share, 1,000 shares
authorized, 1 share issued and held in treasury................... --
Additional paid-in capital......................................... 1,407,247
Retained earnings.................................................. 54,247
----------
1,462,494
----------
Total liabilities and shareholders' equity........................ $2,017,716
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES:
Loan placement and brokerage....................................... $2,776,119
Loan servicing..................................................... 693,926
Other income....................................................... 8,970
----------
3,479,015
EXPENSES:
Salaries and other compensation.................................... 2,093,064
General and administrative......................................... 975,849
Depreciation and amortization...................................... 273,393
----------
3,342,306
----------
NET INCOME.......................................................... $ 136,709
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
VOTING NONVOTING ADDITIONAL RETAINED
COMMON COMMON PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.. $1,000 $ 1 $1,205,025 $(81,268) $1,124,758
DISTRIBUTIONS TO OR ON BE-
HALF OF SHAREHOLDERS....... -- -- (25,000) -- (25,000)
CAPITAL CONTRIBUTIONS....... -- -- 227,222 -- 227,222
NET INCOME.................. -- -- -- 136,709 136,709
REPURCHASE OF NONVOTING
COMMON STOCK............... -- (1) -- (1,194) (1,195)
------ --- ---------- -------- ----------
BALANCE, December 31, 1995.. $1,000 $-- $1,407,247 $ 54,247 $1,462,494
====== === ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 136,709
Adjustments to reconcile net income to net cash used in operating
activities--
Depreciation and amortization..................................... 273,393
Changes in operating assets and liabilities--
Accounts receivable and other current assets..................... (991,917)
Accrued employee benefits........................................ 176,847
Accounts payable and accrued expenses............................ 59,031
---------
Net cash used in operating activities........................... (345,937)
INVESTING ACTIVITIES:
Proceeds from sale of equipment.................................... 1,577
Purchase of equipment.............................................. (69,483)
Purchase of loan servicing rights and related assets............... (41,124)
---------
Net cash used in investing activities........................... (109,030)
FINANCING ACTIVITIES:
Capital contributions.............................................. 227,222
Distributions to shareholders...................................... (25,000)
Repurchase of nonvoting common stock............................... (1,195)
---------
Net cash provided by financing activities....................... 201,027
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (253,940)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................... 435,340
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $ 181,400
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for state income taxes................... $ 800
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING MATTERS:
L.J. Melody & Company of California (the Company) is a commercial mortgage
banker and servicer of commercial mortgages. As of December 31, 1995, the
Company was servicing loans for others with principal balances aggregating
approximately $1.4 billion. Approximately 52 percent of loan placement and
brokerage revenue and 71 percent of loan servicing revenue were earned from
one investor. In addition, 12 percent of loan placement and brokerage
revenue and 25 percent of loan servicing revenue were earned from two
separate investors. The Company primarily operates in Southern California
and Arizona; however, it pursues mortgage banking operations in other areas
of the country as they arise. The following is a summary of the Company's
significant accounting matters.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement established the recognition and measurement standards
related to the impairment of long-lived assets. In May 1995, the Financial
Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans
for others, however those servicing rights are acquired. Effective January
1, 1996, the Company adopted SFAS No. 121 and 122. The adoption of these
standards did not have a material effect on the Company's financial
position or results of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market mutual funds.
Cash equivalents are carried at cost, which approximates fair value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Depreciation and
amortization are computed using the straight-line or double declining
balance methods over the assets' estimated useful lives, which range from
three to ten years.
PURCHASED LOAN SERVICING RIGHTS
The cost of purchased loan servicing rights is being amortized in
proportion to and over the period of estimated servicing income and on a
straight-line basis. Adjustments are made for unexpected loan prepayments
as they occur.
F-64
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
Capitalized costs relating to employment agreements and covenants not to
compete are amortized on a straight-line basis over the term of the related
agreement.
LOAN PLACEMENT AND BROKERAGE
Revenue from loan placement and brokerage is recognized at the time that a
noncontingent commitment is obtained and the Company has no significant
remaining obligations for performance in connection with the transaction.
Related expenses are charged to income as incurred.
LOAN SERVICING
Loan servicing revenue represents a participation in interest collections
on loans serviced for investors, normally based upon a stipulated
percentage of the outstanding monthly principal balance of such loans.
These revenues are credited to income as monthly principal and interest
payments are collected from mortgagors, and expenses of loan servicing are
charged to income as incurred. As of December 31, 1995, escrow funds of
$6,691,225, held in conjunction with servicing activities, were on deposit
in bank accounts held in trust for investors and are not included in the
accompanying balance sheet.
INCOME TAXES
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to federal income tax. The shareholders
include the Company's taxable income or loss in their individual tax
returns. For California state income tax purposes, the Company is taxed
under Subchapter S status.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are either carried at fair value or
cost. The carrying amounts of financial instruments reported at cost
approximate their fair values because of the short maturity, short lapse of
time between their issuance and year-end, and market interest rates, as
applicable, of those instruments.
2. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS:
The components of accounts receivable and other current assets at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Loan placement and brokerage fees receivable..................... $1,063,766
Other receivables................................................ 51,715
Other current assets............................................. 52,708
----------
$1,168,189
==========
</TABLE>
3. RELATED-PARTY TRANSACTIONS:
L.J. Melody & Company provides loan servicing on certain loans obtained by
the Company and also provides administrative services for which the Company
paid $261,246 and $72,000, respectively, during 1995.
F-65
<PAGE>
L.J. MELODY & COMPANY OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
4. LEASES:
Future minimum lease payments for noncancelable operating leases for office
space and equipment approximate $241,000, $230,000, $223,000, $207,000 and
$213,000 for the years ended December 31, 1996 through 2000, respectively.
Rent expense under these operating leases aggregated approximately $247,000
for the year ended December 31, 1995.
5. PROFIT-SHARING PLANS:
The Company has a 401(k) profit-sharing plan under which all employees are
eligible for participation after completing six months of service.
Participating employees can elect to make contributions to the plan on a
pretax salary deduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. Under the provisions of the plan, the
Company may make discretionary matching contributions. The Company's
contribution to the plan in 1995 was $42,867.
6. SUBSEQUENT EVENT:
On July 1, 1996, CB Commercial Mortgage Company, Inc. (CB Mortgage), a
wholly owned subsidiary of CB Commercial Real Estate Group, Inc., acquired
all of the outstanding capital stock of the Company and of L.J. Melody &
Company (LJMCo), an affiliate of the Company. On July 9, 1996, CB Mortgage
merged into LJMCo, with LJMCo surviving the merger. As a result of the
merger, the Company became a wholly owned subsidiary of LJMCo, and it is
intended that, at the end of 1996, the Company will be merged into LJMCo.
F-66
<PAGE>
Graphic on Inside Back Cover
Circular Diagram of arrows illustrating the integration
of all of the Company's commercial real estate services with
the needs of real estate owners and investors.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY, OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY
JURISDICTION WHERE OR, TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 12
The Company............................................................... 16
Use of Proceeds........................................................... 16
Price Range of Common Stock and Dividend Policy........................... 17
Capitalization............................................................ 18
Selected Consolidated Financial and Other Data............................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 36
Management................................................................ 50
Certain Transactions...................................................... 59
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 64
The Company's Credit Agreements........................................... 68
Shares Eligible For Future Sale........................................... 69
Underwriting.............................................................. 72
Legal Matters............................................................. 73
Experts................................................................... 73
Additional Information.................................................... 73
Pro Forma Financial Statements............................................ P-1
Financial Statements...................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,347,000 SHARES
[LOGO OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.]
CB COMMERCIAL REAL ESTATE
SERVICES GROUP, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee............................................. $ 39,205
National Association of Securities Dealers, Inc. filing fee...... 12,250
Nasdaq Stock Market Listing Fee.................................. 38,165
Blue Sky fees and expenses....................................... 20,000
Accounting fees and expenses..................................... 365,000
Legal fees and expenses.......................................... 300,000
Printing and engraving expenses.................................. 250,000
Registrar and Transfer Agent's fees.............................. 15,000
Miscellaneous fees and expenses.................................. 60,380
----------
Total........................................................ $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article Six of the
Registrant's Fourth Amended Restated Certificate of Incorporation (Exhibit
3(i).2 hereto) provides for the indemnification of the Company's directors and
officers to the extent and under the circumstances permitted by the Delaware
General Corporation Law.
The Purchase Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1996, the Company has sold 510,906 shares of Common Stock
to eight executive officers of the Company under the Company's 1996 Equity
Incentive Plan. These sales were made by private placement in reliance on the
exemption from registration provisions provided for in Section 4(2) of the
Securities Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access,
through employment, to information about the Registrant.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Purchase Agreement.
3(i).1* Third Restated Certificate of Incorporation of Registrant
filed as Exhibit 3.1 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
3(i).2+ Form of Fourth Restated Certificate of Incorporation of
Registrant to be filed after the effective date of this
Registration Statement.
3(ii).1* Second Amended and Restated Bylaws of the Registrant filed
as Exhibit 3.4 to Registrant's Post-Effective Amendment No.
1 to its Form S-1 Registration Statement, File No. 33-
29410.
3(ii).2+ Form of Third Amended and Restated Bylaws of the Registrant
to be adopted after the effective date of this Registration
Statement.
4.1+ Specimen Form of Common Stock Certificate.
4.2* Form of CB Commercial Holdings, Inc. Restricted Stock
Agreement between CB Commercial Holdings, Inc. and CB
Commercial Holdings, Inc.'s Officer or Employee, filed as
Exhibit 4.8 to the CB Commercial Holdings, Inc. Form S-1
Registration Statement, File No. 33-29410.
4.3* First Amendment to CB Commercial Holdings, Inc. Restricted
Stock Agreement files as Exhibit 4.9 to the CB Commercial
Holdings, Inc. Annual Report on Form 10-K for the year
ended December 31, 1989.
4.4++ Agreement by and between CB Commercial Holdings, Inc. and
Kajima U.S.A., Inc., Fukoku Mutual Life Insurance Company,
Kasen Development, Inc. and S.R.E.S.--Fifth Avenue, Inc.
dated August 30, 1996.
5.1+ Opinion of Pillsbury Madison & Sutro LLP.
10.1(i)* CB Commercial Holdings, Inc. Omnibus Stock and Incentive
Plan filed as Exhibit 10.13 to the CB Commercial Holdings,
Inc. Post-Effective Amendment No. 1 to Form S-1
Registration Statement, File No. 33-29410.
10.1(ii)* First Amendment to the CB Commercial Holdings, Inc. Omnibus
Stock and Incentive Plan filed as Exhibit 10.16 to the CB
Commercial Holdings, Inc. Annual Report on Form 10-K for
the year ended December 31, 1990.
10.1(iii)* Second Amendment to the CB Commercial Holdings, Inc. Omnibus
Stock and Incentive Plan filed as Exhibit 10.16 (iii) to
the CB Commercial Holdings, Inc. Annual Report on Form 10-K
for the year ended December 31, 1993.
10.1(iv)* Third Amendment to the CB Commercial Holdings, Inc. Omnibus
Stock and Incentive Plan filed as Exhibit 10.4 (iv) to the
CB Commercial Holdings, Inc. Annual Report on Form 10-K for
the year ended December 31, 1994.
10.2(i)* 1990 Stock Option Plan filed as Exhibit 4(a) to the CB
Commercial Holdings, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990.
10.2(ii)* First Amendment to the 1990 Stock Option Plan, filed as
Exhibit 10.15(ii) to the CB Commercial Holdings, Inc.
Annual Report on Form 10-K for the year ended December 31,
1992.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.2(iii)* Second Amendment to the 1990 Stock Option Plan filed as Exhibit
10.8 (iii) to the CB Commercial Holdings, Inc. Annual Report
on Form 10-K for the year ended December 31, 1993.
10.2(iv)* Third Amendment to the 1990 Stock Option Plan filed as Exhibit
10.5 (iv) to the
CB Commercial Holdings, Inc. Annual Report on Form 10-K for
the year ended December 31, 1994.
10.3* Form of Incentive Stock Option Agreement filed as Exhibit 4(b)
to the
CB Commercial Holdings, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990.
10.4* Form of Nonstatutory Stock Option Agreement filed as Exhibit
4(c) to the
CB Commercial Holdings, Inc. Quarter Report on Form 10-Q for
the quarter ended June 30, 1990.
10.5(i)* Second Amended and Restated Senior Secured Credit Agreement,
dated as of June 30, 1994 between CB Commercial Real Estate
Group, Inc. and The Sumitomo Bank, Limited filed as Exhibit
10.9 to the CB Commercial Holdings, Inc. Annual Report on Form
10-K for the year ended December 31, 1994.
10.5(ii)* Limited Waiver, Consent and Amendment No. 1 dated as of June
30, 1995 to Second Amended and Restated Senior Secured Credit
Agreement dated as of June 30, 1995 between CB Commercial Real
Estate Group, Inc. and The Sumitomo Bank, Limited, filed as to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.5(iii)* Amendment No. 2 dated as of June 30, 1996, to Second Amended
and Restated Senior Secured Credit Agreement dated as of June
30, 1994, between CB Commercial Real Estate Group, Inc. and
The Sumitomo Bank, Limited filed as Exhibit 10.6(iii) to the
Company's Quarterly Report on 10-Q for the quarter ended June
30, 1996.
10.5(iv)+ Form of Third Amended and Restated Senior Secured Credit
Agreement between
CB Commercial Real Estate Group, Inc. and The Sumitomo Bank,
Limited.
10.6(i)* Senior Subordinated Credit Agreement among Coldwell Banker
Commercial Group, Inc., CB Commercial Holdings, Inc. and
certain subsidiaries of Coldwell Banker Commercial Group,
Inc., as guarantors and Sumitomo Finance (Dublin) Limited,
dated July 20, 1990 (the "Senior Subordinated Credit
Agreement") filed as Exhibit 4(e) to the CB Commercial
Holdings, Inc. Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990.
10.6(ii)* Amendment No. 1 to Senior Subordinated Credit Agreement dated
as of October 10, 1991 among CB Commercial Real Estate Group,
Inc., as borrower,
CB Commercial Holdings, Inc. and certain subsidiaries of CB
Commercial Real Estate Group, Inc., as guarantors, and
Sumitomo Finance (Dublin) Limited, as lender filed as Exhibit
10.19 to CB Commercial Holdings, Inc. Current Report on Form
8-K dated March 27, 1992.
10.6(iii)* Amendment No. 2 to Senior Subordinated Credit Agreement dated
as of June 30, 1994 among CB Commercial Real Estate Group,
Inc., as borrower,
CB Commercial Holdings, Inc. and certain subsidiaries of CB
Commercial Real Estate Group, Inc., as guarantors, and
Sumitomo Finance (Dublin) Limited, as lender, filed as Exhibit
10.11 to the CB Commercial Holdings, Inc. Annual Report on
Form 10-K for the year ended December 31, 1994.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.6(iv)* Limited Waiver, Consent and Amendment No. 3 dated as of June
30, 1995 to Senior Subordinated Credit Agreement dated as of
October 10, 1991 among CB Commercial Real Estate Group, Inc.,
as borrower, CB Commercial Holdings, Inc. and certain
subsidiaries of CB Commercial Real Estate Group, Inc., as
guarantors, and Sumitomo Finance (Dublin) Limited, as lender,
filed as exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.6(v)* Amendment No. 4 dated as of June 30, 1996, to Senior
Subordinated Credit Agreement dated as of October 10, 1991,
among CB Commercial Real Estate Group, Inc. as borrower. CB
Commercial Holdings, Inc. and certain subsidiaries of CB
Commercial Real Estate Group, Inc., as guarantors, and
Sumitomo Finance (Dublin) Limited, as lender filed as Exhibit
10.7(v) to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1996.
10.7* CB Commercial Holdings, Inc. 1991 Service Providers Stock
Option Plan filed as Exhibit 10.27 to the CB Commercial
Holdings, Inc. Current Report on Form 8-K dated April 1, 1992.
10.8(i)* CB Commercial Holdings, Inc. Deferred Compensation Plan filed
as Exhibit 10.21 to the CB Commercial Holdings, Inc. Annual
Report on Form 10-K for the year ended December 31, 1993.
10.8(ii)* First Amendment to the CB Commercial Holdings, Inc. Deferred
Compensation Plan filed as Exhibit 10.13 (ii) to the CB
Commercial Holdings, Inc. Annual Report on Form 10-K for the
year ended December 31, 1994.
10.8(iii)* Second Amendment to the CB Commercial Holdings, Inc. Deferred
Compensation Plan, filed as exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.9* 1996 Equity Incentive Plan of CB Commercial Holdings, Inc.,
filed as exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.10* Form of Indemnification Agreement between CB Commercial
Holdings, Inc., CB Commercial Real Estate Group, Inc. and
directors and officers, filed as Exhibit 10.29 to the CB
Commercial Holdings, Inc. Annual Report on Form 10-K for the
year ended December 31, 1992.
10.11* Purchase Agreement dated as of May 15, 1995 among CB Commercial
Real Estate Group, Inc., Westmark Real Estate Acquisition
Partnership, L.P., and certain individuals signatory thereto,
filed as Exhibit 10.1 to the CB Commercial Holdings, Inc.
Current Report on Form 8-K dated June 30, 1995.
10.12 Employment Agreement between the Company and Lawrence J. Melody
dated July 1, 1996.
10.13 Registration Rights Agreement among the Company and Kajima
U.S.A., Inc., Fukoko Mutual Life Insurance Company, Kasen
Development, Inc. and S.R.E.S.-Fifth Avenue, Inc. dated
, 1996.
11.1* Statement of computation of earnings per share.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP regarding CB Commercial.
23.2 Consent of Arthur Andersen LLP regarding L.J. Melody.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Pillsbury Madison & Sutro LLP (included in its opinion
filed as Exhibit 5.1 to this Registration Statement).
24.1 Power of Attorney (see page II-6).
</TABLE>
- --------
* Incorporated by reference.
+ To be filed by amendment.
++ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Opinion of Arthur Anderson LLP.......................................... S-1
I--Condensed Financial Information of Registrant....................... S-2
II--Valuation and Qualifying Accounts................................... S-3
</TABLE>
All other schedules are not submitted because either they are not
applicable, not required or the information required is included in the
Consolidated Financial Statements, including the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS
ANGELES, STATE OF CALIFORNIA, ON THE 4TH DAY OF NOVEMBER, 1996.
CB Commercial Holdings, Inc.
/s/ David A. Davidson
By: _________________________________
DAVID A. DAVIDSON
SENIOR EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
TREASURER (PRINCIPAL FINANCIAL
OFFICER)
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
---- ----- ----
* Chief Executive November 4, 1996
- ------------------------------------- Officer (Principal
JAMES J. DIDION Executive Officer)
and Director
/s/ David A. Davidson Senior Executive November 4, 1996
- ------------------------------------- Vice President,
DAVID A. DAVIDSON Chief Financial
Officer, Treasurer
(Principal
Financial Officer)
* Executive Vice November 4, 1996
- ------------------------------------- President
RONALD J. PLATISHA (Principal
Accounting Officer)
* Director November 4, 1996
- -------------------------------------
STANTON D. ANDERSON
* Director November 4, 1996
- -------------------------------------
GARY J. BEBAN
* Director November 4, 1996
- -------------------------------------
RICHARD C. BLUM
II-6
<PAGE>
NAME TITLE DATE
---- ----- ----
* Director November 4, 1996
- -------------------------------------
* Director November 4, 1996
- -------------------------------------
RICHARD C. CLOTFELTER
Director November 4, 1996
- -------------------------------------
DANIEL A. D'ANIELLO
Director November 4, 1996
- -------------------------------------
HIROAKI HOSHINO
* Director November 4, 1996
- -------------------------------------
PAUL C. LEACH
* Director November 4, 1996
- -------------------------------------
GEORGE J. KALLIS
* Director November 4, 1996
- -------------------------------------
TAKAYUKI KOHRI
* Director November 4, 1996
- -------------------------------------
FREDERIC V. MALEK
* Director November 4, 1996
- -------------------------------------
LAWRENCE J. MELODY
* Director November 4, 1996
- -------------------------------------
JEFFREY S. MORGAN
* Director November 4, 1996
- -------------------------------------
RICHARD A. POGUE
II-7
<PAGE>
NAME TITLE DATE
---- ----- ----
Director November 4, 1996
- -------------------------------------
PETER V. UEBERROTH
* Director November 4, 1996
- -------------------------------------
GARY L. WILSON
*By: /s/ David A. Davidson
--------------------------------
DAVID A. DAVIDSON
ATTORNEY-IN-FACT
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CB Commercial Holdings, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of CB Commercial Holdings, Inc. included in this
Registration statement and have issued our report thereon dated January 31,
1996. Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The Schedule of Condensed
Financial Information of the Company and the Schedule of Valuation and
Qualifying Accounts of the Company are for purposes of complying with the
Securities Exchange Commission rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
January 31, 1996
Los Angeles, California
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
BALANCE SHEET
Advances to CB Commercial.................................... $ 42,918 $ 40,682
Investment in CB Commercial and subsidiaries................. 62,124 62,124
-------- --------
Total assets............................................... $105,042 $102,806
======== ========
Stockholders' Equity......................................... $105,042 $102,806
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT
Expenses--other.............................................. $ 39 $(45) 47
Provision for income taxes................................... 51 -- 1
---- ---- ----
Net income (loss).......................................... $(90) $ 45 $(48)
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS
Net income (loss)............................................ $(90) $ 45 $(48)
Adjustments to reconcile net income (loss) to net cash used
in operating activities..................................... -- -- --
Advances to CB Commercial................................... 90 (45) 48
---- ---- ----
Net cash provided by operating activities................... -- -- --
Cash flows from investing activities......................... -- -- --
Cash flows from financing activities......................... -- -- --
Net change in cash and cash equivalents...................... -- -- --
Cash and cash equivalents, at beginning of period............ -- -- --
---- ---- ----
Cash and cash equivalents, at end of period.................. $ -- $ -- $ --
==== ==== ====
</TABLE>
NOTES TO CONDENSED FINANCIAL INFORMATION
Note 1--In connection with the Acquisition, the Company, together with all
other CB Commercial subsidiaries, has guaranteed any and all
obligations of CB Commercial.
S-2
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RESERVE FOR ALLOWANCE
EMPLOYEE FOR BAD LEGAL
LOANS DEBTS RESERVE
----------- --------- -------
<S> <C> <C> <C>
Balance, December 31, 1992....................... $ -- $1,238 $1,226
Charges to expense.............................. 1,810 4,275 1,500
Write-offs...................................... (42) (975) (117)
------ ------ ------
Balance, December 31, 1993....................... 1,768 4,538 2,609
Charges to expense.............................. -- 1,096 1,250
Write-offs...................................... (23) (1,090) (404)
------ ------ ------
Balance, December 31, 1994....................... 1,745 4,544 3,455
Charges to expense.............................. -- 346 --
Write-offs...................................... (210) (490) --
------ ------ ------
Balance, December 31, 1995....................... $1,535 $4,400 $3,455
====== ====== ======
</TABLE>
S-3
<PAGE>
EXHIBIT 1.1
================================================================================
CB Commercial Holdings, Inc.
(a Delaware corporation)
. Shares of Common Stock
PURCHASE AGREEMENT
------------------
Dated: November __, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PURCHASE AGREEMENT................................................................ 1
SECTION 1. Representations and Warranties.................................. 3
-------------------------------
(a) Representations and Warranties.................................. 3
(i) Compliance with Registration Requirements.............. 3
(ii) Independent Accountants................................ 4
(iii) Financial Statements................................... 4
(iv) No Material Adverse Change in Business................. 4
(v) Good Standing of the Company........................... 4
(vi) Good Standing of Subsidiaries.......................... 5
(vii) Capitalization......................................... 5
(viii) Authorization of Agreement............................. 6
(ix) Authorization and Description of Securities............ 6
(x) Absence of Defaults and Conflicts...................... 6
(xi) Absence of Labor Dispute............................... 7
(xii) Absence of Proceedings................................. 7
(xiii) Accuracy of Exhibits................................... 7
(xiv) Possession of Intellectual Property.................... 7
(xv) Absence of Further Requirements........................ 7
(xvi) Possession of Licenses and Permits..................... 8
(xvii) Title to Property...................................... 8
(xviii) Compliance with Cuba Act............................... 8
(xix) Investment Company Act................................. 8
(xx) Environmental Laws..................................... 9
(xxi) Registration Rights.................................... 9
(xxii) [Others.].............................................. 9
(b) Officer's Certificates.......................................... 9
SECTION 2. Sale and Delivery to Underwriters; Closing...................... 9
------------------------------------------
(a) Initial Securities.............................................. 9
(b) Option Securities............................................... 10
(c) Payment......................................................... 10
(d) Denominations; Registration..................................... 11
SECTION 3. Covenants of the Company........................................ 11
-------------------------
(a) Compliance with Securities Regulations and Commission
Requests........................................................ 11
(b) Filing of Amendments............................................ 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(c) Delivery of Registration Statements............................. 11
(d) Delivery of Prospectuses........................................ 12
(e) Continued Compliance with Securities Laws....................... 12
(f) Blue Sky Qualifications......................................... 12
(g) Rule 158........................................................ 13
(h) Use of Proceeds................................................. 13
(i) Listing......................................................... 13
(j) Restriction on Sale of Securities............................... 13
(k) Reporting Requirements.......................................... 13
SECTION 4. Payment of Expenses............................................. 14
-------------------
(a) Expenses........................................................ 14
(b) Termination of Agreement........................................ 14
SECTION 5. Conditions of Underwriters' Obligations......................... 14
---------------------------------------
(a) Effectiveness of Registration Statement......................... 14
(b) Opinion of Counsel for Company.................................. 15
(c) Opinion of Counsel for Underwriters............................. 15
(d) Officers' Certificate........................................... 15
(e) Accountant's Comfort Letter..................................... 15
(f) Bring-down Comfort Letter....................................... 16
(g) Approval of Listing............................................. 16
(h) No Objection.................................................... 16
(i) Lock-up Agreements.............................................. 16
(j) The Recapitalization............................................ 16
(k) Conditions to Purchase of Option Securities..................... 16
(l) Additional Documents............................................ 17
(m) Termination of Agreement........................................ 17
SECTION 6. Indemnification................................................. 17
---------------
(a) Indemnification of Underwriters................................. 17
(b) Indemnification of Company, Directors and Officers.............. 18
(c) Actions against Parties; Notification........................... 18
(d) Settlement without Consent if Failure to Reimburse.............. 19
SECTION 7. Contribution.................................................... 19
------------
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.. 21
--------------------------------------------------------------
SECTION 9. Termination of Agreement........................................ 21
-----------------------
(a) Termination; General............................................ 21
(b) Liabilities..................................................... 21
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 10. Default by One or More of the Underwriters................... 21
------------------------------------------
SECTION 11. Notices...................................................... 22
-------
SECTION 12. Parties...................................................... 22
-------
SECTION 13. Governing Law and Time....................................... 23
----------------------
SECTION 14. Effect of Headings........................................... 23
------------------
SCHEDULE A................................................................ Sch A-1
SCHEDULE B................................................................ Sch B-1
SCHEDULE C................................................................ Sch C-1
Exhibit A................................................................. A-1
Exhibit B................................................................. B-1
</TABLE>
iii
<PAGE>
Draft of October 15, 1996
CB Commercial Holdings, Inc.
(a Delaware corporation)
. Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
------------------
November __, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
and
Montgomery Securities
as Representatives of the Several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
2 North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
CB Commercial Holdings, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch and Montgomery Securities are acting as
representatives (in such capacity, the "Representatives"), with respect to the
issue and sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of Common Stock,
par value $.01 per share, of the Company ("Common Stock") set forth in said
Schedule A, and with respect to the grant by the Company to the Underwriters,
acting severally and not jointly, of the option described in Section 2(b) hereof
to purchase all or any part of XXX additional shares of Common Stock to cover
over-allotments, if any. The aforesaid . shares of Common Stock (the "Initial
Securities") to be purchased by the Underwriters and all or any part of the XXX
shares of Common Stock subject to the option described in Section 2(b) hereof
(the "Option Securities") are hereinafter called, collectively, the
"Securities."
1
<PAGE>
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-12757) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
The information included in such prospectus or in such Term Sheet, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 1996 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
2
<PAGE>
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties. Each of the Company and CB Commercial
Real Estate Group, Inc, a Delaware corporation and wholly-owned subsidiary of
the Company ("Real Estate Group"), represent and warrant to each Underwriter as
of the date hereof, as of the Closing Time referred to in Section 2(c) hereof,
and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither the Prospectus nor any amendments or supplements
thereto, at the time the Prospectus or any such amendment or supplement was
issued and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply with the requirements of Rule 434 and the
Prospectus shall not be "materially different," as such term is used in
Rule 434, from the prospectus included in the Registration Statement at the
time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
3
<PAGE>
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
--------------------
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company,
Westmark Realty Advisors, L.J. Melody & Company and L.J. Melody & Company
of California and their respective consolidated subsidiaries at the dates
indicated and the statement of operations, stockholders' equity and cash
flows of such companies and their respective consolidated subsidiaries for
the periods specified; said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied
on a consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in
the Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectus present fairly the information shown therein,
have been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred
to therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly organized
----------------------------
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform
4
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its obligations under this Agreement; and the Company is duly qualified as
a foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
-----------------------------
the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are [(a)] the subsidiaries listed on Exhibit 21
to the Registration Statement [and (b) certain other subsidiaries which,
considered in the aggregate as a single Subsidiary, do not constitute a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X.]
(vii) Capitalization. Upon the occurrence of the recapitalization
--------------
described in the Prospectus under the caption "The Recapitalization" (the
"Recapitalization") and after giving effect to (A) the Company's
acquisition of L.J. Melody & Company and L.J. Melody & Company of
California and (B) the offering of the Securities, the authorized, issued
and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" in the column entitled "As
Further Adjusted" (except for subsequent issuances, if any, pursuant to
this Agreement, pursuant to reservations, agreements or employee benefit
plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus). The
shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock of the Company was issued
in violation of the preemptive or other similar rights of any
securityholder of the Company. Upon completion of the Recapitalization,
the shares of capital stock of the Company issued in connection therewith
will have been duly authorized and validly issued and will be fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company issued in connection with the Recapitalization will have been
issued in violation of the preemptive or other similar rights of any
securityholder of the Company.
5
<PAGE>
(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities have
-------------------------------------------
been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company pursuant to
this Agreement against payment of the consideration set forth herein, will
be validly issued and fully paid and non-assessable; upon completion of the
Recapitalization, the Common Stock will conform to all statements relating
thereto contained in the Prospectus and such description will conform to
the rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the preemptive
or other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any of
---------------------------------
its subsidiaries is in violation of its charter or by-laws or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein and
in the Registration Statement (including the Recapitalization, the issuance
and sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Company with its obligations hereunder and
in connection with the Recapitalization have been duly authorized by all
necessary corporate action and do not and will not, whether with or without
the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary
pursuant to, the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will any such action result in
any violation of the provisions of the charter or by-laws of the Company or
any subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any subsidiary.
6
<PAGE>
(xi) Absence of Labor Dispute. No labor dispute with the employees of
------------------------
the Company or any subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected
to materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated by the Recapitalization or in
this Agreement or the performance by the Company of its obligations
thereunder or hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any subsidiary is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this
7
<PAGE>
Agreement and the Recapitalization, except such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws.
(xvi) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one enterprise,
and under which the Company or any of its subsidiaries holds properties
described in the Prospectus, are in full force and effect, and neither the
Company nor any subsidiary has any notice of any material claim of any sort
that has been asserted by anyone adverse to the rights of the Company or
any subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
8
<PAGE>
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(xxi) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act.
(xxii) [Others.]
------
(b) Officer's Certificates. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or
to counsel for the Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered
thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
9
<PAGE>
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional XXX shares of Common Stock at
the price per share set forth in Schedule B, less an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Representatives to the Company setting
forth the number of Option Securities as to which the several Underwriters are
then exercising the option and the time and date of payment and delivery for
such Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, Suite 3400, Los
Angeles, CA 90071 or at such other place as shall be agreed upon by the
Representatives and the Company, at 6:00 A.M. (California time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Representatives and the Company
(such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment
10
<PAGE>
of the purchase price for the Initial Securities or the Option Securities, if
any, to be purchased by any Underwriter whose funds have not been received by
the Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives notice
of its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies of the
11
<PAGE>
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for each of the Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any
12
<PAGE>
jurisdiction in which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so qualified,
the Company will file such statements and reports as may be required by the laws
of such jurisdiction to continue such qualification in effect for a period of
not less than one year from the effective date of the Registration Statement and
any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds."
(i) Listing. [The Company will use its best efforts to effect the listing
of the Common Stock (including the Securities) on the New York Stock
Exchange.][The Company will use its best efforts to effect and maintain the
quotation of the Securities on the Nasdaq National Market and will file with the
Nasdaq National Market all documents and notices required by the Nasdaq National
Market of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National Market.]
(j) Restriction on Sale of Securities. During a period of [ ] days
from the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee
director stock plan.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
13
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SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
-------------------
all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the listing of the Securities on the
[New York Stock Exchange][inclusion of the Securities in the Nasdaq National
Market].
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon
14
<PAGE>
Rule 434, a Term Sheet shall have been filed with the Commission in accordance
with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of
Pillsbury, Madison & Sutro, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the charter or by-laws of the Company), (viii) through (x),
inclusive, (xii), (xiv) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State of
New York and the federal law of the United States and the General Corporation
Law of the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of each of the
Company and Real Estate Group and of the chief financial or chief accounting
officer of each of the Company and Real Estate Group, dated as of Closing Time,
to the effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) each of the Company and Real Estate Group has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from each of Arthur Andersen
and KPMG Peat Marwick a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced copies
of such letter for each of the other Underwriters containing
15
<PAGE>
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from each of Arthur Andersen and KPMG Peat Marwick a letter, dated
as of Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(g) Approval of Listing. [At Closing Time, the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.] [At Closing Time, the Securities shall have been approved
for inclusion in the Nasdaq National Market, subject only to official notice of
issuance.]
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Representatives
shall have received an agreement substantially in the form of Exhibit B hereto
signed by the persons and entities listed on Schedule C hereto.
(j) The Recapitalization. The Recapitalization shall have occurred prior
to or simultaneously with the Closing Time. [Others.]
(k) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
Pillsbury, Madison & Sutro, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by Section 5(b)
hereof.
16
<PAGE>
(iii) Opinion of Counsel for Underwriters. The favorable opinion of
-----------------------------------
Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, dated
such Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from each of Arthur Andersen
-------------------------
and KPMG Peat Marwick, in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the same
form and substance as the letter furnished to the Representatives pursuant
to Section 5(f) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than five
days prior to such Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of Underwriters. The Company and Real Estate Group
agree jointly and severally to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the
17
<PAGE>
Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment thereto)
or such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from
18
<PAGE>
any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
------------
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and Real
Estate Group on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and Real Estate Group on
the one hand and of the Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
19
<PAGE>
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company and Real Estate Group on the one hand and
the Underwriters on the other hand shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by the Company and Real Estate Group or by the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and Real Estate Group and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations
20
<PAGE>
to contribute pursuant to this Section 7 are several in proportion to the number
of Initial Securities set forth opposite their respective names in Schedule A
hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or [the New
York Stock Exchange] [the Nasdaq National Market], or if trading generally on
the American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by any
Federal, New York or California authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of
------------------------------------------
the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms
21
<PAGE>
herein set forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the number
of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at 10900 Wilshire
Boulevard, Suite 900, Los Angeles, California 90024, attention of David L.
Knowles; and notices to the Company shall be directed to it at 533 Fremont
Avenue, Los Angeles, CA 90071, attention of Walter V. Stafford.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No
22
<PAGE>
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
CB Commercial Holdings, Inc.
By:
___________________________________________
Title:
CB Commercial Real Estate Group, Inc.
By:
___________________________________________
Title:
CONFIRMED AND ACCEPTED
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MONTGOMERY SECURITIES
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By _____________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
<PAGE>
SCHEDULE A
Number of
Initial
Name of Underwriter Securities
------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................
Montgomery Securities................................
----------
Total................................................ .
==========
Sch A-1
<PAGE>
SCHEDULE B
CB Commercial Holdings, Inc.
. Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $. .
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $., being an amount equal to the initial public
offering price set forth above less $. per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
List of Persons and Entities
Subject to Lock-up
Sch C-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(iv) Upon the occurrence of the recapitalization described in the
Prospectus under the caption "The Recapitalization" (the
"Recapitalization") and after giving effect to (a) the Company's
acquisition of L.J. Melody & Company and L.J. Melody & Company of
California and (b) the offering of the Securities, the authorized, issued
and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" in the column entitled "As
Further Adjusted" (except for subsequent issuances, if any, pursuant to the
Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the
shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
and none of the outstanding shares of capital stock of the Company was
issued in violation of the preemptive or other similar rights of any
securityholder of the Company. Upon completion of the Recapitalization,
the shares of capital stock of the Company issued in connection therewith
will have been duly authorized and validly issued and will be fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company issued in connection with the Recapitalization will have been
issued in violation of the preemptive or other similar rights of any
securityholder of the Company.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment
of the consideration set
A-1
<PAGE>
forth in the Purchase Agreement, will be validly issued and fully paid and
non-assessable and no holder of the Securities is or will be subject to
personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
(vii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect; except as otherwise disclosed in the Registration Statement, all of
the issued and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to the
best of our knowledge, is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the
best of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the
Registration Statement and Prospectus as of their respective effective or
issue dates (other than the financial statements and supporting schedules
included therein or omitted therefrom, as to which we need express no
opinion) complied as to form in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
A-2
<PAGE>
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws
of the Company and the requirements of the [New York Stock Exchange/Nasdaq
National Market].
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Company or any subsidiary is a party, or to which the property of the
Company or any subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated by the
Recapitalization or in the Purchase Agreement or the performance by the
Company of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of Capital
Stock" and "The Company's Credit Agreements" and in the Registration
Statement under Item 14, to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and by-laws or legal
proceedings, or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are
no franchises, contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto, and the descriptions thereof or references thereto are
correct in all material respects.
(xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and no default by the
Company or any subsidiary exists in the due performance or observance of
any material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by
reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the
A-3
<PAGE>
various states, as to which we need express no opinion) is necessary or
required in connection with the due authorization, execution and delivery
of the Purchase Agreement or for the offering, issuance or sale of the
Securities.
(xix) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the
Purchase Agreement and in the Registration Statement (including the
Recapitalization and the issuance and sale of the Securities and the use of
the proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use Of Proceeds") and compliance by the Company with its
obligations under the Purchase Agreement and in connection with the
Recapitalization do not and will not, whether with or without the giving of
notice or lapse of time or both, conflict with or constitute a breach of,
or default or Repayment Event (as defined in Section 1(a)(x) of the
Purchase Agreement) under or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Company or any subsidiary is a party
or by which it or any of them may be bound, or to which any of the property
or assets of the Company or any subsidiary is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not have a Material Adverse Effect), nor will any such action result
in any violation of the provisions of the charter or by-laws of the Company
or any subsidiary, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their respective properties, assets or
operations.
(xx) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
(xxii) [Others.]
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the
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<PAGE>
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. Such opinion shall
not state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA
Section of Business Law (1991).
A-5
<PAGE>
Exhibit B
November __, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
and
MONTGOMERY SECURITIES
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
2 North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by CB Commercial Holdings, Inc.
--------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of CB
Commercial Holdings, Inc., a Delaware corporation (the "Company"), understands
that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Montgomery Securities propose to enter into a Purchase
Agreement (the "Purchase Agreement") with the Company providing for the public
offering of shares (the "Securities") of the Company's common stock, par value
$.01 per share (the "Common Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned as a stockholder [and an officer
and/or director] of the Company, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the undersigned
agrees with each underwriter to be named in the Purchase Agreement that, during
a period of [ ] days from the date of the Purchase Agreement, the undersigned
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of the Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file or cause to be filed any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause
B-1
<PAGE>
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise.
Very truly yours,
Signature:
___________________________________
Print Name:
__________________________________
B-2
<PAGE>
EXHIBIT 10.12
6/29/96
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is made the 1st day of July, 1996, by and
between CB Commercial Mortgage Company, Inc., a Delaware corporation (the
"COMPANY") and Lawrence J. Melody (the "EXECUTIVE").
RECITALS
--------
Whereas Executive was a principal owner and an executive officer of
L.J. Melody & Company, a Texas corporation ("LJMCO") and L.J. Melody of
California, a Texas corporation ("LJMCAL"), each of which has been in the
business of real estate loan originations, real estate loan servicing and
pension advisory/asset management services; and,
Whereas Executive, who is a highly respected and experienced
individual in the mortgage banking area of loan originations, loan servicing and
pension advisory/asset management services, has sold his interests in LJMCo and
LJMCal to the Company (the "ACQUISITION") pursuant to two separate Stock
Purchase Agreements, each dated as of June 27, 1996 (the "STOCK PURCHASE
AGREEMENTS"), subject to the condition that he become an executive of the
Company and, following the merger of the Company with and into LJMCo that he
remain an executive of LJMCo; and,
Whereas CB Commercial Real Estate Group, Inc., a Delaware corporation
("CB COMMERCIAL"), the parent corporation of the Company, has transferred and
contributed, or within thirty (30) days after the date hereof will transfer and
contribute, its real estate loan origination and servicing business to LJMCo for
consolidation with the similar businesses of LJMCo and LJMCal.
AGREEMENT
---------
Now therefore, the parties hereto hereby agree as follows:
SECTION I. POSITION AND REPORTING RELATIONSHIP
On the terms and conditions set forth herein, the Company agrees to employ
Executive as its President and Chief Executive Officer and Executive agrees to
be so employed on a full-time basis. Executive shall not (a) render services
which are competitive to the real estate loan origination, loan servicing and
pension advisory/asset management services business of the Company to any other
person or entity (other than an Affiliate of the Company) or (b) engage in any
other active business endeavor (as distinguished from investments and other
activities referred to below) that diverts any significant time from the
business of the Company or performance of Executive's duties pursuant to this
Agreement, in either case without the express prior approval of the Company's
Board of Directors or the Chief Executive Officer of CB Commercial. The
foregoing notwithstanding, the Company
<PAGE>
understands and agrees that Executive may engage in civic, charitable, religious
or comparable activities and may devote a reasonable amount of time to private
investments that are not competitive with and do not unreasonably interfere or
conflict with Executive's responsibilities to the Company.
Executive shall report to the Board of Directors of the Company and
the Chief Executive Officer of CB Commercial.
SECTION II. EXECUTIVE'S REQUIRED WORK; EXECUTIVE'S JOB DESCRIPTION AND
GOALS
A. REQUIRED WORK. Executive shall work on the business of the Company on
-------------
a "FULL TIME BASIS," which for purposes hereof shall mean such time as Executive
determines, in his own judgment, to be necessary to discharge his duties under
this Agreement. Executive shall perform his responsibilities to the Company in
good faith, without engaging in activities which he knows would be in conflict
or be competitive with the real estate loan origination, loan servicing and
pension advisory and asset management services business of the Company, and will
not render his services to any other person or entity (other than an Affiliate
of the Company) for such person's or entity's business except as approved by the
Company's Board of Directors or the Chief Executive Officer of CB Commercial and
except that Executive may engage in civic, charitable, religious or comparable
activities and may devote a reasonable amount of time to investments that are
not competitive with and do not unreasonably interfere or conflict with
Executive's responsibilities to the Company).
B. EXECUTIVE'S JOB DESCRIPTION AND GOALS. Generally, Executive shall
-------------------------------------
fulfill responsibilities with the Company comparable to those which he performed
previously for LJMCo and/or LJMCal, with the objective of sustaining and
increasing the business and profitability of the Company. In discharge of his
responsibilities, Executive shall:
(1) INTEGRATION. Use his best efforts to cause the integration, on a
-----------
cost-effective basis, of the real estate loan origination and real estate loan
servicing businesses of LJMCo, LJMCal and CB Commercial. On a combined basis
for 1995, such companies produced a pre-tax return of approximately 9.3% on $20
million of combined revenues, without adjustment for the excluded costs referred
to below and without taking into account the changes in personnel and offices to
be completed pursuant to the Merger Agreement. One of the goals which Executive
and Company mutually agree that the Company should pursue is to seek to attain,
over time, a pre-tax income for the Company (computed before CB Commercial and
other allocated overhead, loan amortization and Executive's incentive
compensation) of at least 20% of the Company' s revenues.
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<PAGE>
(2) NEW LOAN SOURCES. Use his best efforts to develop loan sources
----------------
which (a) will help to permit the establishment of the network described below
in this Section and (b) will help to serve the needs of the clients of the
Investment Properties Division of CB Commercial, with particular emphasis on
loan sources for loans in the $1,000,000 to $5,000,000 range. In working to
develop such loan sources, Executive will use reasonable efforts to work closely
with the head of the Investment Properties Division of CB Commercial.
(3) DIRECTIVES OF BOARD OF DIRECTORS. Use reasonable efforts to carry
--------------------------------
out the lawful directives of the Board of Directors of the Company and the Chief
Executive Officer of CB Commercial from time to time.
(4) ESTABLISHMENT OF ORIGINATION NETWORK. To the extent funds for
------------------------------------
such purposes are provided by the Company, use his best efforts to establish on
or before December 31, 1998, a loan origination network which has offices in
each of the cities set forth on Exhibit A; provided, however, Executive shall
---------
have no obligation to establish an office in any location which in his
reasonable judgment cannot both access multiple competitive loan sources on a
reasonable basis and employ high quality, experienced loan producers, unless the
cost of such office is borne by someone other than the Company; and provided
further Executive shall have no obligation to establish an office in any
location in which he reasonably concludes an acquisition of an existing mortgage
banking business should be made rather than the Company establishing a "start-
up" office in such city.
(5) BUSINESS DEVELOPMENT/CLIENT RELATIONS. Spend such time and
-------------------------------------
energies as Executive considers appropriate in maintaining contact and working
relations with existing clients (borrowers and lenders) of the Company and in
efforts to expand the business of the Company with prospective borrowers or
lenders with which the Company seeks to do business.
SECTION III. EXECUTIVE'S AUTHORITY
Subject to the applicable limitations referred to in Section IV, as the
Chief Executive Officer of the Company, Executive shall have all authority
reasonably appropriate to that position, including the authority to:
A. manage the day-to-day activities of the Company;
B. fulfill his duties under this Agreement including the right to hire
and fire employees and other service providers and, subject to applicable law,
the right to establish compensation levels (hourly wage, salary, commissions and
incentives) and other terms and conditions of engagement for all employees and
service providers of the Company, subject to any compensation decision by
Executive not being contrary to or inconsistent with
-3-
<PAGE>
any compensation plan, policy or limitation adopted by the Company's Board of
Directors and communicated to Executive;
C. sign agreements, including real and personal property leases and other
documents on behalf of the Company, in the ordinary course of business; and
D. subject to Section II.B.2. (New Loan Sources), select the lending
sources used by the Company to provide borrowers with funds to acquire, improve
or refinance real property related projects.
SECTION IV. LIMITATIONS ON EXECUTIVE'S AUTHORITY
Executive shall not take any action which is materially contrary to or
inconsistent with any operating or capital budget or other limitation adopted by
the Company's Board of Directors and communicated to Executive. Executive shall
not, in the course of his employment, take any action or omit to take any action
which is contrary to Executive's duties under this Agreement, or any code of
conduct applicable to all senior executive officers in CB Commercial and its
major subsidiaries, as any such code of conduct may be established by the
Company's Board of Directors and communicated to Executive from time to time.
SECTION V. TERM
Unless earlier terminated pursuant to an express provision in this
Agreement, this Agreement shall be in effect from July 1, 1996 through June 30,
2001 (the "Term").
SECTION VI. COMPENSATION, INCENTIVE COMPENSATION AND EMPLOYEE BENEFITS
A. SALARY. During the Term of this Agreement and thereafter while an
------
employment relationship (as defined in Section VII.H. hereof) continues to
exist, Employee shall receive a salary of $25,000 per month (payable semimonthly
in accordance with the Company's regular payroll procedures) plus a car
allowance of $1,000 per month (such salary and car allowance are collectively
referred to as the "BASE SALARY"); however, Company shall not be obligated to
continue paying such Base Salary for any period after this Agreement is
terminated for other cause pursuant to Section VII.A.2. hereof. The Board of
Directors of the Company will review Executive's Base Salary at least annually
and may increase or decrease the monthly salary and car allowance of Executive
upon each such annual review for the coming year, but in no event shall the sum
of such items be less than the initial $26,000 monthly Base Salary stated in
this paragraph.
B. INCENTIVE COMPENSATION. Executive shall be entitled to incentive
----------------------
compensation ("INCENTIVE COMPENSATION") for each year
-4-
<PAGE>
during the Term of this Agreement equal to ten percent (10%) of the Company's
Adjusted Pre-Tax Profits provided he is employed by the Company on December 31
of such year, and in certain cases as herein expressly provided Executive shall
be entitled to receive a pro rated percentage of such incentive compensation for
a partial year. Such incentive compensation for any year shall be paid on or
before March 15 of the next following year. The term "ADJUSTED PRE-TAX PROFIT"
means the annual pre-tax net income of the Company determined under generally
accepted accounting principles, consistently applied throughout the Term,
without deducting any of the items listed in paragraph 1. below but after
deducting all of the items listed in paragraph 2. below:
1. Items Not To Be Deducted In Determining Executive's Incentive
-------------------------------------------------------------
Compensation. The following items shall not be deducted in calculated
------------
Adjusted Pre-Tax Profit:
a. Executive's incentive compensation;
b. Payments to and/or accruals of any employee equity
equivalent or other profit sharing arrangement established
as contemplated by Section 9.7 of the Merger Agreement
relating to the Acquisition;
c. Any amortization (or other cost) associated with goodwill
relating to the Acquisition of LJMCo or LJMCal by the
Company;
d. Any interest on any debt associated with or fees paid for
any letter of credit obtained in connection with the
Acquisition of LJMCo and LJMCal by the Company;
e. Any expenses or one time costs related to the Acquisition of
LJMCo or LJMCal by the Company, including, without
limitation, legal fees, accounting fees, travel costs,
filing fees, employee termination costs, office closing or
consolidation costs, and other costs of the Acquisition and
the combination of the Company's and CB Commercial's real
estate loan origination and servicing operations;
f. Except as provided in subparagraph 2.d. below, any
centralized costs or overhead allocations of CB Commercial
or any of its Affiliates otherwise allocated to the Company;
and
g. Any costs of key man or similar life insurance on the life
of Executive purchased by the Company after the date hereof
-5-
<PAGE>
(including any policy obtained pursuant to Section 9.12 of
the LJMCO Stock Purchase Agreement).
2. Items To Be Deducted For Determining Executive's Incentive
----------------------------------------------------------
Compensation. The following items shall be deducted in calculating
------------
Adjusted Pre-Tax Profit:
a. The actual cost to CB Commercial of providing employee
benefits to the employees of the Company (other than as
provided in subparagraphs 1.a. and 1.b. above);
b. Interest on working capital provided by CB Commercial which
is reasonably required for the successful operation of the
Company and not available from cash flow from Company
operations, but the rate of such interest shall not exceed
the rate charged to CB Commercial by its principal lender
(currently, The Sumitomo Bank, Ltd.);
c. Interest, goodwill amortization and expenses associated with
any acquisition made by the Company (subject to the
limitations on future acquisitions as provided in Section
9.8 of the LJMCO Stock Purchase Agreement) other than the
Acquisition of LJMCo and LJMCal;
d. 1.5% of the Company's revenues in excess of $20.5 Million,
as the only allocation of overhead and central costs of CB
Commercial and any of its Affiliates; and
e. The actual cost to CB Commercial of providing the Company
with liability, errors and omissions and other insurance,
the actual cost of providing the Company with accounting
services and the actual cost of any other goods or services
provided to the Company by CB Commercial at the Company's
express request and with the approval of Executive.
With respect to 1996 only, in computing the Adjusted Pre-Tax Profits,
loan origination fees attributable to CB Commercial producers with respect to
loans which were committed or under application on or before June 30, 1996 and
which close on or before July 31, 1996, shall be excluded from revenue, but all
other loan origination fees attributable to CB Commercial producers shall be
included in revenue in computing Adjusted Pre-Tax Profits.
C. EMPLOYEE BENEFITS. In addition to his participation in the Company's
-----------------
benefit and other plans available to selected
-6-
<PAGE>
officers in the Company (such as the employee equity equivalent plan), Executive
shall be entitled to participate in each employee pension, welfare, fringe
benefit and deferred compensation plan (but not any bonus or incentive
compensation plans) (such pension, welfare, fringe benefit and deferred
compensation plans being herein referred to as the "EMPLOYEE BENEFIT PLANS")
available to Senior Executive Vice Presidents of CB Commercial, but subject to
the terms and conditions of each such plan and applicable legal requirements.
D. MEMORIAL CITY SHOPPING CENTER FEE. Within ten (10) days after all or
---------------------------------
any part of a fee is collected by L.J. Melody & Company or Company with respect
to Memorial City Shopping Center, the Company or L.J. Melody & Company shall pay
to Executive thirty-five percent (35%) of such fee so collected, whether or not
Executive is then employed by the Company or L.J. Melody & Company and
regardless of the cause for termination of such employment. The fee payable
under this paragraph is separate and distinct from Base Salary and incentive
compensation provided for herein and shall not be taken into account for
purposes of any severance benefits payable under Section VIII hereof.
SECTION VII. TERMINATION
A. COMPANY'S RIGHT WITH CAUSE.
--------------------------
1. Material Cause. The Company may terminate Executive's employment
--------------
and his employment relationship hereunder at any time, upon notice to
Executive (and after an opportunity to cure as provided in Section VII.I.
hereof) provided it has Material Cause (as defined in Section IX.A.) for
such termination. In the event of termination by the Company for Material
Cause, Executive's sole rights for Claims (as herein defined) under this
Agreement as a result of such termination of employment shall be as set
forth in Section VIII.A. (Accrued Salary and Benefits).
2. Other Cause. If no Material Cause for termination of the
-----------
employment relationship exists, Company may nevertheless terminate
Executive's employment by the Company at any time, upon notice (and after
opportunity to cure as provided in Section VII.I. hereof), if in Company's
good faith judgment Executive has failed to comply with his duty of loyalty
to the Company or has failed to use his best or reasonable efforts (as
specified in Section II hereof) to discharge the duties and
responsibilities and/or reach the goals set under Section II.B.
(Executive's Job Description and Goals) or Executive exceeds his authority
under Article III (Executive's Authority). Without limiting the generality
of the foregoing, Company may terminate Executive's employment pursuant to
this Agreement (without terminating his employment relationship) if
Executive commits any material breach of his obligations under Section I.
(Position and Reporting Relationship),
-7-
<PAGE>
Section II.B.(3) (Directives of Board of Directors), Section IV.
(Limitations on Executive's Authority) or Section X. (Proprietary
Information) of this Agreement or if Executive repetitively and willfully
breaches any such obligations whether or not each such breach is material.
A failure to achieve any of the goals described in subparagraphs (1), (2)
or (4), Section II.B. (Executive's Job Description and Goals) shall not
constitute a breach of this Agreement by Executive, and Executive's failure
to perform any of his duties under Section II to the satisfaction of the
Board of Directors of the Company shall not constitute Material Cause.
B. COMPANY'S RIGHT WITHOUT CAUSE. The Company may terminate Executive's
-----------------------------
employment hereunder, without impact on the continued existence of Executive's
employment relationship hereunder, without Material Cause or without other cause
as provided above in Section VII A.2. (Other Cause) upon notice to Executive;
however such termination shall be deemed a breach by Company hereof and require
the payment of severance benefits pursuant to Section VIII. A. and C
(Termination Without Terminating Employment Relationship).
C. EXECUTIVE'S RIGHT WITH GOOD REASON. Executive may terminate his
----------------------------------
employment hereunder at any time upon notice to the Company (and after an
opportunity to cure as provided in Section VII.I. below) with Good Reason (as
defined in Section IX. B.) upon notice to the Company. In such event Executive
shall be entitled to severance benefits pursuant to Section VIII. A. and C.
D. EXECUTIVE'S RIGHT WITHOUT GOOD REASON. Executive may terminate his
-------------------------------------
employment hereunder without Good Reason at any time upon notice to the Company,
but in such event he shall be deemed to be in breach of this Agreement and in
such case Company's sole obligation shall be to make the payments accrued under
Section VIII.A. hereof and Company shall not be obligated to pay and Executive
shall not be entitled to receive any then unpaid incentive compensation for the
year in which such termination occurs.
E. DEATH. Executive's employment hereunder shall automatically terminate
-----
in the event of his death. In such event Executive shall be entitled to
severance benefits as provided in Section VIII. A. and B, with incentive
compensation for the year in which death occurs prorated to the date of death.
F. DISABILITY. The Company may terminate Executive's employment pursuant
----------
to this Agreement at any time upon 30 days' written notice to Executive if as a
result of a physical or mental condition, Executive has been unable, with
reasonable accommodation provided by the Company, for a period of three
consecutive months and will continue to be unable for an additional period
exceeding six consecutive months to
-8-
<PAGE>
substantially perform his duties and obligations under Section II. A. (Required
Work) of this Agreement. In such event, Executive shall be entitled to
severance benefits as provided in Section VIII. A. and B, with incentive
compensation for the year in which termination occurs prorated to the date of
termination under this provision.
G. GENERAL. Regardless of whether or not expressly so stated in this
-------
Agreement, in the event of any termination of Executive's employment or
termination of this Agreement, Sections VIII., IX., X., XI., XII., and XIII.
shall survive such termination for the full Term of this Agreement.
H. EMPLOYMENT RELATIONSHIP. For all purposes of this Agreement,
-----------------------
Executive shall have and be deemed to have an "EMPLOYMENT RELATIONSHIP" with the
Company as of the date of execution and delivery of this Agreement, and such
relationship shall continue or be deemed to continue, even after termination of
Executive's employment, unless this Agreement is terminated by Company for
Material Cause or by Executive pursuant to Section VII.D. without Good Reason.
I. OPPORTUNITY TO CURE. For purposes of Section VII.A.1, VII.A.2 and
-------------------
VII.C., Executive or the Company (a) shall have the right to cure if within a
period not to exceed 60 days he or it is reasonably likely to be able to restore
the other party to substantially the same position it would have been in but for
the act or omission which established, as applicable, Material Cause, other
cause or Good Reason and (b) shall be considered to have cured only if in fact
within such 60 day period the other party is restored to substantially the same
position it would have been in but for such act or omission.
SECTION VIII. REMEDIES; SEVERANCE BENEFITS
In the event of any termination of Executive's employment by the
Company or Executive pursuant to any provision of this Agreement, Executive's
sole remedies for termination of his employment shall be as set forth in this
Section VIII, subject to the Company's performance of its obligations under this
Agreement, including making all payments and providing all benefits required
pursuant to this Section VIII. Such payments shall be in full satisfaction of
any claims, liabilities, demands or causes of action directly or indirectly
arising out of Executive's employment by the Company (whether based upon legal
theories of contract, tort or otherwise), other than claims which had no
material relationship to the Company's decision to terminate Executive's
employment pursuant to Section VII.A. or B. or Executive's decision to terminate
employment pursuant to Section VII.C. (such claims relating to termination of
Executive's employment are collectively referred to herein as "CLAIMS") that
Executive may have against the Company, or any Affiliate of the Company or any
director, officer, employee or agent of the Company or any Affiliate of the
Company, for
-9-
<PAGE>
termination of Executive's employment. In such event, Executive shall be deemed
to have waived any other rights or remedies which he might otherwise have with
respect to such Claims; however, Executive's waiver of Claims shall not alter
Executive's rights or relieve Company and its Affiliates of their duties,
obligations and liabilities under the Stock Purchase Agreement and the Notes
given to consummate the Acquisition.
A. ACCRUED SALARY AND BENEFITS. If Executive's employment is terminated
---------------------------
pursuant to any provision of this Agreement, Executive shall be paid any Base
Salary earned to the date of the termination and shall be entitled to receive
any benefits payable under the terms of the Company's Employee Benefit Plans
which are payable as a result of his employment termination or for reasons
unrelated to his termination. Executive's waivers herein shall not constitute a
waiver of benefits and rights generally available under applicable law upon
termination of employment (e.g., COBRA rights and similar benefits).
B. DEATH OR DISABILITY. If Executive's employment is terminated pursuant
-------------------
to Section VII.E. (Death) or VII.F. (Disability), then in addition to the
amounts due under Section VIII.A. above, Executive (or his heirs or
representative) shall be paid incentive compensation pursuant to Section VI.B.
which is payable with respect to the year in which the termination occurs on a
pro rated basis (which shall mean the amount computed as incentive compensation
for the whole year, as though Executive's employment had not been terminated,
multiplied by a fraction representing the portion of the year to the date of
termination of Executive's employment).
C. TERMINATION WITHOUT TERMINATING EMPLOYMENT RELATIONSHIP. If
-------------------------------------------------------
Executive's employment hereunder is terminated pursuant to Section VII. B.
(Company's Right Without Cause) or C. (Executive's Right With Good Reason), then
in addition to the amounts due under Section VIII.A. above, Executive shall be
entitled to a lump sum cash severance payment equal to:
1. If the termination occurs prior to July 1, 1997, $43,750
multiplied by the difference between (a) the number of calendar months
elapsed from July 1, 1996 to the date of the termination and (b) thirty-
six;
2. If the termination occurs on or after July 1, 1997, but prior to
July 1, 2000, an amount equal to $25,000 multiplied by the number of months
from the date of termination to June 30, 2001, but not more than $600,000,
plus the greater of (a) twice his incentive compensation pursuant to
Section VI. B. (Incentive Compensation) for the calendar year preceding the
year of termination and (b) twice the incentive compensation he would have
received pursuant to Section VI. B. (Incentive Compensation) for the year
of the termination if the termination had not occurred; or
-10-
<PAGE>
3. If the termination occurs on or after July 1, 2000, the sum of:
(a) $25,000 multiplied by the number of months (and prorated for
any partial months) between the date of such termination and July
1, 2001;
(b) a fraction, with numerator equal to the number of months
elapsed from July 1, 2000 to the date of such termination and a
denominator of 12, multiplied by the greater of (i) his incentive
compensation pursuant to Section VI.B. (Incentive Compensation)
for the calendar year preceding the year of termination and (ii)
the incentive compensation he would have received pursuant to
Section VI.B. (Incentive Compensation) for the year of the
termination if the termination had not occurred.
Each amount payable pursuant to any provision of this Section VIII. C. shall be
paid within 15 business days after such amount can reasonably be determined (and
in the case of 2 and 3 above, the minimum known at time of termination shall be
so paid, with subsequent adjustment if a greater amount is due under such
provisions) unless a dispute exists with respect to such amount and an
arbitration proceeding has been commenced pursuant to Section XII. with respect
to such dispute; however, in lieu of such cash payment promptly following
determination, Company may pay such sums at the times payments would have been
payable under this Agreement if it had not been terminated if the full amount of
such payment obligation is secured by an irrevocable letter of credit in form
and substance and issued by a bank satisfactory to Executive in his sole
discretion (and in such case, Executive may draft on such letter of credit if
Company fails to make a subsequent payment when due or fails to renew such
letter of credit at least 15 business days prior to expiration).
D. TERMINATION BY COMPANY FOR MATERIAL CAUSE OR BY EXECUTIVE WITHOUT GOOD
----------------------------------------------------------------------
REASON. If Executive's employment and employment relationship are terminated by
- ------
the Company pursuant to Section VII.A.1. (Material Cause) or Executive pursuant
to Section VII.D. (without Good Reason), then Executive shall be entitled to
receive the accrued payments under Paragraph A above, but shall not receive any
unpaid incentive compensation for the year in which termination occurs or
receive any severance payment under Section VIII.C. above.
E. TERMINATION FOR OTHER CAUSE. If Executive's employment is terminated
----------------------------
by the Company pursuant to Section VII.A.2. (Other Cause), then Executive shall
be entitled to receive the accrued payments under Paragraph A above, but shall
not be entitled to any unpaid incentive compensation for the year in which
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<PAGE>
termination occurs and shall not receive any severance payment under Section
VIII.C. above.
F. COMPANY'S REMEDIES. In the event of any failure of Executive to
------------------
perform under this Agreement or any termination of Executive's employment by
Company or Executive pursuant to this Agreement, Company's sole remedies (in
addition to termination of Executive's employment) shall be to obtain specific
performance or injunctive relief for any violation of the terms of Section X
hereof and, solely in the event of termination for Material Cause, to cancel
certain contingent notes issued by the Company in connection with the
Acquisition of LJMCo stock pursuant to the LJMCO Stock Purchase Agreement.
SECTION IX. DEFINITIONS
A. MATERIAL CAUSE. The Company shall have "MATERIAL CAUSE" pursuant to
--------------
Section VII.A.1. hereof to terminate both Executive's employment hereunder and
Executive's employment relationship if:
1. Executive commits a material breach of his obligation to work for
the Company in good faith on a full time basis, as provided in Section
II.A.1.;
2. Executive commits a material breach of the Covenant Not To
Compete attached hereto as Exhibit B;
----------
3. Subject to the limitations and exceptions (for up to $100,000 of
liabilities) contained in Section 11.2 of the LJMCO Stock Purchase
Agreement, Executive commits a material breach of the LJMCO Stock Purchase
Agreement (such a breach shall be deemed cured if Executive pays to the
Company the damages which the Company has suffered as a result of the
breach); or
4. Executive is convicted (a plea of nolo contendere shall be deemed
---------------
to be a conviction) of fraud, violation of state or federal securities law
or violation of any other law where such conviction would or would be
reasonably likely to materially and adversely affect the Company's
relationship with its clientele if Executive's employment were to continue;
and
any of the foregoing events shall continue after Executive's right to cure
period pursuant to Section VII.I. hereof.
The existence of Material Cause must be confirmed by a written notice
provided to Executive and signed by a majority of the members of the Board of
Directors, setting forth the act, or acts, upon the basis of which the majority
of the Board of Directors has confirmed the existence of Material Cause.
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<PAGE>
B. GOOD REASON. Executive shall have "GOOD REASON" to terminate his
-----------
employment under this Agreement if:
1. The Company (a) commits any material breach of any of its
material obligations under this Agreement or (b) repetitively breaches such
obligations whether or not each breach is material.
2. The Company or any of its Affiliates commits a material breach of
any of its obligations to Executive under the Stock Purchase Agreements
relating to the Acquisition of LJMCo or LJMCal, including any breach of any
promissory note, guaranty or other agreement which is an exhibit to or is
referred to in such Stock Purchase Agreements.
3. The Company, CB Commercial or CB Commercial Holdings, Inc.
voluntarily files a bankruptcy or insolvency proceeding or is adjudicated
bankrupt or insolvent in an involuntary proceeding.
4. Executive is removed as or is not elected a director of the
Company.
5. Without Executive's express consent, the location of the
Company's principal place of business is changed from the greater Houston,
Texas area.
6. Executive's title (President and Chief Executive Officer) is
changed.
7. Executive's job responsibilities are changed in a material way
unless such change is reasonably attributable to Executive's material lack
of performance hereunder whether or not such lack of performance
constitutes other cause for termination pursuant to Section VII.A.2.
SECTION X. PROPRIETARY INFORMATION
A. "PROPRIETARY INFORMATION" includes all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the business
of the Company, CB Commercial or any person directly or indirectly controlled
by, in control of or under common control with the Company or CB Commercial
(collectively, the "CBC GROUP"), unless (1) the information is or becomes
publicly known through lawful means, (2) the information was rightfully in
Executive's possession or part of his general knowledge prior to his employment
by the Company and did not come into his possession or knowledge as a result of
his position as a shareholder or executive of LJMCo or LJMCal or (3) the
information is subsequently disclosed to Executive by a third party without
Executive's knowledge of a breach of any agreement and without restriction of
its use. Executive acknowledges and agrees that he has acquired, and is likely
to continue to acquire by virtue of his employment with the Company and his
previous
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<PAGE>
positions with LJMCo and LJMCal, extensive Proprietary Information regarding the
CBC Group's products, costs, finances, operations, business plans and
strategies, marketing strategies and methods, customer base and prospective
customers, customer preferences and contact persons, and the identities and
roles of the key employees of the CBC Group.
Executive agrees to hold all Proprietary Information in confidence and
not to directly or indirectly disclose, use, copy, publish, summarize or remove
from the CBC Group's premises any Proprietary Information, except (1) during the
term of this Agreement to any extent necessary to carry out Executive's
responsibilities under this Agreement, including the use of Proprietary
Information at Executive's home or while traveling, and (2) after the
termination of this Agreement as specifically authorized in writing by the
President or Chief Executive Officer of CB Commercial. In the event of any
termination of Executive's employment by the Company, or at any time upon the
Company's request, Executive shall return immediately to the Company all
Proprietary Information held by Executive wherever it may be located.
B. NON-SOLICITATION. In consideration of the engagement of his services
----------------
and the compensation and benefits accorded him as described in this Agreement,
and acknowledging and agreeing that he could not undertake the following
activities without necessarily benefiting from and making use of Proprietary
Information, Executive covenants and agrees that, during his employment
hereunder and during the Restricted Period after his employment terminates for
any reason, he shall not, for himself or any third party, directly or indirectly
(1) solicit the real estate loan or mortgage servicing business of, or otherwise
interfere with the Company's relationship with, any person who at any time
during the eighteen (18) months preceding the date of the termination was a
lender or a borrower in a transaction in which the Company received 50% or more
of the fees or for whom the Company was servicing one or more loans on the date
of termination or (2) employ or solicit for employment any person currently
employed by the CBC Group or within the last year preceding any such action has
been employed by the CBC Group who has (or during such preceding year had) an
active role with respect to the real estate loan or mortgage servicing business
of the Company on the date Executive's employment hereunder terminates.
The term "RESTRICTED PERIOD" means the period determined from the
following chart:
<TABLE>
<CAPTION>
Reason for Termination Restricted Period
---------------------- -----------------
<S> <C>
Any termination by Executive for None
Good Reason or by the Company
without Cause
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C>
Any termination by Executive other Until the later to
than for Good Reason or by the occur of the 3rd
Company with Cause Other than Anniversary of the
Material Cause or by the Company Date of this Agreement
for Disability or 24 months from the
date of termination,
but not later than the
5th Anniversary of the
Date of this Agreement
Any termination by the Company for The balance of the
Material Cause Term
</TABLE>
Nothing in this Agreement, however, is intended to limit any remedy of
the Company or CB Commercial under the California Uniform Trade Secrets Act
(California Civil Code Section 3426) or Texas law relating to the misuse of
trade secret or proprietary information, or which is otherwise available under
law.
SECTION XI. INDEMNIFICATION
The Company and CB Commercial, jointly and severally, agree to the
maximum extent permitted under Delaware law to indemnify Executive against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any action, suit or proceeding which
arises by reason of the fact that, subsequent to the Acquisition, Executive is
or was an officer or employee or a director of the Company excluding (a)
actions, suits or proceedings which relate to this Agreement and which are
brought by or on behalf of Executive and (b) counter or cross claims by
Executive against the Company or CB Commercial or their respective employees,
officers or directors and which relate to this Agreement. Furthermore, at all
times that insurance is provided for any officers and/or directors of CB
Commercial, the Company or CB Commercial will maintain in force and effect
officers' and directors' liability insurance, providing coverage to Executive on
the same terms and conditions for the same maximum amount provided to any
officer or director of CB Commercial.
SECTION XII. ARBITRATION
A. All disputes or controversies arising under or in connection with this
Agreement shall be settled exclusively by final and binding arbitration in
accordance with Section 14.11 of the LJMCO Stock Purchase Agreement, dated as of
June 27, 1996, between Executive, John M. Bradley, and the Company relating to
the merger and the LJMCal Stock Purchase Agreement dated June 27, relating to
the purchase of all of the outstanding stock of LJMCal.
B. Section XII.A. to the contrary notwithstanding, the Company may seek
interim relief (temporary restraining order,
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<PAGE>
preliminary injunction, etc.) in any court of competent jurisdiction with
respect to any violation of Section X. by Executive.
SECTION XIII. MISCELLANEOUS
A. NOTICE. All notices, requests, demands and other communication called
------
for or contemplated hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally or three days after the date mailed by
United States certified or registered mail, postage prepaid, addressed to the
parties or their successors in interest at the following addresses or such other
addresses as the parties may designate by notice in the manner aforesaid:
If to Company: CB Commercial Mortgage, Inc.
c/o CB Commercial Real Estate Group, Inc.
533 S. Fremont Avenue
Los Angeles, California 90071-1798
Attn.: Chief Executive Officer
With Copy to: CB Commercial Real Estate Group, Inc.
533 S. Fremont Avenue
Los Angeles, California 90071-1798
Attn.: General Counsel
If to Executive: Lawrence J. Melody
506 Ramblewood
Houston, Texas 77079
With Copy to: Baker & Botts, L.L.P.
3000 One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Attn.: Fred H. Dunlop
B. LAW GOVERNING. This Agreement and the resolution of any disputes
-------------
hereunder shall be governed by and construed in accordance with the laws of the
State of Texas.
C. ENTIRE AGREEMENT. The terms of this Agreement are intended by the
----------------
parties to be the final expression of their agreement with respect to
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreements, course of dealing or any former
employment agreements. The parties further intend that the Agreement shall
constitute the complete and exclusive statement of its terms and that no
extrinsic evidence whatsoever may be introduced in any judicial, administrative
or other legal proceeding involving this Agreement.
D. VALIDITY. If any provision of this Agreement, or the application
--------
thereof to any person, place or circumstance, shall be held by an arbitrator or
court of competent jurisdiction to be
-16-
<PAGE>
invalid, unenforceable or void, the remainder of this Agreement and such
provision as applied to other persons, places and circumstances shall remain in
full force and effect.
E. AMENDMENT. This Agreement may not be modified or amended except by an
---------
instrument in writing signed by the Executive, the President or Chief Executive
Officer of CB Commercial and an officer of the Company other than the Executive.
F. EFFECT ON SUCCESSORS IN INTEREST; ASSIGNMENT. This Agreement shall
--------------------------------------------
inure to the benefit of and be binding upon the heirs, administrators, executors
and successors of each of the parties hereto. Without limiting the foregoing,
upon the merger of CB Commercial Mortgage, Inc. with and into LJMCo, LJMCo as
the surviving corporation shall be the successor to (and thereafter constitute)
the "Company" under this Agreement. The obligations and duties of Executive
under this Agreement are personal to and may not be assigned by Executive.
In WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
CB COMMERCIAL MORTGAGE COMPANY, INC.
By: /s/ David A. Davidson
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
CB COMMERCIAL REAL ESTATE GROUP, INC.
By: /s/ Walter V. Stafford
----------------------------------
Name: Walter V. Stafford
Title: Senior Executive Vice
President and General Counsel
EXECUTIVE
/s/ Lawrence J. Melody
--------------------------------------
Lawrence J. Melody
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<PAGE>
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of the ____ day of __________________, by and among CB Commercial
Holdings, Inc., a Delaware corporation (the "Company"), and Kajima U.S.A. Inc.,
a corporation organized under the laws of Delaware ("Kajima"), Fukoku Mutual
Life Insurance Company, a corporation organized under the laws of Japan
("Fukoku"), Kasen Development, Inc., a corporation organized under the laws of
Japan ("Kasen"), and S.R.E.S.-Fifth Avenue, Inc., a corporation organized under
the laws of Delaware ("SRESFA") (Kajima, Fukoku, Kasen and SRESFA are
hereinafter individually referred to as "Preferred Stockholder" and collectively
referred to as "Preferred Stockholders").
RECITALS
WHEREAS, the Preferred Stockholders currently hold collectively an
aggregate of 4,000,000 shares of the Company's Series A-1, Series A-2 and Series
A-3 Preferred Stock (the "Existing Preferred Stock");
WHEREAS, subject to the issuance of a number of shares of a new class of
common stock, par value $.01 per share (the "New Common Stock"), not to exceed
5,000,000 shares, pursuant to a Proposed Public Offering (as defined below), the
Company has proposed a recapitalization (the "Recapitalization") pursuant to
which, among other things, each share of Series A-1, Series A-2 and Series A-3
Existing Preferred Stock will be automatically converted into a new class of
Series A-1, Series A-2 and Series A-3 preferred stock, respectively, which will
replace the Series A-1, Series A-2 and Series A-3 Existing Preferred Stock (the
4,000,000 shares of new Series A-1, Series A-2 and Series A-3 preferred stock
held collectively by the Preferred Stockholders into which the Existing
Preferred Stock automatically converts pursuant to the Recapitalization is
referred to herein as the "New Preferred Stock");
WHEREAS, the New Preferred Stock is convertible into a lesser number of
shares of New Common Stock at the option of the holder thereof;
WHEREAS, pursuant to that certain Agreement dated as of August 30, 1996
between the Company and the Preferred Stockholders (the "Voting Agreement"),
each Preferred Stockholder agreed to vote in favor of amending and restating the
Company's Certificate of Incorporation (the "New Certificate") and By-laws,
effective upon completion of the Proposed Public Offering, to effectuate the
Recapitalization, and the Company and the Preferred Stockholders agreed to enter
into this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereto agree as follows:
SECTION 1
Restrictions on Transferability of Securities;
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the meanings set forth below:
(a) "Affiliate" with respect to any Preferred Stockholder or Holder means
any entity that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with, such Preferred
Stockholder or Holder or any Affiliate thereof.
(b) "Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
(c) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(d) "Holder" means any Preferred Stockholder who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been validly transferred in compliance
with Sections 1.2, 1.3 and 1.9 hereof.
(e) "Proposed Public Offering" means a sale of New Common Stock, not to
exceed 5,000,000 shares, for not less than $18.75 per share in an underwritten
offering registered under the Securities Act, which is completed on or before
March 31, 1997, which results in aggregate proceeds to the Company (prior to
underwriters' discounts and expenses relating to the issuance) of $75,000,000 or
more and which results in the approval for quotation of such New Common Stock on
the National Association of Securities Dealers Automated Quotation System or the
listing of such New Common Stock on The New York Stock Exchange.
(f) "Registrable Securities" means (i) shares of New Common Stock issued or
issuable pursuant to the conversion of the New Preferred Stock in accordance
with the New Certificate following consummation of the Proposed Public Offering
and (ii) any New Common Stock issued as a dividend or other distribution with
respect to or in exchange for or in replacement of the shares referenced in (i)
above; provided, however, that Registrable Securities shall not include any
shares of New Common Stock which have previously been registered or which have
been sold to the public and any shares of New Common Stock acquired other than
pursuant to the conversion of New Preferred Stock which was acquired by the
automatic conversion of Existing Preferred Stock pursuant to the
Recapitalization.
-2-
<PAGE>
(g) "Registration Expenses" means all expenses incurred in effecting any
registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses.
(h) "Restricted Period" means the period commencing on the first date any
of the New Common Stock to be sold in the Proposed Public Offering is released
for sale to the public and continuing until and including a date twelve (12)
months thereafter.
(i) "Rule 144" means Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(j) "Rule 144 Period" means the period beginning on the first date any of
the New Common Stock to be sold in the Proposed Public Offering is released for
sale to the public pursuant to the Proposed Public Offering and continuing until
the offer and sale of New Common Stock acquired by a Preferred Stockholder upon
conversion of the New Preferred Stock is no longer subject to the volume
limitation provisions of Rule 144, either by this Agreement or by operation of
law.
(k) "Rule 145" means Rule 145 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(l) "Securities Act" means the Securities Act of 1933, as amended, or any
similar successor federal statute and the rules and regulations thereunder, all
as the same shall be in effect from time to time.
(m) "Selling Expenses" means all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and fees and
disbursements of counsel for any Holder.
1.2 Restrictions on Transfer at Any Time. Each Preferred Stockholder and
------------------------------------
each Holder agrees not to make any disposition of all or any portion of the New
Preferred Stock or any Registrable Securities at any time unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 1.2 and:
(a) There is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Such Preferred Stockholder or Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition and such
other information as is reasonably requested by the Company, and (ii) at the
request of the Company, such Preferred
-3-
<PAGE>
Stockholder or Holder shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such disposition will not
require registration of such shares under the Securities Act. Each certificate
representing the New Preferred Stock and Registrable Securities shall be stamped
or otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR
UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
THE SHARES REPRESENTED HEREBY ARE ALSO SUBJECT TO RESTRICTIONS ON TRANSFER
WHICH ARE SET FORTH IN A REGISTRATION RIGHTS AGREEMENT. A COPY OF SUCH
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE
CORPORATION. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF IT, AGREES
TO BE BOUND BY THE PROVISIONS OF SUCH AGREEMENT.
1.3 Restrictions on Transfer During Restricted Period.
-------------------------------------------------
In addition to the obligations set forth in Section 1.2 hereof, each
Preferred Stockholder and each Holder further agrees (i) not to directly or
indirectly sell, offer, pledge, hypothecate, make any short sale of, contract to
sell, grant any option to purchase or otherwise transfer or dispose of or in any
way transfer the economic risk of ownership in any Registrable Securities or New
Preferred Stock or any other securities convertible into, exchangeable for or
exercisable for New Common Stock or New Preferred Stock or any rights to
purchase or acquire New Common Stock or New Preferred Stock, owned either of
record or beneficially by the undersigned for up to 180 days from the date the
New Common Stock to be sold in the Proposed Public Offering is released for sale
to the public (the "Lockup Period"); and (ii) that if, after the Lockup Period,
but during the Restricted Period, any Preferred Stockholder or Holder sells,
offers to sell or otherwise disposes of Registrable Securities or New Preferred
Stock convertible into Registrable Securities, whether or not in connection with
a distribution, or participates or has a direct or indirect participation in any
such undertaking, at a price less than the price at which New Common Stock is
sold to the public in the Proposed Public Offering, such Preferred Stockholder
or Holder, as the case may be, shall comply with the volume limitations set
forth in Rule 144(e) of the Securities Act, regardless of whether the provisions
of Rule 144 would otherwise apply to such a transaction, unless such sale, offer
for sale or other disposition is pursuant to one or more block trades made from
time to time which do not involve a brokers' transaction executed on any
exchange or in the over-the-counter market. The Company may impose stop
transfer instructions with respect to the New Preferred Stock and Registrable
Securities subject to the
-4-
<PAGE>
foregoing restriction. The transfer restrictions of this Section 1.3 shall also
apply to any Affiliate of a Preferred Stockholder or Holder to which Registrable
Securities are transferred and each Preferred Stockholder and Holder hereby
agrees to cause any of its Affiliates to which it intends to transfer
Registrable Securities to agree in writing to be so bound prior to making any
such transfer.
1.4 Company Registration.
--------------------
(a) If during the Rule 144 Period the Company shall determine to register
any New Common Stock for its own account or for the account of any entity
exercising registration rights (other than pursuant to (i) the Proposed Public
Offering, (ii) a registration, other than a firmly underwritten registration,
pursuant to a written request by securityholders pursuant to registration rights
granted by the Company with respect to shares issued after the date hereof,
(iii) a registration relating to an employee benefit plan, a dividend or
interest reinvestment plan or other similar plan, (iv) a registration relating
to a corporate reorganization or other transaction under Rule 145 of the
Securities Act, a reclassification, merger, consolidation or acquisition, (v) a
registration on any registration form that does not permit secondary sales or
(vi) a registration relating to shares of New Common Stock issued or issuable
upon the exercise of rights, options or warrants to acquire New Common Stock or
upon the conversion or exchange of indebtedness, shares of capital stock or
other securities other than New Preferred Stock), the Company will:
(i) promptly give to each Holder written notice thereof which shall
describe the proposed registration and distribution; and
(ii) use its best efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), except as
set forth in Section 1.4(b) below, and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by any Holder and received by the Company within fifteen
(15) days after the Company provides the written notice described in clause
(i) above. Such written request may specify all or a part of a Holder's
Registrable Securities and any other Registrable Securities held by an
Affiliate of such Holder which such Holder is entitled to register pursuant
to Section 1.9.
(b) Underwriting. If the registration with respect to which the Company
------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.4(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute Registrable Securities through such underwriting
shall (together with the Company and the other holders of securities of the
Company with registration rights to participate therein distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected by the Company.
-5-
<PAGE>
Notwithstanding any other provision of this Section 1.4, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten or
offered or sold for the account or persons other than the Company, the
representative may exclude all Registrable Securities from, or limit the number
of Registrable Securities to be included in, the registration and underwriting.
The Company may limit, to the extent so advised by the underwriters, the amount
of securities (including Registrable Securities) to be included in the
registration by the Company's shareholders (including the Holders), or may
exclude, to the extent so advised by the underwriters, such underwritten or
other securities entirely from such registration. The Company shall so advise
all holders of securities requesting registration pursuant to Section
1.4(a)(ii), and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated first to the
Company for securities being sold for its own account and thereafter as set
forth in Section 1.11. If any person does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from the
Company or the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
1.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 1.4 shall be borne by the Company. All Selling Expenses relating to
securities so registered shall be borne by the holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf.
1.6 Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to Section 1.4, at its expense, the Company will use its
best efforts to:
(a) Keep such registration effective for a period equal to the earlier of
(i) the date the Holder or Holders have completed the distribution described in
the registration statement relating thereto or (ii) sixty (60) days; provided,
--------
however, that such 60-day period shall be extended for a period of time equal to
- -------
the period the Holder refrains from selling any securities included in such
registration at the request of an underwriter of Registrable Securities of the
Company;
(b) Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement and otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request; and
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating to the
registration is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result
-6-
<PAGE>
of which, the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
(e) Cause all such Registrable Securities registered pursuant hereto to be
listed on each securities exchange on which similar securities issued by the
Company are then listed.
1.7 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers, directors
and partners, legal counsel, and accountants and each person controlling such
Holder within the meaning of Section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been effected pursuant to
Section 1.4 hereof, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any underwriter, against
all expenses, claims, losses, damages, and liabilities (or actions, proceedings,
or settlements in respect thereof) (collectively, "Losses") arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or registration statement
incident to any such registration, qualification, or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each such Holder, each of its officers, directors, partners,
legal counsel, and accountants and each person controlling such Holder, each
such underwriter, and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending or settling any such Loss, provided that the Company
will not be liable in any such case to the extent that (i) any such Loss arises
out of or is based on any untrue statement or omission based upon written infor-
mation furnished to the Company by such Holder or underwriter expressly for use
therein or (ii) the Company has advised such Holder of an event as a result of
which the prospectus included in the registration statement covering any
Registrable Securities, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, and any such claim, loss, damage, liability or
expense is caused by such Holder having offered or sold Registrable Securities
notwithstanding such notice prior to receipt of a supplement or amended
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing, and the omission or misstatement was caused by
such event and corrected in the supplement or amended prospectus; provided,
--------
however, that the Company shall not be liable in any such case to the extent
- -------
that any such claim, loss, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus if (i) such Holder failed to
send or deliver a copy of the prospectus with or prior to the delivery of
written confirmation of the sale of Registrable Securities to the person
asserting such claim, loss, damage, liability or expense who purchased such
Registrable Securities which are the subject thereof and (ii) the
-7-
<PAGE>
prospectus would have corrected such untrue statement or omission or alleged
untrue statement or alleged omission; and provided further, that the Company
shall not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission in the prospectus,
if such untrue statement or alleged untrue statement, omission or alleged
omission is corrected in an amendment or supplement to the prospectus and if,
having previously been furnished by or on behalf of the Company, with copies of
the prospectus as so amended or supplemented, such Holder thereafter fails to
deliver such prospectus as so amended or supplemented, prior to or concurrently
with the sale of a Registrable Security to the person asserting such claim,
loss, damage, liability or expense who purchased such Registrable Security which
is the subject thereof from such Holder. It is agreed that the indemnity
agreement contained in this Section 1.7(a) shall not apply to amounts paid in
settle ment of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent has not
been unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are included in
the securities as to which such registration, qualification, or compliance is
being effected, furnish to the Company in writing such information as the
Company reasonably requests for use in connection with any prospectus,
preliminary prospectus, offering circular or registration statement, and will
indemnify the Company, each of its directors, officers, partners, legal counsel,
and accountants and each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, each
other such Holder and each of its officers, directors, and partners, and each
person controlling such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, directors,
officers, partners, legal counsel, and accountants, persons, underwriters, or
control persons for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder expressly for inclusion therein; provided, however, that
the obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld). The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution to the same extent as provided above with respect to information so
furnished in writing by such persons expressly for use in any prospectus,
registration statement, offering circular or other document.
-8-
<PAGE>
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.7, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into by a Holder in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
1.8 Information by Holder. Each Holder of Registrable Securities shall
---------------------
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may request in writing and
as shall be reasonably required in con nection with any registration,
qualification, or compliance referred to in Section l.
1.9 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the Company to register securities granted to a Holder by the Company under this
Section 1 may be
-9-
<PAGE>
transferred or assigned by a Preferred Stockholder only to a transferee or
assignee of all (but not less than all) shares of New Preferred Stock and
Registrable Securities (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like) held by such Preferred Stockholder, provided that the Company is given
written notice prior to such transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes
the obligations of such Preferred Stockholder under this Agreement.
Notwithstanding the foregoing, a Preferred Stockholder may, pursuant to its
registration rights granted hereunder, cause Registrable Securities validly
transferred pursuant to this Agreement to an Affiliate of such Preferred
Stockholder to be registered to the same extent and subject to the same terms
and conditions as the Registrable Securities held by such Preferred Stockholder.
1.10 "Market Stand-Off" Agreement in Connection with an Underwritten
---------------------------------------------------------------
Public Offering. If requested by the Company and an underwriter of New Common
- ---------------
Stock (or other securities) of the Company, a Holder shall not sell or otherwise
transfer or dispose of any Registrable Securities (or other securities) of the
Company held by such Holder (other than those included in the registration)
during a reasonable and customary period of time (not to exceed 180 days) after
the effective date of a registration statement of the Company filed under the
Securities Act. The Company may impose stop-transfer instructions with respect
to the shares (or securities) subject to the foregoing restriction.
1.11 Allocation of Registration Opportunities. In any circumstance in
----------------------------------------
which all of the Registrable Securities and other shares of New Common Stock of
the Company (other than shares of New Common Stock issued or issuable upon
conversion of shares of any currently unissued series of New Preferred Stock of
the Company) with registration rights (the "Other Shares") requested to be
included in a registration on behalf of the Holders or other selling
shareholders cannot be so included as a result of limitations of the aggregate
number of shares of Registrable Securities and Other Shares that may be so
included, the number of shares of Registrable Securities and Other Shares that
may be so included shall be allocated among the Holders and other selling
shareholders requesting inclusion of shares pro rata on the basis of the number
of shares of Registrable Securities and Other Shares that would be held by such
Holders and other selling shareholders, assuming conversion; provided, however,
so that such allocation shall not operate to reduce the aggregate number of
Registrable Securities and Other Shares to be included in such registration, if
any Holder or other selling shareholder does not request inclusion of the
maximum number of shares of Registrable Securities and Other Shares allocated to
him pursuant to the above-described procedure, the remaining portion of his
allocation shall be reallocated among those requesting Holders and other selling
shareholders whose allocations did not satisfy their requests pro rata on the
basis of the number of shares of Registrable Securities and Other Shares which
would be held by such Holders and other selling shareholders, assuming
conversion, and this procedure shall be repeated until all of the shares of
Registrable Securities and Other Shares which may be included in the
registration on behalf of the Holders and other selling shareholders have been
so allocated.
-10-
<PAGE>
1.12 Delay of Registration. No Holder shall have any right to take any
---------------------
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.13 Termination of Registration Rights. The right of any Holder to
----------------------------------
request inclusion in any registration pursuant to this Agreement shall terminate
at the expiration of the Rule 144 Period.
SECTION 2
Representations and Warranties of Holders.
-----------------------------------------
Each Preferred Stockholder and each Holder hereby severally represents and
warrants on behalf of itself to the Company that:
2.1 Authorization. It has full power and authority to enter into this
-------------
Agreement, and this Agreement constitutes its valid and legally binding
obligation.
2.2 Purchase Entirely for Own Account. The New Preferred Stock and the
---------------------------------
New Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof, and that it has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this Agree-
ment, each Preferred Stockholder and each Holder further represents that it does
not have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
2.3 Disclosure of Information. Such Preferred Stockholder and such Holder
-------------------------
believes it has received all the information it considers necessary or
appropriate for making an investment decision with respect to the
Recapitalization, the conversion of the Existing Preferred Stock into New
Preferred Stock. Such Preferred Stockholder and such Holder further represents
that it has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the Recapitalization and the
conversion of the Existing Preferred Stock into New Preferred Stock.
2.4 Investment Experience. It is an experienced investor in securities
---------------------
and acknowledges that it is able to fend for itself, can bear the economic risk
of its investment and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Securities.
2.5 Restricted Securities. Each Preferred Stockholder and each Holder
---------------------
represents that it is familiar with Rule 144 and understands the resale
limitations imposed thereby and by the Securities Act.
SECTION 3
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<PAGE>
Miscellaneous
-------------
3.1 Covenant Regarding Prepayment of Certain Indebtedness.
-----------------------------------------------------
Notwithstanding any other agreement among the parties hereto, including the
Voting Agreement, the Company hereby covenants and agrees with the Preferred
Stockholders that, following the Proposed Public Offering and for so long as any
Preferred Stockholder holds any New Preferred Stock, the Company will not, and
will not permit CB Commercial Real Estate Group, Inc. ("CBC") to, voluntarily
prepay any Indebtedness unless the Company shall have first paid all unpaid
accrued dividends and any unpaid interest accrued thereon to the Preferred
Stockholders in accordance with the New Certificate, provided, however, nothing
-------- -------
contained herein shall preclude the Company or CBC from making any prepayments
(a) required by the terms of any instrument relating to Indebtedness, (b) with
respect to any Indebtedness incurred in connection with the acquisition by the
Company of Westmark Realty Advisors L.L.C., (c) in connection with the
refinancing of any Indebtedness and (d) from the proceeds of the Proposed Public
Offering. For the purposes of this Section 3.1, (a) "Indebtedness" shall mean
(i) the obligations of CBC and the Company pursuant to that certain Third
Amended and Restated Senior Secured Credit Agreement to be effective upon
consummation of the Proposed Public Offering, as such agreement may be amended
from time to time, between CBC and The Sumitomo Bank, Limited and that certain
Guaranty to be effective upon consummation of the Proposed Public Offering, as
such guaranty may be amended from time to time from the Company to The Sumitomo
Bank, Limited, (ii) the obligations of CBC pursuant to that certain Amended and
Restated Senior Subordinated Credit Agreement to be effective upon consummation
of the Proposed Public Offering, as such agreement may be amended from time to
time, between CBC and Sumitomo Finance (Dublin) Limited and (iii) all
obligations for borrowed money for a term in excess of one year; provided that
the term Indebtedness shall not include trade accounts payable, accrued
commissions and other similar accrued current liabilities in respect of such
obligations, capitalized lease obligations, accounts payable and indebtedness
payable within one year, accruals for taxes, the current portion of any long-
term indebtedness required to be paid within one year and similar obligations.
3.2 Governing law. This Agreement shall be governed in all respects by
-------------
the laws of the State of New York, as if entered into by and between New York
residents exclusively for performance entirely within New York.
3.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
3.4 Entire Agreement; Amendment; Waiver. This Agreement constitutes the
-----------------------------------
full and entire understanding and agreement between the parties with regard to
the subjects hereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and the holders of at least a majority of the Registrable Securities and
any such amendment, waiver, discharge or termination shall be binding on all the
Holders.
-12-
<PAGE>
3.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be sent by facsimile
transmission, mailed by United States first-class mail, postage prepaid, or
delivered personally by hand or nationally recognized courier addressed (a) if
to a Preferred Stockholder or Holder, as indicated on the signature page hereof,
or at such other address as such Preferred Stockholder or Holder shall have
furnished to the Company in writing, or (b) if to the Company, at 533 South
Fremont Avenue, Los Angeles, CA 90071, Attention: Walter V. Stafford, with a
copy to the attention of the Corporate Secretary, or at such other address as
the Company shall have furnished to each holder in writing. All such notices
and other written communications shall be effective (i) if sent by facsimile
transmission, upon confirmation of receipt, (ii) if mailed, seven (7) days after
mailing, and (iii) if delivered, upon delivery.
3.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party hereunder, upon any breach or default of
another party hereunder shall impair any such right, power or remedy nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default therefore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement or any waiver on the part of any party of
any provisions or conditions of this Agreement must be made in writing and shall
be effective only to the extent specifically set forth in such writing.
3.7 Rights; Separability. Unless otherwise expressly provided herein, the
--------------------
rights of each Preferred Stockholder and each Holder hereunder are several
rights, not rights jointly held with any of the other Preferred Stockholder or
Holders. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
3.8 Information Confidential. Each Preferred Stockholder and each Holder
------------------------
acknowledges that the information received by them pursuant hereto may be
confidential and for its use only, and it will not use such confidential
information in violation of the Exchange Act or reproduce, disclose or
disseminate such information to any other person (other than its employees or
agents having a need to know the contents of such information, and its
attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Preferred Stockholder or Holder is required to disclose such
information by a governmental body.
3.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
3.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-13-
<PAGE>
3.11 Effectiveness. This Agreement shall be of no further force and
-------------
effect in the event the Proposed Public Offering does not occur on or before
March 31, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement effective as of the day and year first above written.
CB COMMERCIAL HOLDINGS, INC.
By:-------------------------------
Name:-----------------------------
Title:----------------------------
KAJIMA U.S.A. INC.
By:-------------------------------
Name:-----------------------------
Title:----------------------------
Address for Notice:
----------------------------------
----------------------------------
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<PAGE>
FUKOKU MUTUAL LIFE INSURANCE
COMPANY
By:-------------------------------
Name:-----------------------------
Title:----------------------------
Address for Notice:
----------------------------------
----------------------------------
KASEN DEVELOPMENT, INC.
By:-------------------------------
Name:-----------------------------
Title:----------------------------
Address for Notice:
----------------------------------
----------------------------------
-15-
<PAGE>
S.R.E.S.-FIFTH AVENUE, INC.
By:-------------------------------
Name:-----------------------------
Title:----------------------------
Address for Notice:
----------------------------------
----------------------------------
-16-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
---------------
CB COMMERCIAL HOLDINGS, INC.
----------------------------
NAME JURISDICTION OF
---- INCORPORATION/FORMATION
-----------------------
CB Commercial Brokerage, Inc. Arizona
CB Commercial Partners, Inc. Delaware
CB Commercial Real Estate Fund Management, Inc. California
CB Commercial Real Estate Group, Inc. Delaware
CB Commercial Real Estate Group of Hawaii, Inc. Delaware
CB Commercial Real Estate Group of Iowa, Inc. Iowa
CB Commercial Real Estate Management Services, Inc. California
CB Commercial Realty Advisors, Inc. California
CB Commercial Sutton & Towne, Inc. New York
CB Commercial Warehouse Property Corp. Delaware
Global Professional Assurance Company Vermont
L.J. Melody & Company Texas
L.J. Melody & Company of California Texas
L.J. Melody Investments, Inc. Texas
Sutter Fremont, Inc. California
Sutter Fremont Property Services, Inc. Washington
Sutter Fremont Real Estate Merchant Capital Corporation California
Sutton & Towne N.J., Inc. New Jersey
Westmark Real Estate Acquisition Partnership, L.P. Delaware
Westmark Realty Advisors L.L.C. Delaware
HoldPar A Delaware
HoldPar B Delaware
Sol L. Rabin, Inc. California
Roger C. Schultz, Inc. California
Bruce L. Ludwig, Inc. California
Vincent F. Martin, Jr., Inc. California
Stanton H. Zarrow, Inc. California
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 31, 1996 (except with respect to Notes 1, 2 and 13, for
which the date is November 1, 1996) on the CB Commercial Holdings, Inc. and
Subsidiaries financial statements and to all references to our firm included
in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 1, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the consolidated financial statements of L.J. Melody & Company and
the financial statements of L.J. Melody & Company of California, and to all
references to our firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
Houston, Texas
November 1, 1996
<PAGE>
EXHIBIT 23.3
WESTMARK REALTY ADVISORS L.L.C.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
November 1, 1996
