-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mt+zjUqGFJh1lTXJ+UD2yayf8RJygvFnft5MqRGUIeMG7dlGx7peVooq9UHIVaYL qBVIbJdCBTQ0ewLbU+rGRQ== 0000898430-97-001297.txt : 19970401 0000898430-97-001297.hdr.sgml : 19970401 ACCESSION NUMBER: 0000898430-97-001297 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CB COMMERCIAL REAL ESTATE SERVICES GROUP INC CENTRAL INDEX KEY: 0000852203 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521616016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18525 FILM NUMBER: 97568891 BUSINESS ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 BUSINESS PHONE: 2136133123 MAIL ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 FORMER COMPANY: FORMER CONFORMED NAME: CB COMMERCIAL HOLDINGS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CB ACQUISITION CORP DATE OF NAME CHANGE: 19890731 10-K 1 ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X For the Fiscal Year Ended December 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _______________ to __________________ Commission File Number 0-18525 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. (Exact name of Registrant as Specified in its Charter) Delaware 52-1616016 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 533 South Fremont Avenue Los Angeles, California 90071-1798 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (213) 613-3123 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Common Stock held by non- affiliates of the Registrant on March 25, 1997 was 285,739,183. Number of shares of Common Stock outstanding at March 25, 1997 was 13,347,303. DOCUMENTS INCORPORATED BY REFERENCE None PART I ITEM 1. BUSINESS COMPANY OVERVIEW Founded in 1906, the Company is the largest vertically-integrated commercial real estate services company in the United States with aggregate 1996 revenue of $583 million and 230 business unit offices in 108 locations. In addition, the Company has established exclusive alliances with international commercial real estate services firms (DTZ in Europe, C.Y. Leung & Company in Hong Kong, China and Singapore, and Ikoma Corporation in Japan) which have offices in an additional 134 locations in 31 countries. These alliances have not generated significant revenues to the Company to date. 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 primarily for pension plans, and valuation and appraisal services (collectively "Investor Services"). 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. . 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 geographical 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. 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. . CHANGING COMPOSITION AND NEEDS OF INVESTORS IN AND OWNERS OF COMMERCIAL REAL ESTATE ASSETS. Investors in and owners of commercial real estate assets have become increasingly institutional (including pension funds, life insurance companies, banks and publicly-held REITs). Simultaneously, their investment and management needs have become increasingly multi-market due to the fact that the commercial real estate properties in their portfolios are typically located in numerous geographic locations. With respect to institutions other than REITs, this change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for the growth of multi-service, nationally-oriented real estate service providers. As most REITs are internally managed and to date generally have outsourced only their brokerage service needs, their demand for the Company's other real estate services may be less than that of other institutional investors. . 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 1 to support these service and investment needs. These factors have fueled the current consolidating industry environment, which the Company believes will motivate local and regional real estate service providers to sell to, or form alliances with, major national and international companies. . CONTINUING CORPORATE OUTSOURCING TREND. Shareholder pressure for higher performance and return on equity within most American corporations in the 1980s heightened corporate management's awareness that corporate real estate assets are a major component of corporate net worth. Simultaneously, with competitive pressures encouraging greater focus on core businesses, companies have emphasized leaner staffing in non-core activities and, as a result, outsourced certain non-core activities to third parties. As a consequence, the demand for multi-discipline, multi-market professional real estate service firms that provide integrated services capable of supplementing a corporate real estate department has increased significantly. . 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 through its L. J. Melody & Company subsidiary have caused it to become the largest supplier of commercial mortgages to the CMBS market (almost $1 billion in 1996). In addition, the Company expects to service a majority of the mortgage loans that it originated and the profit margin potential for servicing an increasing volume of mortgage loans may be significant for the Company's mortgage banking business. The acquisition and subsequent combination with L. J. Melody in July 1996 was a strategic step in substantially expanding the Company's capabilities in this area. The Company does not currently securitize loans and has no present intention of doing so. ACQUISITIONS As part of its growth strategy, the Company is continually assessing acquisition opportunities. 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 $15.0 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 increased the Company's presence in 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. 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% 2 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 (which the Company intends to take as a single charge at the time of the acquisition to the maximum extent possible). Management's strategy is to pursue acquisitions that are expected to be accretive to income before interest expense and provision for amortization of goodwill and intangibles, if any, resulting from the acquisitions and to operating cash flows (excluding the costs of integration). On March 18, 1997, the Company announced that it had signed a non-binding letter of intent to merge with Koll Real Estate Services, Inc. ("Koll") in a tax-free reorganization to be accounted for as a purchase. The Company has agreed to issue 0.85 shares of its common stock for each share of Koll common stock, which will result in the issuance of approximately 6.0 million shares. The merger is subject to execution of a definitive agreement and the approval of stockholders of both companies as well as regulatory approval. 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, multi-family residential properties and unimproved land. In 1996, the Company generated revenue from commercial real estate brokerage services of approximately $335.4 million representing approximately 19,950 completed transactions. In 1996, brokerage facilitated over 2,750 sale transactions with an aggregate estimated total consideration of over $3.7 billion and approximately 17,200 lease transactions involving aggregate rents, under the terms of leases facilitated, of over $8.1 billion. Brokerage services comprise the largest source of revenue for the Company and provide a foundation for growing the Company's other disciplines which make up its multi-discipline integrated commercial real estate services. The Company believes that its position in the brokerage services industry provides a competitive advantage for all of its lines of business by enabling them to leverage off brokerage's (i) national network of relationships with owners and users of commercial real estate, (ii) real-time knowledge of completed transactions and real estate market trends, and (iii) brand recognition in the brokerage area. OPERATIONS. As of December 31, 1996, the Company employed approximately 1,630 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. In order to increase market share in its domestic brokerage business, the Company has implemented a plan to establish "partnerships" with leading local firms in order to institute geographic coverage in markets that currently are not being served by the Company. To date, through the "CB Commercial/Partners" program, the Company has identified approximately 70 markets on which it intends to focus during the next three years. Through December 31, 1996, the Company had established ten such partnership-type arrangements in Des Moines, Iowa; Louisville, Kentucky; Buffalo and Rochester, New York; Pittsburgh, Pennsylvania; Charleston and Columbia, South Carolina; Memphis, Tennessee; and Madison and Milwaukee, Wisconsin. 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. 3 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. 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 1996, the Company completed approximately 1,200 investment property transactions with an aggregate value of over $7.0 billion, generating total revenues of $130.2 million. On behalf of property owners seeking to dispose of investment properties, the Company strives to ensure that the owner achieves the maximum value in the minimum amount of time by providing services which include (i) accessing the Company's proprietary databases and other information sources to provide real-time knowledge of available properties, completed comparable transactions, real estate market trends, and active investors in the market, and to assist with valuation and buyer identification, and (ii) designing the appropriate marketing strategy that allows the owner to target probable buyers or buyer categories. On behalf of prospective investors, access to the same sources of information provides the Company's clients with a competitive advantage by enabling the Company's professionals (i) to identify the geographical areas and specific properties which are most suitable for the investor and (ii) to advise investors in negotiations and due diligence. OPERATIONS. As of December 31, 1996, the Company employed approximately 270 investment properties professionals who exclusively handle acquisitions and sales of investment properties and are located in 37 offices in the United States. A team of professionals with expertise within a given market and property type is assembled for each investment properties assignment to best accomplish the client's objectives. As necessary, the team may also include professionals from the Company's other disciplines. On larger and more complex assignments, the Company's financial consulting professionals provide sophisticated financial and analytical resources to the client, the marketing team and the investor. These services provide the client with in-depth analyses of transaction specific data as well as real estate market data. COMPENSATION. Under the typical investment properties agreement, the Company is entitled to receive sale commissions, which are calculated as a percentage of sales price and are generally earned by the Company at the close of escrow. In cases where another real estate broker is not involved, sale commissions earned by the Company typically range from 1% to 6% of the sales price, with the rate of commissions generally declining as the sales price increases. In cases where another firm is involved in the transaction, the Company must typically share up to 50% of the commission it would have otherwise received with the other firm. The Company's investment properties professionals typically receive 50% of the Company's commission before costs and expenses. 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 4 service providers. Specifically, through contractual relationships, the Company assists major, multi-market companies in developing and executing real estate strategies as well as addressing specific occupancy and facilities management objectives. Corporate services coordinates the utilization of all the Company's various disciplines to deliver an integrated service to its clients. Essentially, corporate services expands a client's real estate department and supports most of the functions involved in a corporate real estate department. 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 extension 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 December 31, 1996, managed approximately 107 million square feet of commercial space. Property management services include maintenance, marketing and leasing services for investor-owned properties, including office, industrial, retail and multi-family residential properties. Additionally, the Company provides construction management services, which relate primarily to tenant improvements. The Company works closely with its clients to implement their specific goals and objectives, focusing on the enhancement of property values through maximization of cash flow. The Company markets its services primarily to long-term institutional owners of large commercial real estate assets. OPERATIONS. The Company employs approximately 190 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. 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 is reflected in brokerage rather than property management revenue since brokerage professionals are normally engaged to accomplish the leasing. 5 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. Real Estate Market Research Real estate market research services are provided by 15 professionals in Boston, Massachusetts employed by CB Commercial/Torto Wheaton Research. Real estate market research services are provided to the Company's other businesses as well as sold to third-party clients and include (i) data collection and interpretation, (ii) econometric forecasting, and (iii) evaluating marketing opportunities and portfolio risk for institutional clients within and across U.S. commercial real estate markets. The Company's publications and products provide real estate data for more than 50 of the largest MSAs in the United States and are sold on a subscription basis to many of the largest portfolio managers, insurance companies and pension funds in the United States. 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 with L. J. Melody, originated approximately $3.25 billion, $2.3 billion and $2.0 billion of mortgages in 1996, 1995 and 1994, respectively. As part of these origination activities, the Company has special conduit arrangements with affiliates of Merrill Lynch & Co., Citicorp, Lehman Brothers and NationsBank which permit it to service the mortgage loans which it originates. 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 with L. J. Melody, mortgages in the names of the insurance companies valued at approximately $1.7 billion in 1996. The Company has correspondency arrangements with various life insurance companies which entitle it to service the mortgage loans it originates. As of December 31, 1996, 1995 and 1994, the Company, on a combined basis with L. J. Melody, serviced mortgage loan portfolios of approximately $7.0 billion, $7.3 billion and $7.1 billion, respectively. 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. 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 .03% 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. A majority of the Company's 1996 mortgage loan origination revenue, on a combined basis with L. J. Melody, was from agreements which entitled it to both originate and service mortgage loans. The Company also originates mortgage loans on behalf of conduits and insurance companies for whom it does not perform servicing. The Company's client relationships have historically been long term. The Company pays its mortgage banking professionals a combination of salary, commissions and incentive-based bonuses which typically average between 46% and 50% of the Company's loan origination fees. 6 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. As of December 31, 1996, the Company represented more than 180 clients in 13 commingled funds and a variety of separate accounts. OPERATIONS. Westmark operates as a separate and independent subsidiary of the Company, providing advisory services and, as of December 31, 1996, managing approximately $3.7 billion in tax-exempt capital invested in more than 215 office, industrial and retail properties located in more than 40 major U.S. markets with an aggregate of more than 38 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 approximately 100 professionals who perform the following services for its investors -- market research and forecasting, acquisition 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. 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 and early termination provisions based upon a vote of the investors. Over the next several years several commingled funds formed in the 1980s will be liquidated. In the Company's separate account relationships, the agreements are generally one to three years in term, with "at will" termination provisions. In general, both the capital managed by Westmark and its client relationships are long-term in nature. Valuation and Appraisal Services The Company's valuation and appraisal services business delivers sophisticated commercial real estate valuations through a variety of products including market value appraisals, portfolio valuation, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. At December 31, 1996, the Company's appraisal staff had more than 80 professionals with approximately 50% of the staff holding the MAI 7 professional designation. The business is operated nationally through 23 regional offices and its clients are generally corporate and institutional portfolio owners and lenders. INTERNATIONAL ALLIANCES AND ACTIVITIES In response to growing cross-border capital flows for investment in commercial real estate, and the multi-national strategies of the Company's U.S. corporate clients, the Company 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 20 real estate advisory firms operating in 15 countries in Europe as well as in Australia, New Zealand and elsewhere, C.Y. Leung & Company, a locally-owned firm operating in Hong Kong, China, Singapore and Malaysia, and, commencing in February 1997, Ikoma Corporation, a commercial real estate services firm in Japan, have allowed the Company to provide global corporate service capabilities and significantly strengthen its client relationships in the United States. These relationships are reciprocal referral arrangements whereby the Company's clients who require services in a geographical region serviced by its alliance partners must be referred by the Company to its alliance partner operating in that region. Conversely, the Company's alliance partners are obligated to refer their clients with commercial real estate needs in the United States to the Company. 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. By special arrangement, some of the Company's clients have remote modern access to selected client-customized software application, and the CB Commercial Web Site has also given clients direct access through the CB Internet home page. These systems allow clients to gain access to various levels of information, maintain day-to-day contact with the Company's professionals, and track and monitor property acquisition and disposition activities and property portfolios. 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. The courses offered at 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 1996, approximately 320 employees and clients took courses at CBCU. 8 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 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. EMPLOYEES As of December 31, 1996, the Company had approximately 4,100 employees, approximately 66% 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. ITEM 2. PROPERTIES 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. The Company also leases office space on terms that vary depending on the size and location of the office. The leases expire at various date through 2007. For those leases that are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs. ITEM 3. LEGAL PROCEEDINGS In August 1993, a former commissioned salesperson of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company (the "Mogull case"). On November 20, 1996, a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. The Company hired new counsel and in January 1997 filed motions for new trial, reversal of the verdict and reduction of damages. On March 27, 1997 the trial court denied the Company's motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The Company has been advised by appellate counsel that it has a meritorious basis to pursue an appeal of the verdict, which the 9 Company will do. Included in the Company's December 31, 1996 financial statements is an accrual sufficient to reserve against any probable outcome in the case. This accrual was initially established at $250,000 in 1994 and increased to $800,000 in 1995 and represented the Company's estimate of its loss exposure for this matter based on its assessment and analysis as of those dates. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. In addition, as a result of the thousands of transactions in which the Company participates and its employment of over 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. Management believes that any liability to the Company, net of insurance proceeds, that may result from proceedings to which it is currently a party will not have a material adverse effect on the consolidated financial position or results of operations of the Company. As part of its process of minimizing, to the extent possible, potential litigation, the Company requires its sales professionals to agree to contribute each month toward a "Reserve Account" to be used whenever a claim of professional liability is asserted. In addition, each sales professional contractually agrees to be responsible for a portion of any amount paid to defend or settle a claim against that professional or for any resulting judgment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Special Meeting of Stockholders held on October 30, 1996. (b) Not Applicable. (c) The matter voted upon was the proposed recapitalization of the Company's capital structure. The stockholders approved the proposed recapitalization as follows: by the affirmative vote of 4,000,000 shares of the Company's Series A-1 and A-2 Preferred Stock (representing 100 percent of the outstanding shares of such Series), by the affirmative vote of 1,000,000 shares of the Company's Series A-3 Preferred Stock (representing 100 percent of the outstanding shares of such Series), by the affirmative vote of 1,854,106 shares of the Company's Class B-1 Common Stock (representing 100 percent of the outstanding shares of such Class), by the affirmative vote of 5,334,467 shares of the Company's Class B-2 Common Stock, with 9,966 shares of Class B-2 Common Stock voting in the negative and 9,385 shares of Class B-2 Common Stock abstaining, by the affirmative vote of 800,000 shares of the Company's Class C-1 Common Stock (representing 100 percent of the outstanding shares of such Class) and by the affirmative vote of 2 shares of the Company's Class J Common Stock (representing 100 percent of the outstanding shares of such Class). (d) Not Applicable 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) On November 26, 1996, trading of the Company's Common Stock on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "CBCG" commenced. Prior to that date, there was no established public trading market for any of the Company's securities. The high and low sales prices for the Company's Common Stock during the period from November 26, 1996 through December 31, 1996 as reported by The Nasdaq Stock Market were $20 and $18, respectively. The last reported sales price of the Company's Common Stock on March 25, 1997 as reported by The Nasdaq Stock Market was 26 1/8. (b) As of March 25, 1997, the Company had 1,051 record holders of its Common Stock. (c) Since its incorporation in March 1989 the Company has not declared any cash dividends on any of its classes of common stock. The Company's existing credit agreements restrict its ability to pay dividends on common stock but permit the payment of dividends on preferred stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of this report. (d) 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 of 1933. The recipients of such 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 Company. 11 Item 6. Selected Financial Data CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL INFORMATION: (Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------------- ------------- --------------- -------------- ------------------- STATEMENT OF OPERATIONS DATA: Revenue.................................... $ 583,068 $ 468,460 $ 428,988 $ 392,037 $ 360,223 Costs and Expenses: Commissions, fees and other incentives.. 292,266 239,018 225,085 206,070 187,582 Operating, administrative and other..... 228,799 187,968 170,234 160,073 152,402 Depreciation and amortization........... 13,574 11,631 8,091 49,606 45,855 Non-recurring charges................... - - - - 4,500 ----------- ----------- ----------- ----------- ----------- Operating income (loss).................... 48,429 29,843 25,578 (23,712) (30,116) Interest income............................ 1,503 1,674 1,109 915 1,083 Interest expense........................... 24,123 23,267 17,362 14,240 15,516 ----------- ----------- ----------- ----------- ----------- Income (loss) before provision (benefit) for income tax............................ 25,809 8,250 9,325 (37,037) (44,549) Provision for income tax................... 11,160 841 152 112 12 Reduction of valuation allowances (1)...... (55,900) - - - - ----------- ----------- ----------- ----------- ----------- Net provision (benefit) for income tax..... (44,740) 841 152 112 12 ----------- ----------- ----------- ----------- ----------- Net income (loss).......................... $ 70,549 $ 7,409 $ 9,173 $ (37,149) $ (44,561) =========== =========== =========== =========== =========== Net income (loss) applicable to common stockholders.............................. $ 69,549 $ 7,409 $ 9,173 $ (37,149) $ (44,561) Primary earnings (loss) per share.......... $ 5.02 $ 0.55 $ 0.69 $ (3.23) $ (3.89) Number of shares used in computing primary earnings (loss) per share................. 13,845,325 13,540,541 13,305,118 11,504,644 11,445,377 Fully diluted earnings (loss) per share.... $ 4.97 $ 0.55 $ 0.69 $ (3.23) $ (3.89) Number of shares used in computing fully diluted earnings (loss) per share......... 14,184,296 13,540,541 13,305,118 11,504,644 11,445,377 OTHER DATA: EBITDA (2)................................. $ 62,003 $ 41,474 $ 33,669 $ 25,894 $ 15,739 Net cash provided by operating activities.. $ 65,694 $ 30,632 $ 31,418 $ 19,609 $ 10,911 Net cash used in investing activities...... $ (10,906) $ (24,888) $ (3,865) $ (5,629) $ (4,821) Net cash used in financing activities...... $ (28,505) $ (11,469) $ (4,923) $ (14,662) $ (2,157) AS OF DECEMBER 31, ------------------------------------------------------------------------------- BALANCE SHEET DATA: 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents.................. $ 49,328 $ 23,045 $ 28,770 $ 6,140 $ 6,822 Total assets............................... 278,944 190,954 150,100 128,914 173,274 Total long-term debt....................... 148,529 250,142 233,571 239,853 239,473 Total liabilities.......................... 280,459 345,642 314,648 303,774 311,630 Total stockholders' equity (deficit)....... (1,515) (154,688) (164,548) (174,860) (138,356)
- ------------------- (1) See Note 9 of Notes to Consolidated Financial Statements. (2) EBITDA effectively removes the impact of certain non-cash charges on income such as depreciation and the amortization of intangible assets relating to acquisitions and Federal income taxes (to the extent they are offset by NOLs). 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. EBITDA should not be considered as an alternative to (i) operating income determined in accordance with GAAP or (ii) operating cash flow determined in accordance with GAAP. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company provides integrated real estate services which 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 loan origination and servicing) through L.J. Melody & Company ("L.J. Melody"), investment management and advisory services through Westmark Realty Advisors, L.L.C. ("Westmark"), and valuation and appraisal services. On November 25, 1996, the Company completed an initial public offering (the "Offering") of 4,347,000 shares of common stock, par value $.01 per share (the "Common Stock"). The net proceeds from the Offering of approximately $79.5 million were used to repay a portion of the Company's senior secured and senior subordinated indebtedness. Concurrently with the Offering, CB Commercial Holdings, Inc. was renamed CB Commercial Real Estate Services Group, Inc. 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 was allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million was recorded as a tax benefit (a reduction in income tax provision). During the fourth quarter of 1996, the Company further reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. For the year ended December 31, 1996, a $11.2 million provision for income taxes has been recorded without regard to the income tax benefit resulting from the reduction of the valuation allowance. Net income for the year ended December 31, 1996 was $70.5 million ($5.02 per share of common stock), which includes the current year provision of $11.2 million offset by the cumulative year-to-date tax benefit of $55.9 million or a net benefit for income tax of $44.7 million. If the Company had not recorded tax benefits related to projected future taxable income for the year ended December 31, 1996, the Company's provision for income tax would have consisted of current and deferred state tax provisions and provision for Federal alternative minimum tax and net income for such period would have been $24.2 million ($1.75 per share of common stock). Provision for regular Federal taxes would have been offset by reductions in valuation allowances to the extent of such regular Federal taxes. The $55.9 million recognized tax benefit has a material effect on the reported net income for the year ended December 31, 1996. This $55.9 million tax benefit is a nonrecurring 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. 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. 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, diversity of services offered and large client base tend to reduce the impact on annual revenue caused by economic cycles. Due in 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 23.0% of the costs and expenses of Investor Services are directly correlated to revenue. The Company has completed three strategic acquisitions since the beginning of 1995 and is continually assessing acquisition opportunities as part of its growth strategy (see Item 1 "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 and because of interest expense associated with acquisition financing, management anticipates that future acquisitions may adversely affect net income. In addition, during the first six months following an acquisition, the Company believes there are generally significant one-time costs relating to integrating information technology, accounting and management services and rationalizing personnel levels (which the Company intends to take as a single charge at the time of the acquisition to the maximum extent possible). Management's strategy is to pursue acquisitions that are expected to be accretive to income before interest expense and provision for amortization of goodwill and intangibles, if any, resulting from the acquisitions, and to 13 operating cash flows (excluding the costs of integration). 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. The $0.25 per share quarterly dividend on the Company's Preferred Stock, which accrues 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. The Company's revenues are impacted by numerous factors, including the perception of trends in the general economy, interest rate levels and anticipated and actual changes in the federal tax law. RESULTS OF OPERATIONS The following table sets forth items derived from the Company's Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994.
Year Ended December 31, --------------------------------------------------------- 1996 1995 1994 ----------------- ---------------- ----------------- (Dollars in thousands) Revenue............................................ $583,068 100.0% $468,460 100.0% $428,988 100.0% Costs and Expenses: Commissions, fees and other incentives............ 292,266 50.1 239,018 51.0 225,085 52.5 Operating, administrative and other............... 228,799 39.3 187,968 40.1 170,234 39.7 Depreciation and amortization..................... 13,574 2.3 11,631 2.5 8,091 1.9 -------- ----- -------- ----- -------- ----- Operating income................................... 48,429 8.3 29,843 6.4 25,578 5.9 Interest income.................................... 1,503 0.2 1,674 0.4 1,109 0.3 Interest expense................................... 24,123 4.1 23,267 5.0 17,362 4.0 -------- ----- -------- ----- -------- ----- Income before provision (benefit) for income tax... 25,809 4.4 8,250 1.8 9,325 2.2 Provision for income tax........................... 11,160 1.9 841 0.2 152 0.0 Reduction of valuation allowances.................. (55,900) (9.6) - - - - -------- ----- -------- ----- -------- ----- Net provision (benefit) for income tax............. (44,740) (7.7) 841 0.2 152 0.0 -------- ----- -------- ----- -------- ----- Net income......................................... $ 70,549 12.1% $ 7,409 1.6% $ 9,173 2.2% ======== ===== ======== ===== ======== =====
14 The following tables summarize the revenue, cost and expenses, and operating income by operating segment for the years ended December 31, 1996, 1995 and 1994.
Year Ended December 31, ---------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ----------------- (Dollars in thousands) PROPERTY AND USER SERVICES Revenue: Brokerage................................ $335,401 65.3% $294,290 69.6% $284,775 71.1% Investment Properties.................... 130,202 25.4 87,576 20.7 81,394 20.4 Corporate Services....................... 25,550 5.0 21,723 5.1 15,631 3.9 Property Management (1).................. 20,540 4.0 18,332 4.4 17,692 4.4 Real Estate Market Research.............. 1,378 0.3 912 0.2 758 0.2 -------- ----- -------- ----- -------- ----- 513,071 100.0 422,833 100.0 400,250 100.0 Costs and expenses: Commissions, fees and other incentives... 276,120 53.8 227,387 53.8 215,506 53.8 Operating, administrative and other...... 187,707 36.6 160,415 37.9 152,141 38.0 Depreciation and amortization............ 9,142 1.8 8,889 2.1 7,485 1.9 -------- ----- -------- ----- -------- ----- Operating income........................... $ 40,102 7.8% $ 26,142 6.2% $ 25,118 6.3% ======== ===== ======== ===== ======== ===== INVESTOR SERVICES Mortgage Banking Revenue.................................... $ 20,185 100.0% $ 10,417 100.0% $ 9,488 100.0% Costs and expenses: Commissions, fees and other incentives... 8,007 39.7 4,209 40.4 3,914 41.3 Operating, administrative and other...... 9,489 47.0 6,338 60.8 5,538 58.4 Depreciation and amortization............ 703 3.5 268 2.6 195 2.1 -------- ----- -------- ----- -------- ----- Operating income (loss).................... $ 1,986 9.8% $ (398) (3.8)% $ (159) (1.8)% ======== ===== ======== ===== ======== ===== Investment Management and Advisory Revenue.................................... $ 31,022 100.0% $ 18,610 100.0% $ 5,902 100.0% Costs and expenses: Operating, administrative and other...... 24,096 77.7 13,745 73.9 5,580 94.5 Depreciation and amortization............ 3,316 10.7 2,148 11.5 149 2.5 -------- ----- -------- ----- -------- ----- Operating income........................... $ 3,610 11.6% $ 2,717 14.6% $ 173 3.0% ======== ===== ======== ===== ======== ===== Valuation and Appraisal Services Revenue.................................... $ 18,790 100.0% $ 16,600 100.0% $ 13,348 100.0% Costs and expenses: Commissions, fees and other incentives... 8,139 43.3 7,422 44.7 5,665 42.4 Operating, administrative and other...... 7,507 40.0 7,470 45.0 6,975 52.3 Depreciation and amortization............ 413 2.2 326 2.0 262 2.0 -------- ----- -------- ----- -------- ----- Operating income........................... $ 2,731 14.5% $ 1,382 8.3% $ 446 3.3% ======== ===== ======== ===== ======== ===== TOTAL INVESTOR SERVICES Revenue.................................... $ 69,997 100.0% $ 45,627 100.0% $ 28,738 100.0% Costs and expenses: Commissions, fees and other incentives... 16,146 23.1 11,631 25.5 9,579 33.3 Operating, administrative and other...... 41,092 58.7 27,553 60.4 18,093 63.0 Depreciation and amortization............ 4,432 6.3 2,742 6.0 606 2.1 -------- ----- -------- ----- -------- ----- Operating income........................... $ 8,327 11.9% $ 3,701 8.1% $ 460 1.6% ======== ===== ======== ===== ======== =====
- ------------------- (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. 15 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 REVENUE on a consolidated basis in 1996 was $583.1 million, an increase of $114.6 million or 24.5% from $468.5 million in 1995. The overall increase in revenue, compared to 1995, reflected a continued improvement in the commercial real estate markets in most areas of the United States. This improvement reflected increasing investor confidence, increasing prices and a more liquid market than in prior years resulting from declining vacancy levels and the return of some bargaining power to landlords. Property and User Services revenue was $513.1 million in 1996, an increase of $90.3 million or 21.3% from $422.8 million in 1995. Brokerage revenue accounted for $335.4 million, an increase of $41.1 million or 14.0% from $294.3 million and investment properties revenue accounted for $130.2 million, an increase of $42.6 million or 48.7% from $87.6 million. Corporate services revenue accounted for $25.6 million, an increase of $3.9 million or 17.6% from $21.7 million. Property management revenue accounted for $20.5 million, an increase of $2.2 million or 12.1% from $18.3 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 1996 and in part from an increase in total size of brokerage lease transactions closed during 1996. Although the number of lease transactions declined in 1996 from 1995 as available quality space came into short supply, the average lease commission amount increased by approximately 7.3%, resulting in an overall increase in revenue from leasing. Investor Services revenue was $70.0 million in 1996, an increase of $24.4 million or 53.4% from $45.6 million in 1995, largely due to an increase in investment management and advisory revenue to $31.0 million in 1996 from $18.6 million in 1995, primarily resulting from the Westmark acquisition. Mortgage banking revenue accounted for $20.2 million, an increase of $9.8 million or 93.8% from $10.4 million as a result of the L.J. Melody acquisition. Valuation and appraisal services revenue accounted for $18.8 million, an increase of $2.2 million or 13.2% from $16.6 million. COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis in 1996 were $292.3 million, an increase of $53.3 million or 22.3% from $239.0 million in 1995. The increase in these costs is largely correlated to the increase in revenue since most of the Company's sales professionals are compensated based on revenue. As a percentage of revenue, commissions fees and other incentives decreased from 51.0% in 1995 to 50.1% in 1996. The decrease in commissions, fees and other incentives as a percentage of revenue is primarily due to the significant revenue growth in investment management and advisory, which does not incur this type of revenue-based expense. Excluding investment management and advisory, commissions, fees and other incentives were relatively flat as a percent of revenues decreasing to 52.9% for 1996 from 53.1% for 1995. Property and User Services commissions, fees and other incentives were $276.1 million in 1996, an increase of $48.7 million or 21.4% from $227.4 million in 1995 and constant as a percentage of revenue at 53.8%. Investor Services commissions, fees and other incentives were $16.1 million in 1996, an increase of $4.5 million or 38.8% from $11.6 million in 1995 and a decrease as a percentage of revenue from 25.5% to 23.1%. OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis in 1996 was $228.8 million, an increase of $40.8 million or 21.7% from $188.0 million in 1995, and a decrease as a percentage of revenue from 40.1% for 1995 to 39.3% for 1996. Property and User Services operating, administrative and other was $187.7 million in 1996, an increase of $27.3 million or 17.0% from $160.4 million in 1995. 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 and other support expenditures and related personnel costs, as well as higher business promotion and other expenses. Investor Services operating, administrative and other was $41.1 million in 1996, an increase of $13.5 million or 49.1% from $27.6 million in 1995, primarily resulting from the Westmark acquisition. DEPRECIATION AND AMORTIZATION on a consolidated basis in 1996 was $13.6 million, an increase of $1.9 million or 16.7% from $11.6 million in 1995 as a result of the Westmark and L.J. Melody acquisitions and new capital leases for computer equipment entered into in 1996. Property and User Services depreciation and amortization was $9.1 million in 1996, an increase of $0.2 million or 2.9% from $8.9 million in 1995. Investor Services depreciation and amortization was $4.4 million in 1996, an increase of $1.7 million or 61.6% from $2.7 million in 1995, primarily as a result of a full year of Westmark expense in 1996 as compared to six months in 1995 16 and the L.J. Melody acquisition in July 1996. OPERATING INCOME on a consolidated basis in 1996 was $48.4 million, an increase of $18.6 million or 62.3% from $29.8 million in 1995. The increase in operating income resulted from an increase in revenue of $114.6 million or 24.5% partially offset by a related increase in commission expense of $53.3 million or 22.3%, a $40.8 million or 21.7% increase in operating expenses and a $1.9 million or 16.7% increase in depreciation and amortization as described above. Property and User Services operating income was $40.1 million in 1996, an increase of $14.0 million or 53.4% from $26.1 million in 1995. The increase in Property and User Services operating income resulted from an increase in Property and User Services revenue of $90.3 million or 21.3% partially offset by a related increase in commission expense of $48.7 million or 21.4%, a $27.3 million or 17.0% increase in operating expenses and a $0.2 million or 2.9% increase in depreciation and amortization as described above. Investor Services operating income was $8.3 million in 1996, an increase of $4.6 million or 125.0% from $3.7 million in 1995. The increase in Investor Services operating income resulted from an increase in Investor Services revenue of $24.4 million or 53.4% partially offset by a related increase in commission expense of $4.5 million or 38.8%, a $13.5 million or 49.1% increase in operating expenses and a $1.7 million or 61.6% increase in depreciation and amortization primarily as a result of the Westmark acquisition as described above. INTEREST INCOME on a consolidated basis in 1996 was $1.5 million, a decrease of $0.2 million or 10.2% from $1.7 million in 1995. INTEREST EXPENSE on a consolidated basis in 1996 was $24.1 million, an increase of $0.8 million or 3.7% from $23.3 million in 1995 primarily resulting from debt incurred with respect to the Westmark acquisition in June 1995 and the L.J. Melody acquisition in July 1996, offset in part by reduced average borrowing levels on other Company indebtedness. NET PROVISION (BENEFIT) FOR INCOME TAX on a consolidated basis in 1996 was a benefit of $(44.7) million, compared to a $0.8 million provision in 1995. During the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million was allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million was recorded as a tax benefit (a reduction in income tax provision). During the fourth quarter of 1996, the Company further reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. For the year ended December 31, 1996, a $11.2 million provision for income taxes has been recorded without regard to the income tax benefit resulting from the reduction of the valuation allowance. Net income for the year ended December 31, 1996 was $70.5 million ($5.02 per share of common stock), which includes the current year provision of $11.2 million offset by the cumulative year-to-date tax benefit of $55.9 million or a net benefit for income tax of $44.7 million. If the Company had not recorded tax benefits related to projected future taxable income for the year ended December 31, 1996, the Company's net income for such period would have been $24.2 million ($1.75 per share of common stock). The provision for income tax would have consisted of current and deferred state tax provisions and provision for Federal alternative minimum tax. Provision for regular Federal taxes would have been offset by reductions in valuation allowances to the extent of such regular Federal taxes. The $55.9 million recognized tax benefit has a material effect on the reported net income for the year ended December 31, 1996. This $55.9 million tax benefit is a non-recurring item and is unrelated to the Company's performance and should not be used in evaluating the Company's prospects or future performance. NET INCOME on a consolidated basis in 1996 was $70.5 million ($5.02 per share of common stock), after giving effect to the tax benefit resulting from the reduction of valuation allowances of $55.9 million ($4.04 per share of common stock) an improvement of $63.1 million from net income of $7.4 million ($0.55 per share of common stock) in 1995. The improvement also resulted from a revenue increase of $114.6 million or 24.5% which was partially offset by a related increase in commission expense of $53.3 million or 22.3%, a $40.8 million or 21.7% increase in operating expenses and a $1.9 million or 16.7% increase in depreciation and amortization as described above. 17 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 39.0% 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 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 $29.8 million, an increase of $4.3 million or 16.7% from $25.6 18 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 $25.1 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 ($0.69 per share of common stock) in 1994. The decrease in net income resulted from an 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% partially offset by an increase in revenue of $39.5 million or 9.2% 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 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 December 31, 1996, the Company had outstanding $55.4 million, under the Senior Secured Credit Agreement and no amounts outstanding 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 $65.9 million (including $3.9 million of deferred interest) under the Senior Subordinated Credit Agreement. In addition, as of December 31, 1996 the Company had outstanding other long-term indebtedness, consisting primarily of acquisition debt, totaling approximately $42.3 million. In connection with the Offering, the senior secured lenders agreed to amend the terms of the Senior Secured Credit Agreement. As amended, the Company is required to make quarterly principal payments of $2.625 million commencing March 31, 1997 with a final payment of $5.5 million on December 31, 2001. As amended, the senior indebtedness bears interest at the rate of LIBOR plus 2.5%, all of which interest is payable currently. 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. Revolving Credit Facility B is a facility that can be used 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. Also in connection with the Offering, the senior subordinated credit terms were amended. As amended, interest will be payable on a current basis commencing January 1, 1997 and the entire amount outstanding under the Senior Subordinated 19 Credit Agreement will be due on July 23, 2002. The senior subordinated indebtedness bears interest at a rate of LIBOR plus 1.25% from January 1, 1997 through December 31, 1998 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% will be deferred and added to the principal balance of the senior subordinated indebtedness until the final maturity of the senior subordinated indebtedness. Interest payments on outstanding senior subordinated debt had been deferred since June 1994 until the payment in full of the senior secured debt. As of December 31, 1996, principal payments on the senior secured debt, senior subordinated debt and the Company's other indebtedness, including debt incurred to finance the acquisitions of Westmark and L.J. Melody, are as follows (in thousands): 1997......... $ 15,314 1998......... 19,163 1999......... 12,807 2000......... 34,198 2001......... 14,582 Thereafter... 67,779 -------- $163,843 ========
The Company expects to have capital expenditures of approximately $4.0 million in 1997 exclusive of acquisitions. In connection with the Westmark acquisition, the sellers may be entitled to a supplemental purchase price payment 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 borrowings. Effective October 1996, a dividend on the Company's Preferred Stock has been reinstated. The $0.25 per share quarterly dividend on the Company's Preferred Stock has accrued from October 1, 1996, and 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. The Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") were $62.0 million, $41.5 million and $33.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. The improvement in EBITDA reflects the overall period to period revenue growth discussed above. EBITDA effectively removes the impact of certain non-cash charges on income such as depreciation and the amortization of intangible assets relating to acquisitions and Federal income taxes (to the extent they are offset by NOLs). 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. 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. RECENT LITIGATION In August 1993, a former commissioned salesperson of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bargain County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996 a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. The Company hired new counsel and in January 1997 filed motions for new trial, reversal of the verdict and reduction of damages. On March 27, 1997 the trial court denied the Company's motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The Company has been advised by appellate counsel that it has a meritorious basis to pursue an appeal of the verdict, which the Company will do. Included in the Company's December 31, 1996 financial statements is an 20 accrual sufficient to reserve against any probable outcome in the case. This accrual was initially established at $250,000 in 1994 and increased to $800,000 in 1995 and represented the Company's estimate of its loss exposure for this matter based on its assessment and analysis as of those dates. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. CASH FLOWS Net cash provided by operating activities was $65.7 million in 1996, an increase of $35.1 million from $30.6 million in 1995. The increase resulted primarily from an improvement in operating income, excluding the tax benefit from the reduction of valuation allowances. See "Net Operating Losses" below. Additionally, non-cash charges, consisting of depreciation, amortization and deferred compensation and interest, included in net income in 1996, were $3.0 million higher than 1995. Net cash provided by operating activities was also impacted by changes in components of other operating assets and liabilities which provided a net increase to net cash provided by operating activities of $16.0 million. Net cash used in investing activities decreased to $10.9 million in 1996, compared to $24.9 million in 1995 as a result of the Westmark acquisition in June 1995 and the L.J. Melody acquisition in July 1996. Net cash used in financing activities was $28.5 million in 1996, compared to $11.5 million in 1995. The $17.0 million difference between periods resulted primarily from $95.9 million repayment of amounts outstanding under the Senior Secured Credit Agreement in 1996 as compared to $19.0 million repayment in 1995, $6.0 million repayment of amounts outstanding under the Senior Subordinated Credit Agreement as compared to no repayments in 1995, and a $10.0 million decrease in proceeds from the Senior Subordinated Credit Agreement, partially offset by $80.0 million proceeds from issuance of common stock in 1996. 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 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, partially offset by a $2.1 million decrease in purchases of property and equipment. 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 OPERATING LOSSES The Company had NOLs of approximately $184.3 million as of December 31, 1996, corresponding to $64.5 million of the Company's $77.8 million in net deferred tax assets, of which $26.4 was 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 had experienced continuing profitability due to a variety of reasons, including the strength of the commercial real estate markets. In addition, the Company had operated Westmark for one full year since acquiring Westmark in June 1995, and as a result had concluded that Westmark should make a positive contribution to the Company's consolidated taxable income. Finally, the acquisition of L.J. Melody in July 1996 is expected to make a positive contribution to the Company's consolidated taxable income. As a result of these factors, during the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million was allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million was recorded as a tax benefit (a reduction in income tax provision). During the fourth quarter of 1996, the Company further 21 reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. For the year ended December 31, 1996, an $11.2 million provision for income taxes has been recorded without regard to the income tax benefit resulting from the reduction of the valuation allowance. Net income for the year ended December 31, 1996 was $70.5 million ($5.02 per share of common stock), which includes the current year provision of $11.2 million offset by the cumulative year-to-date tax benefit of $55.9 million or a net benefit for income tax of $44.7 million. If the Company had not recorded tax benefits related to projected future taxable income for the year ended December 31, 1996, the Company's net income for such period would have been $24.2 million ($1.75 per share of common stock). The provision for income tax would have consisted of current and deferred state tax provisions and provision for Federal alternative minimum tax. Provision for regular Federal taxes would have been offset by reductions in valuation allowances to the extent of such regular Federal taxes. The $55.9 million recognized tax benefit has a material effect on the reported net income for the year ended December 31, 1996. This $55.9 million tax benefit is a non-recurring item and is unrelated to the Company's performance and should not be used in evaluating the Company's prospects or future performance. The Company believes that its future taxable income will be adequate to realize the deferred tax assets on the December 31, 1996 balance sheet. The ability of the Company to utilize NOLs may 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, 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 of its capital structure consummated in connection with the Offering 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 taxable 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 Effective January 1, 1996, 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. These standards, including the proforma effect of SFAS No. 123, were not material to the Company's 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 is required to be adopted by the Company in 1997 and only applies to the operations of L.J. Melody. Under SFAS No. 125, the Company will be required to recognize, at fair value, financial and servicing assets it has acquired control over and related liabilities it has incurred and amortize them over the period of estimated net servicing income or loss. Write- off of the asset is required when control is surrendered and of the liability when extinguished. The Company does not currently recognize the value of financial and servicing assets when loans are originated. The adoption of the new statement will result in the recognition of amortization cost along with income from servicing as services are performed and the recognition of gains or losses at the time servicing rights are sold. Management of the Company believes that the adoption of this standard will not have a material impact on the Company's financial position or results of operations. 22 QUARTERLY RESULTS OF OPERATIONS AND OTHER FINANCIAL DATA The following table sets forth certain unaudited consolidated statement of operations data for each of the Company's last twelve quarters and the percentage of the Company's revenues represented by each line item reflected in each consolidated income statement. In the opinion of management, this information has been presented on the same basis as the consolidated financial statements included in Item 8, and includes all adjustments, consisting only of normal recurring adjustments and accruals, that the Company considers necessary for a fair presentation. The unaudited quarterly information should be read in conjunction with the audited financial statements of the Company and the notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period.
1996 1995 -------------------------------------------- ------------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ---------- ---------- ---------- ----------- ---------- ----------- ----------- --------- (Dollars in thousands) Results of Operations: Revenue...................... $192,205 $147,168 $130,954 $112,741 $143,570 $116,603 $108,361 $ 99,926 Costs and Expenses: Commissions, fees and other incentives........... 96,801 74,196 66,262 55,007 71,449 57,804 57,370 52,395 Operating, administrative and other.................. 69,603 56,042 53,594 49,560 53,129 47,803 44,206 42,830 Depreciation and amortization............... 3,825 3,431 3,038 3,280 3,458 3,546 2,297 2,330 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)...... 21,976 13,499 8,060 4,894 15,534 7,450 4,488 2,371 Interest income.............. 468 286 354 395 446 345 393 490 Interest expense............. 6,240 6,196 5,759 5,928 6,323 6,428 5,313 5,203 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 16,204 7,589 2,655 (639) 9,657 1,367 (432) (2,342) Provision (benefit) for income tax.................. 6,550 4,220 438 (48) 603 138 26 74 Reduction of valuation allowances.................. (15,500) (40,400) - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- Net provision (benefit) for income tax.................. (8,950) (36,180) 438 (48) 603 138 26 74 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............ $ 25,154 $ 43,769 $ 2,217 $ (591) $ 9,054 $ 1,229 $ (458) $ (2,416) ======== ======== ======== ======== ======== ======== ======== ======== Other Financial Data: EBITDA....................... $ 25,801 $ 16,930 $ 11,098 $ 8,174 $ 18,992 $ 10,996 $ 6,785 $ 4,701 Net cash provided by (used in) operating activities.... $ 41,524 $ 22,150 $ 13,865 $(11,845) $ 30,082 $ 8,143 $ 6,890 $(14,483) Net cash (used in) investing activities.................. $ (1,389) $ (9,401) $ 1,768 $ (1,884) $ (2,928) $ (595) $(18,887) $ (2,478) Net cash provided by (used in) financing activities.... $(15,710) $(15,297) $ (4,306) $ 6,808 $(16,002) $ (8,098) $ 15,391 $ (2,760) 1994 ------------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ---------- ---------- ----------- --------- (Dollars in thousands) Results of Operations: Revenue...................... $128,905 $112,843 $103,730 $ 83,510 Costs and Expenses: Commissions, fees and other incentives........... 67,919 59,645 54,367 43,154 Operating, administrative and other.................. 46,316 42,675 42,487 38,756 Depreciation and amortization............... 2,562 1,797 1,783 1,949 -------- -------- -------- -------- Operating income (loss)...... 12,108 8,726 5,093 (349) Interest income.............. 370 270 255 214 Interest expense............. 4,747 5,383 3,790 3,442 -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 7,731 3,613 1,588 (3,577) Provision (benefit) for income tax.................. (73) 75 75 75 Reduction of valuation allowances.................. - - - - -------- -------- -------- -------- Net provision (benefit) for income tax.................. (73) 75 75 75 -------- -------- -------- -------- Net income (loss)............ $ 7,804 $ 3,538 $ 1,483 $ (3,652) ======== ======== ======== ======== Other Financial Data: EBITDA....................... $ 14,670 $ 10,523 $ 6,876 $ 1,600 Net cash provided by (used in) operating activities.... $ 21,911 $ 13,817 $ 5,894 $(10,204) Net cash (used in) investing activities.................. $ (1,321) $ (1,006) $ (748) $ (790) Net cash provided by (used in) financing activities.... $ (4,369) $ (5,114) $ (5,407) $ 9,967
AS A PERCENTAGE OF REVENUES ------------------------------------------------------------------------------------------ 1996 1995 ------------------------------------------- --------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 --------- --------- --------- ---------- --------- ---------- ---------- -------- Results of Operations: Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Commissions, fees and other incentives........... 50.4 50.4 50.6 48.8 49.8 49.6 52.9 52.4 Operating, administrative and other.................. 36.2 38.1 40.9 44.0 37.0 41.0 40.8 42.9 Depreciation and amortization............... 2.0 2.3 2.3 2.9 2.4 3.0 2.1 2.3 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)...... 11.4 9.2 6.2 4.3 10.8 6.4 4.2 2.4 Interest income.............. 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.5 Interest expense............. 3.2 4.2 4.4 5.2 4.4 5.5 4.9 5.2 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.................. 8.4 5.2 2.1 (0.6) 6.7 1.2 (0.4) (2.3) Provision for income tax..... 3.4 2.9 0.3 0.0 0.4 0.1 0.0 0.1 Reduction of valuation allowances.................. (8.1) (27.5) - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- Net provision (benefit) for income tax.................. (4.7) (24.6) 0.3 0.0 0.4 0.1 0.0 0.1 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............ 13.1% 29.7% 1.8% (0.6)% 6.3% 1.1% (0.4)% (2.4)% ======== ======== ======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF REVENUES ------------------------------------------------- 1994 ------------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 --------- --------- ---------- ---------- Results of Operations: 100.0% 100.0% 100.0% 100.0% Revenue...................... Costs and expenses: Commissions, fees and 52.7 52.9 52.4 51.7 other incentives........... Operating, administrative 35.9 37.8 41.0 46.4 and other.................. Depreciation and 2.0 1.6 1.7 2.3 amortization............... -------- -------- -------- -------- 9.4 7.7 4.9 (0.4) Operating income (loss)...... 0.3 0.3 0.3 0.2 Interest income.............. 3.7 4.8 3.7 4.1 Interest expense............. -------- -------- -------- -------- Income (loss) before provision (benefit) for 6.0 3.2 1.5 (4.3) income tax.................. (0.1) 0.1 0.1 0.1 Provision for income tax..... Reduction of valuation - - - - allowances.................. -------- -------- -------- -------- Net provision (benefit) for (0.1) 0.1 0.1 0.1 income tax.................. -------- -------- -------- -------- 6.1% 3.1% 1.4% (4.4)% Net income (loss)............ ======== ======== ======== ========
23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants....................................... 25 Consolidated Balance Sheets as of December 31, 1996, and 1995.................. 26 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994................................................................. 27 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................................................................. 28 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994........................................ 30 Notes to Consolidated Financial Statements..................................... 31 SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS III-Condensed Financial Information of Registrant.............................. 49 VIII-Valuation and Qualifying Accounts......................................... 50 EXHIBIT SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS XI-Computation of Per Share Earnings........................................... 51
All other schedules and exhibits are not submitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto. 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CB Commercial Real Estate Services Group, Inc.: We have audited the accompanying consolidated balance sheets of CB Commercial Real Estate Services Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CB Commercial Real Estate Services Group, Inc. and subsidiaries as of December 31, 1996, and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Los Angeles, California January 30, 1997 25 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share data)
December 31, ----------------------- 1996 1995 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents.......................................................... $ 49,328 $ 23,045 Receivables, less allowance of $4,423 and $4,400 for doubtful accounts at December 31, 1996 and 1995, respectively....................................... 40,927 28,322 Deferred taxes..................................................................... 16,257 765 Prepaid expenses and other......................................................... 7,440 4,889 --------- --------- Total current assets.............................................................. 113,952 57,021 Property and equipment, net......................................................... 40,835 44,500 Goodwill, net of accumulated amortization of $7,563 and $5,194 at December 31, 1996 and 1995......................................................... 65,362 59,491 Other intangible assets, net of accumulated amortization of $253,061 and $249,726 at December 31, 1996 and 1995...................................................... 10,521 10,783 Inventoried property................................................................ 7,355 7,355 Deferred taxes...................................................................... 35,146 - Other assets, net................................................................... 5,773 11,804 --------- --------- Total assets...................................................................... $ 278,944 $ 190,954 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Compensation and employee benefits................................................. $ 38,747 $ 28,324 Accounts payable and accrued expenses.............................................. 28,020 19,245 Reserve for bonus and profit sharing............................................... 21,414 12,997 Current maturities of long-term debt............................................... 15,314 8,250 Current portion of capital lease obligations....................................... 2,510 2,592 --------- --------- Total current liabilities......................................................... 106,005 71,408 --------- --------- Long-term debt, less current maturities: Senior term loans.................................................................. 65,528 160,394 Senior subordinated term loans..................................................... 72,872 78,963 Inventoried property loan.......................................................... 7,470 7,470 Other long-term debt............................................................... 2,659 3,315 --------- --------- Total long-term debt.............................................................. 148,529 250,142 --------- --------- Other long-term liabilities......................................................... 25,925 24,092 --------- --------- Total liabilities................................................................. 280,459 345,642 --------- --------- Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $.01 par value.................................................... 40 40 Common stock, $.01 par value....................................................... 133 93 Additional paid-in capital......................................................... 198,026 110,326 Notes receivable from sale of stock................................................ (5,109) - Accumulated deficit................................................................ (194,605) (265,147) --------- --------- Total stockholders' equity (deficit).............................................. (1,515) (154,688) --------- --------- Total liabilities and stockholders' equity (deficit).............................. $ 278,944 $ 190,954 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 26 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Year Ended December 31, ---------------------------------------- 1996 1995 1994 ------------ ----------- ----------- Revenue............................................ $ 583,068 $ 468,460 $ 428,988 Costs and Expenses: Commissions, fees and other incentives.......... 292,266 239,018 225,085 Operating, administrative and other............. 228,799 187,968 170,234 Depreciation and amortization................... 13,574 11,631 8,091 ----------- ----------- ----------- Operating income................................... 48,429 29,843 25,578 Interest income.................................... 1,503 1,674 1,109 Interest expense................................... 24,123 23,267 17,362 ----------- ----------- ----------- Income before provision (benefit) for income tax... 25,809 8,250 9,325 Provision for income tax........................... 11,160 841 152 Reduction of valuation allowances.................. (55,900) - - ----------- ----------- ----------- Net provision (benefit) for income tax............. (44,740) 841 152 ----------- ----------- ----------- Net income......................................... $ 70,549 $ 7,409 $ 9,173 =========== =========== =========== Net income applicable to common stockholders....... $ 69,549 $ 7,409 $ 9,173 =========== =========== =========== Primary earnings per share......................... $ 5.02 $ 0.55 $ 0.69 =========== =========== =========== Weighted average shares outstanding for primary earnings per share.............................. 13,845,325 13,540,541 13,305,118 =========== =========== =========== Fully diluted earnings per share................... $ 4.97 $ 0.55 $ 0.69 =========== =========== =========== Weighted average shares outstanding for fully diluted earnings per share...................... 14,184,296 13,540,541 13,305,118 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 27 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, --------------------------------- 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income................................................. $ 70,549 $ 7,409 $ 9,173 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization excluding deferred financing costs........................................ 13,574 11,631 8,091 Amortization of deferred financing costs................. 2,840 1,392 1,551 Equity interest in (earnings) loss of unconsolidated subsidiaries........................................... (145) 180 (44) Provision for litigation, doubtful accounts and other.... 9,543 346 2,346 Deferred interest........................................ 6,927 7,738 2,338 Deferred compensation.................................... 2,159 1,762 877 Deferred taxes........................................... (46,128) - - (Increase) decrease in receivables......................... (14,378) (1,778) 1,134 Decrease (increase) in prepaid expenses and other assets... 794 396 (885) Increase in compensation and employee benefits payable..... 19,793 3,276 7,222 Increase (decrease) in other operating liabilities......... 166 (1,720) (385) -------- -------- -------- Net cash provided by operating activities............. 65,694 30,632 31,418 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment........................ (3,002) (2,143) (4,250) Proceeds from collections on notes receivable.............. 2,726 215 445 Acquisitions of businesses including net assets acquired, intangibles and goodwill....................... (8,625) (22,376) - Other investing activities, net............................ (2,005) (584) (60) -------- -------- -------- Net cash used in investing activities................. (10,906) (24,888) (3,865) -------- -------- -------- Cash flows from financing activities: Proceeds from senior revolving credit line................. 21,000 14,000 11,000 Repayment of senior revolving credit line.................. (21,000) (14,000) (11,000) Repayment of senior term loans............................. (95,865) (18,997) (4,100) Repayment of capital leases................................ (2,945) (2,167) - Proceeds from senior subordinated term loan................ - 10,000 - Repayment of senior subordinated term loan................. (6,044) - - Proceeds from issuance of common stock..................... 79,540 - - Other financing activities, net............................ (3,191) (305) (823) -------- -------- -------- Net cash used in financing activities................. (28,505) (11,469) (4,923) -------- -------- -------- Net increase (decrease) in cash and cash equivalents......... 26,283 (5,725) 22,630 Cash and cash equivalents, at beginning of period............ 23,045 28,770 6,140 -------- -------- -------- Cash and cash equivalents, at end of period.................. $ 49,328 $ 23,045 $ 28,770 ======== ======== ========
28 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (Dollars in thousands)
Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (none capitalized).................. $25,899 $14,410 $12,172 Federal and state income taxes............... $ 1,284 $ 497 $ 152 Non-cash investing and financing activities: Portion of Westmark acquisition financed by notes payable................. $ - $20,283 $ - Portion of L.J. Melody acquisition financed by notes payable................. $ 3,667 $ - $ - Equipment acquired under capital leases...... $ 1,701 $ 3,347 $ 4,569
The accompanying notes are an integral part of these consolidated financial statements. 29 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
Common stock Additional Notes Preferred Common options paid-in receivable from Accumulated stock stock outstanding capital sale of stock deficit Total --------- ------ ------------- ----------- -------------- ---------- ------------ 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.......................... - - - - - 70,549 70,549 Common stock issued for deferred compensation and other incentives........................ - 8 - 7,660 (5,109) - 2,559 Common stock options exercised......................... - - (4) 104 - - 100 Preferred dividend accrual.......... - - - (1,000) - - (1,000) Net proceeds from initial public offering.......................... - 32 - 79,399 - - 79,431 Benefit of permanent deferred tax asset............................. - - - 1,541 - - 1,541 Foreign currency translation adjustment........................ - - - - - (7) (7) --------- ---- ------- -------- --------- --------- --------- Balance, December 31, 1996............ $40 $133 $259 $197,767 $(5,109) $(194,605) $ (1,515) ========= ==== ======= ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 30 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND ACQUISITIONS ORGANIZATION. CB Commercial Real Estate Services Group, Inc. (formerly CB Commercial Holdings, Inc.) ("CB Commercial") was organized to acquire Coldwell Banker Commercial Group, Inc. and had no operations prior to the acquisition on April 19, 1989 (the "Acquisition"). In 1991 Coldwell Banker Commercial Group, Inc. was renamed CB Commercial Real Estate Group, Inc. On November 25, 1996, CB Commercial completed an initial public offering (the "Offering") of 4,347,000 shares of common stock, par value $.01 per share (the "Common Stock"). The net proceeds from the Offering of approximately $80.0 million were used to repay a portion of the Company's senior secured indebtedness and senior subordinated indebtedness. CB Commercial is a holding company that conducts its operations solely through CB Commercial Real Estate Group, Inc. and its subsidiaries (collectively the "Company"). NATURE OF OPERATIONS. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (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's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. A significant portion of the Company's revenue is transactional in nature and seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. ACQUISITIONS. Effective 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 mortgage 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 to the sellers. The notes bear interest of 10.0% per annum, with maturities through July 2001. The $2.3 million note will be accounted for as compensation over the term of the note as the payment of this note is contingent upon the principal seller's continued employment with the Company. (See Note 6) The L.J. Melody acquisition was accounted for as a purchase. The Company allocated approximately $3.7 million of the total purchase price to identifiable intangible assets, consisting of loan servicing and asset management contracts, trade name, a covenant not to compete and other intangibles. The remaining $9.0 million and a $1.5 million deferred tax liability resulting from the acquisition were recorded to goodwill. The intangibles are being amortized over their estimated useful lives or the lives of the underlying contracts, as applicable, over periods ranging from three to 13 years. Goodwill is being amortized on a straight line basis over 30 years. On June 30, 1995, CB Commercial Real Estate Group, Inc., through a general partnership ("WREAP") in which it directly or indirectly owns all of the partnership interests, acquired Westmark Realty Advisors L.L.C. ("Westmark"). Westmark is an investment management and advisory business headquartered in Los Angeles. The purchase price consisted of an aggregate initial purchase price of $37.5 million plus $2.9 million in net liabilities assumed and an additional $1.0 million in costs related to the Westmark acquisition. Approximately $20.0 million ($19.8 million at December 31, 1996) 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 31 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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, 1996, approximately $2.8 million was earned, of which $1.9 million and $0.9 million was paid to the sellers on March 31, 1997 and 1996, respectively. Approximately $17.5 million of the purchase price was paid in cash using $7.5 million contributed to WREAP by CB Commercial Real Estate Group, Inc. and $10.0 million of proceeds from a senior subordinated loan ("Westmark Senior Subordinated Loan"). In November 1996, the terms of the Westmark Senior Subordinated Loan were amended to provide for interest to be payable quarterly on a current basis at a rate of 11.0%, effective June 30, 1995, and to provide for quarterly amortization payments by CB Commercial Real Estate Group, Inc. of $500,000. As amended, interest has accrued on the Westmark Senior Subordinated Loan at the original interest rate of 20.0%. Interest in excess of 11.0% will be forgiven upon the payment of the Westmark Senior Subordinated Loan in full. If CB Commercial Real Estate Group, Inc. defaults on its payment obligations under the loan at any time, such excess interest will not be forgiven and the Westmark Senior Subordinated Loan will bear interest at the rate of 20.0% from June 30, 1995. (See Note 6) The Westmark 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, 5 and 10 years, respectively. Based on the nature of the business, Westmark's market position, its workforce and other factors, management estimates that the goodwill resulting from this acquisition has a useful life of approximately 30 years and will be amortized on a straight line basis over this period. 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. On April 11, 1995, the Company acquired certain assets of Langdon Rieder Corporation ("Langdon Rieder"), a tenant advisory business. The purchase price consisted of a closing payment of $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), plus interest on the entire outstanding portion of the deferred payment at an annual rate of 8.0%. The deferred payment is subject to forfeiture under certain circumstances. The purchase price has largely been allocated to intangibles and goodwill, which is being amortized on a straight- line basis over their useful lives ranging from three to seven years. The assets and liabilities of Westmark and Langdon Rieder, along with the related goodwill, intangibles and indebtedness resulting from the acquisitions, are reflected in the accompanying consolidated financial statements as of December 31, 1996 and 1995. The respective financial information for L.J. Melody is reflected in the accompanying consolidated financial statements as of December 31, 1996. The results of operations of the acquired companies are included in the consolidated results from the dates of acquisition, and were not material to the Company's results for the year ended December 31, 1996 and 1995, respectively. The pro forma results of operations of the Company for the years ended December 31, 1996, 1995 and 1994, assuming the Westmark and Langdon Rieder acquisitions had occurred on January 1, 1994 and the L.J. Melody acquisition had occurred on January 1, 1995, would have been as follows:
Year Ended December 31, --------------------------------- (Unaudited) 1996 1995 1994 -------- -------- ----------- (Dollars in thousands except per share data) Revenues............................................ $586,485 $489,684 $452,284 Net income.......................................... 69,001 4,903 4,092 Net income per common and common equivalent share outstanding...................................... 4.98 0.36 0.31
32 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of less than three months. INTANGIBLE ASSETS AND GOODWILL The Company obtained approximately $214.0 million of intangible assets (other than goodwill) from the Acquisition, comprised of a covenant not to compete, a trademark, deferred financing costs and other items. As of December 31, 1996, substantially all of these intangibles have been fully amortized. The remaining unamortized intangibles of approximately $10.5 million at December 31, 1996 consist of approximately $3.1 million relating to deferred financing costs and $7.5 million are intangibles stemming from the L.J. Melody, Westmark and Langdon Rieder acquisitions. (See Note 1) Goodwill of $65.4 million and $59.5 million at December 31, 1996 and 1995, respectively, consists of $21.0 million and $21.6 million, respectively, related to the Acquisition and $44.3 million and $37.9 million, respectively, related to the Westmark, L.J. Melody and other acquisitions. Goodwill related to the Acquisition is being amortized over an estimated useful life of 40 years. Goodwill related to Westmark, L.J. Melody and other acquisitions is being amortized over an estimated useful life of 30 years. The Company periodically evaluates the recoverability of the carrying amount of goodwill and other intangible assets. In this assessment, the Company considers macro market conditions and trends in the Company's relative market position, its capital structure, lender relationships and the estimated undiscounted future cash flows associated with these assets. If any of the significant assumptions inherent in this assessment change in a material way due to market, economic and/or other factors, the recoverability is assessed based on the revised assumptions and resultant undiscounted cash flows. If such analysis indicates impairment, it would be recorded in the period such changes occur based on the fair value of the goodwill and other intangible assets. 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. 33 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates provide a reasonable basis for the fair presentation of its financial condition and results of operations. CERTAIN SIGNIFICANT ESTIMATES DEFERRED TAXES. The Company has net deferred tax assets of approximately $77.8 million at December 31, 1996, of which $26.4 has been reserved through a valuation allowance. The valuation allowance is based on management's conclusion regarding the realizability of this asset on a more likely than not basis, as defined in SFAS No. 109. In reaching this conclusion management considered the Company's past operating results, as well as the current year events and trends, including the impact if any, of the acquisitions that were concluded during the year as well as other factors. Management will continue to evaluate the appropriateness of all or part of this valuation allowance on a periodic basis and if its conclusions change with respect to realizability, any necessary adjustments will be made at that time. The impact of these adjustments, if any, could be material to the Company's financial statements. (See Note 9) PER SHARE INFORMATION Primary earnings per share is calculated based on weighted average common shares and common stock equivalents, which include preferred stock and dilutive stock options outstanding. This calculation also includes all issuances of stock and stock options made within twelve months prior to the Offering as promotional shares for all periods presented. Fully diluted earnings per share further assumes the conversion of preferred stock, if dilutive, for the period after the Offering when the preferred stock was no longer considered to be a common stock equivalent. The Company recapitalized its various classes of stock in conjunction with the Offering. (See Note 8) Weighted average common and common equivalent shares outstanding are comprised of the following:
December 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- PRIMARY EARNINGS PER SHARE: Preferred stock: Series A-1..................... 909,836 1,000,000 1,000,000 Series A-2..................... 1,819,672 2,000,000 2,000,000 Series A-3..................... 909,836 1,000,000 1,000,000 Common stock: Common Stock (post-Offering)... 1,195,402 - - Class B-1 (pre-Offering)....... 1,687,013 1,850,034 1,850,000 Class B-2 (pre-Offering)....... 5,618,323 5,678,262 5,442,839 Class C-1 (pre-Offering)....... 727,869 800,000 800,000 Class C-R (pre-Offering)....... 727,869 800,000 800,000 Promotional shares.................. 188,062 371,566 371,566 Stock options....................... 61,443 40,679 40,713 ---------- ---------- ---------- 13,845,325 13,540,541 13,305,118 ========== ========== ==========
34 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996
December 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- FULLY DILUTED EARNINGS PER SHARE: Preferred stock: Series A-1......................... 909,836 1,000,000 1,000,000 Series A-2......................... 1,819,672 2,000,000 2,000,000 Series A-3......................... 909,836 1,000,000 1,000,000 Common stock: Common Stock (post-Offering)....... 1,195,402 - - Class B-1 (pre-Offering)........... 1,687,013 1,850,034 1,850,000 Class B-2 (pre-Offering)........... 5,618,323 5,678,262 5,442,839 Class C-1 (pre-Offering)........... 727,869 800,000 800,000 Class C-R (pre-Offering)........... 727,869 800,000 800,000 Promotional shares...................... 188,062 371,566 371,566 Stock options........................... 119,103 40,679 40,713 Assumed conversion of preferred stock... 281,311 - - ---------- ---------- ---------- 14,184,296 13,540,541 13,305,118 ========== ========== ==========
Actual shares of common stock outstanding at December 31, 1996 were 13,258,091. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1996, 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. These standards, including the proforma effect of SFAS No. 123, were not material to the Company's 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 is required to be adopted by the Company in 1997 and only applies to the operations of L.J. Melody. Under SFAS No. 125, the Company will be required to recognize, at fair value, financial and servicing assets it has acquired control over and related liabilities it has incurred and amortize them over the period of estimated net servicing income or loss. Write- off of the asset is required when control is surrendered and of the liability when extinguished. The Company does not currently recognize the value of financial and servicing assets when loans are originated. The adoption of the new statement will result in the recognition of amortization cost along with income from servicing as services are performed and the recognition of gains or losses at the time servicing rights are sold. Management of the Company believes that the adoption of this standard will not have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS Certain reclassifications, which do not have an effect on net income, have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 35 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 3. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in thousands):
December 31, --------------------- 1996 1995 --------- --------- Land........................................ $ 11,946 $ 11,843 Buildings and improvements.................. 23,977 26,553 Furniture and equipment..................... 36,672 35,828 Equipment under capital leases.............. 9,617 7,916 -------- -------- 82,212 82,140 Accumulated depreciation and amortization... (41,377) (37,640) -------- -------- Property and equipment, net........... $ 40,835 $ 44,500 ======== ========
The Company capitalizes expenditures that materially increase the life of the related assets and charges the cost of maintenance and repairs to expense. Upon sale or retirement, the capitalized costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in operating income. Depreciation is computed primarily using the straight-line method over estimated useful lives ranging from 3 to 45 years. Leasehold improvements are amortized over the term of the respective leases, excluding options to renew. Equipment under capital leases is depreciated over the related term of the leases. 4. OTHER ASSETS Included in other assets at December 31, 1996, and 1995 are $2.7 million and $1.7 million, respectively, of investments in limited partnerships managed for a fee for institutional investors. The Company has a 1.0% general partnership interest in each of the limited partnerships which is accounted for under the equity method. Although the Company is the general partner of each limited partnership, it does not have majority control over investment decisions in any of the limited partnerships. Management fee income from the partnerships was approximately $7.6 million, $6.4 million and $4.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. The limited partnerships' total assets were approximately $363.8 million and $405.9 million and total liabilities were approximately $72.6 million and $74.1 million as of December 31, 1996, and 1995, respectively. The partnerships' net income (loss) for the years ended December 31, 1996, 1995, and 1994 was approximately $11.7 million, $24.2 million and $(18.3) million, respectively. The general partner capital contributions for four of the partnerships are in the form of unsecured notes payable totaling approximately $2.9 million and $3.2 million at December 31, 1996, and 1995, respectively. (See Note 6) 36 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 Also included in other assets are investments in four unconsolidated commercial real estate broker subsidiaries as of December 31, 1996 and 1995: 25.0% interest in CB Commercial Real Estate Group Canada Inc.; 5.0% interest as of December 31, 1996 reduced from a 40.0% interest in CB Comercial de Mexico, S.A. de C.V. as of December 31, 1995; 19.0% interest in DTZ Leung Pte Ltd.; and 50.0% interest in CB Commercial/Hampshire L.L.C. Investments in and advances to (from) unconsolidated subsidiaries are as follows (in thousands):
December 31, ---------------- 1996 1995 ------ ------- CB Commercial Real Estate Group Canada Inc.... $1,743 $1,604 CB Comercial de Mexico, S.A. de C.V........... - (294) DTZ Leung Pte Ltd............................. 210 210 CB Commercial/Hampshire L.L.C................. 22 22
Equity interest in earnings (losses) of the unconsolidated subsidiaries of $145,000, $180,000 and $(44,000) for the years ended December 31, 1996, 1995 and 1994, 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 $2.2 million and $5.0 million at December 31, 1996, and 1995, respectively. During the second quarter of 1996, payment in full on a 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 common stock have been reserved for issuance under the CB Commercial Real Estate Services Group, 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 at various dates through September 2001. Recent options for 40,000 shares were granted at a $20.00 exercise price. Options for 960,000 shares were outstanding as of December 31, 1996. A total of 600,000 shares of Common Stock have been reserved for issuance under the CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan 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 a prior year, below market options were granted to certain directors in partial payment of director fees. All options vested at grant date and expire at various dates through November 2006. During 1996 and 1995, options to purchase 467 and 4,106 shares, respectively, of Common Stock were exercised. In November 1996, options to purchase 30,000 shares were granted to certain directors at $20.00 per share and vest over a three-year period. As of December 31, 1996 and 1995, options to purchase 66,140 and 36,607 shares of Common Stock were outstanding at $258,750 and $262,500, respectively. A total of 90,750 shares of Common Stock have been reserved for issuance under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the Board of Directors in September 1996 as part of the July 1996 acquisition of L.J. Melody. Options for all such shares have been issued at an exercise price of $10.00 per share and vest over a period of five years at the rate of five percent per quarter. Options for 90,750 shares of Common Stock were outstanding as of December 31, 1996. 37 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 STOCK PURCHASE PLAN. The Company has a restricted stock purchase plan covering certain key employees including senior management. A total of 550,000 shares of Common Stock have been reserved for issuance under the 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc. The shares may be issued to senior executives for a purchase price equal to the greater of $10.00 per share or fair market value. The purchase price for shares under this plan must be paid either in cash or by delivery of a full recourse promissory note. As of December 31, 1996, the Company has issued 510,906 shares of Common Stock to certain key employees at $10.00 per share The related promissory notes are also included in stockholders' equity (deficit). 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 $19.0 million, $10.2 million and $10.3 million for the years ended December 31, 1996, 1995, and 1994, 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, $1.9 million, $1.0 million and $1.0 million for the years ended December 31, 1996, 1995, and 1994, respectively. (See Note 8) DEFERRED COMPENSATION PLAN (THE "DCP"). In 1994, the Company implemented the DCP. Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive amounts deferred at a future date either in cash, which accrues at a rate of interest determined in accordance with the DCP and is an unsecured long term liability of the Company, or in newly issued shares of Common Stock of the Company which elections are recorded as additions to Stockholders' Equity. For the year ended December 31, 1996, approximately $1.1 million (including interest) and $1.3 million has been deferred in cash and stock, respectively, all of which was charged to expense in 1996. The accumulated deferrals as of December 31, 1996, were approximately $2.0 million in cash (including interest) and $2.9 million in stock for a total of $4.9 million, all of which was charged to expense in the period of deferral. 38 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 6. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
December 31, ------------------- 1996 1995 -------- -------- Senior Term Loans, with variable interest rates based on LIBOR plus 2.5% (8.15625% and 7.0% weighted average at December 31, 1996, and 1995, respectively) Senior Term Loan due in quarterly installments of $2.625 million commencing March 31, 1997, with the remaining balance due December 31, 2001...................................... $ 37,415 $130,021 Mortgage Term Loan due in full March 31, 1999................................... 18,000 18,340 Westmark Senior Notes, with interest at 12.0%, $0.283 million due January 2, 1997, $5.482 million due June 30, 1998, with the remaining balance due June 30, 2000............................................. 19,771 20,283 L.J. Melody Senior Notes, with interest at 10.0%, due in quarterly installments of $0.375 million with final payment due July 1, 1998........................... 2,625 - Senior Subordinated Term Loan, with variable interest rates based on LIBOR plus 0.25% through December 31, 1996, LIBOR plus 1.25% during 1997 and 1998, LIBOR plus 2.0% during 1999, LIBOR plus 3.0% during 2000 and LIBOR plus 4.0% during subsequent periods (5.90625% and 6.0% at December 31, 1996, and 1995, respectively) due in full on July 23, 2002.................................................... 65,872 67,896 Westmark Senior Subordinated Loan, with interest at 11.0%, due in quarterly installments of $0.5 million with final payment due July 31, 2001................................................................... 9,000 11,067 Inventoried Property Loan, secured by inventoried property, with interest at short-term commercial paper borrowing rate plus 3.5% (9.0% and 9.37% at December 31, 1996, and 1995, respectively) due in full April 30, 2000........................................ 7,470 7,470 Equipment Loan, secured by computer equipment with interest at the prime rate plus 0.5% (8.75% and 9.25% at December 31, 1996 and 1995, respectively), due in full December 1, 1998............................... 164 164 L.J. Melody Contingent Note, with interest at 10%, due in quarterly installments of $0.056 million with final payment due July 1, 2001.............. 667 - Unsecured Notes Payable, with fixed interest ranging from 6.0% to 13.0% and variable interest at the higher of the Applicable Federal Rate or Consumer Price Index plus 6.0% (Note 4)......................... 2,859 3,151 -------- -------- Total...................................................................... 163,843 258,392 Less current maturities.................................................... 15,314 8,250 -------- -------- $148,529 $250,142 ======== ========
Annual aggregate maturities of long-term debt as of December 31, 1996 are as follows (in thousands): 1997 -$15,314; 1998 - $19,163; 1999 - $12,807; 2000 - $34,198; 2001 - $14,582; and $67,779 thereafter. Of the net proceeds of the Offering, approximately $74.4 million was used to repay a portion of the indebtedness under the Senior Secured Credit Agreement and $5.0 million was used to pay accrued and unpaid interest on the indebtedness outstanding under the Senior Subordinated Credit Agreement. 39 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 In connection with the Offering, the Company's senior secured lenders agreed to amend the terms of the Senior Secured Credit Agreement. As amended, the senior indebtedness bears interest at the rate of LIBOR plus 2.5%, all of which interest is payable currently, has a final maturity date of December 31, 2001 and provides for quarterly principal repayments of $2.625 million with a final payment of $5.5 million on December 31, 2001. (See Note 8) Also in connection with the Offering, the senior subordinated credit terms were amended. As amended, interest is payable on a current basis commencing January 1, 1997. The senior subordinated indebtedness bears interest at a rate of LIBOR plus 1.25% from January 1, 1997 through December 31, 1998, at 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 may be prepaid at any time without penalty and is due in full on July 23, 2002. The Company has two Senior Revolving Credit Lines of $20.0 million and $10.0 million expiring in December 2001. Commitment fees of 0.5% and 0.375%, respectively, per annum are payable quarterly in arrears on the unused portion of the lines. The $10.0 million Senior Revolving Credit Line can be used to fund acquisitions and bears interest at a rate equal to, at the Company's option, LIBOR plus 300 basis points or the prime rate plus 200 basis points payable quarterly. Quarterly principal payments are required but may be borrowed back in full until the line expires, at which time it must be repaid in full. As of December 31, 1996, 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, 1996, $3.4 million of letters of credit have been issued. Borrowings under the Senior Secured Credit Agreement are secured by substantially all of the personal and real property assets of the Company. Collectively these loans are guaranteed by CB Commercial and all the common stock of CB Commercial Real Estate Group, Inc. is pledged to secure the guarantee. Borrowings under the Senior Subordinated Credit Agreement are secured by a second priority lien on the common stock of CB Commercial Real Estate Group, Inc. The Senior Secured Credit 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. 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, 1996. See Note 1 for indebtedness regarding the Westmark, Langdon Reider and L.J. Melody acquisitions. 7. COMMITMENTS AND CONTINGENCIES The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. In August 1993, a former commissioned salesperson of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bargain County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996 a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. The Company hired new counsel and in January 1997 filed motions for new trial, reversal of the verdict and reduction of damages. On March 27, 1997 the trial court denied the Company's motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The Company has been advised by appellate counsel that it has a meritorious basis to pursue an appeal of the verdict, which the Company will do. Included in the Company's December 31, 1996 financial statements is an accrual sufficient to reserve against any probable outcome in the case. This accrual was initially established at $250,000 in 1994 and increased to $800,000 in 1995 and represented the Company's estimate of its loss exposure for this matter based on its assessment and analysis as of those dates. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome 40 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of 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, 1996, are as follows (in thousands): 1997 - $21,320; 1998 - $19,726; 1999 - $17,244; 2000 - $14,657; 2001 - $11,360; and $23,960 thereafter. Future minimum lease commitments for noncancelable capital leases at December 31, 1996, are as follows (in thousands): 1997 - $2,809; 1998 - $1,145; 1999 - $286; and $3 thereafter. The interest portion of these payments totals $472. Capital lease payments due within one year are classified as current liabilities. Substantially all leases require the Company to pay maintenance costs, insurance and property taxes, and generally may be renewed for five year periods. Total rental expense under noncancelable operating leases was $18.1 million, $22.5 million and $21.3 million for the years ended December 31, 1996, 1995, and 1994, respectively. 8. STOCKHOLDERS' EQUITY Stockholders' equity by class of stock at December 31, 1996, and 1995 is as follows:
Votes Shares Original Purchase per Shares Issued and Price of Shares Share Authorized Outstanding Outstanding --------- ------------ ----------------- --------------- December 31, 1996 - -------------------- Preferred stock: Series A-1......... 2 1,000,000 1,000,000 $ 10,000,000 Series A-2......... 1 2,000,000 2,000,000 20,000,000 Series A-3......... - 1,000,000 1,000,000 10,000,000 ------------ ----------- ------------ 4,000,000 4,000,000 $ 40,000,000 ============ =========== ============ Common Stock......... 1 100,000,000 13,258,091 $168,427,149 ============ =========== ============ 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 ============ =========== ============
41 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 On November 25, 1996 the Company provided liquidity to its common stockholders by publicly registering its common stock and raised additional capital in the Offering. The Company issued 4,347,000 shares of common stock in the Offering at $20.00 per share. The proceeds from the Offering totalled $79.5 million, net of a $6.1 million underwriters' discount and $1.4 million in estimated offering expenses, all of which has been recorded to equity. The proceeds were used to repay $74.4 million and $5.0 million of the Company's senior secured and subordinated indebtedness, respectively. The Company recapitalized its various classes of stock in conjunction with the Offering. The following summarizes the terms of the recapitalization: . Class B-1 and B-2 common stock of the Company was converted into Common Stock on a one-for-one basis; . Class C-1 common stock of the Company was converted into Common Stock at a conversion ratio based on the greater of the Offering price per share and $22.00, which resulted in the issuance of 436,362 shares of Common Stock; . The Company acquired all issued and outstanding shares of the Class C-R and Class J common stock at $.01 per share; . The Preferred Stock became convertible into Common Stock at the holder's option 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. Effective October 1996, a $1.00 per share annual dividend on the Company's Preferred Stock was reinstated. The $0.25 per share quarterly dividend on the Company's Preferred Stock has accrued from October 1, 1996, and will result, if and when paid, in a cash outlay 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 has elected to defer payment of the accumulated dividend and utilize available cash to finance future acquisitions. As a consequence, such dividends will accumulate and bear interest which will be paid on a quarterly basis and the Company will be prohibited from voluntarily repaying long-term debt until such accumulated dividend has been paid in full. In the event the preferred dividend is not declared and paid within one year after the last day of the quarter to which it relates, it will bear annual interest compounding at either (i) a fixed rate of 8% annually or (ii) an annual rate equal to the six-month rate offered to The Sumitomo Bank, Limited in the London interbank market, for amounts comparable to the amount of any unpaid dividend, plus 2.5%. As of December 31, 1996, dividends payable were $1,000,000. 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 $10.00 per share to all stockholders on a pro rata basis, regardless of class or series. After payment in full of $10.00 per share, additional distributions, if any, will be made on a share-for-share basis, but each share of preferred stock will be counted as 60.0% of a share of Common Stock. The Company's Class J common stock did not participate in any dividends or liquidation proceeds and had 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 common shares were non-voting (other than as required by law) and upon liquidation had the right to share in the return of the first $10.00 of capital to stockholders only to the extent of their par value of $.01 per share but participated fully in proceeds in excess of $10.00 per share and in all dividends declared on common stock. 42 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 In 1996, the Company issued 4,347,000 shares of Common Stock in the Offering, 510,906 shares to certain key employees in connection with the 1996 Equity Incentive Plan, 125,389 shares 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, 129,216 shares in connection with the DCP (including bonuses deferred in stock) and 10,467 shares in connection with stock option plans. Additionally, the Company repurchased 800,000 shares of Class C-R common stock and 2 shares of Class J common stock and converted 800,000 shares of Class C-1 shares to 436,362 shares of Common Stock. In 1995, the Company issued 159,432 shares of its Class B-2 common 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 common shares issued in 1995. (See Note 5) 9. INCOME TAXES The regular federal tax return loss carryforward is $184.3 million as of December 31, 1996, expiring in the years 2005 through 2008 as follows: $55.4 million--2005; $76.2 million--2006; $38.0 million--2007; and $14.7 million-- 2008. The unexpired loss carryforward for federal alternative tax purposes is $177.0 million as of December 31, 1996 primarily due to depreciation differences. Use of the federal alternative tax loss carryforward is limited to the lesser of 90.0% of the year's alternative minimum taxable income or the remaining alternative minimum tax loss carryforward. The current federal tax includes alternative minimum tax paid, for which credit carryforwards are available, totaling $0.8 million as of December 31, 1996. Loss carryforwards for state income tax purposes expire in various states beginning in 1996. The tax provision for the years ended December 31, 1996, 1995 and 1994 consisted of the following (in thousands):
Year Ended December 31, ------------------------------- 1996 1995 1994 --------- -------- -------- Federal: Current............................. $ 730 $ 503 $ 47 Deferred tax........................ 9,522 1,231 (3,563) Reduction of valuation allowances... (55,900) (1,231) 3,563 -------- ------- ------- (45,648) 503 47 State: Current............................. 658 338 105 Deferred............................ 250 209 (773) Reduction of valuation allowances... - (209) 773 -------- ------- ------- 908 338 105 -------- ------- ------- $(44,740) $ 841 $ 152 ======== ======= =======
43 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 The following is a reconciliation, stated as a percentage of pre-tax income, of the U.S. statutory federal income tax rate to the Company's effective tax rate on income from operations:
Year Ended December 31, -------------------------- 1996 1995 1994 -------- ------ ------ Federal statutory tax rate................... 35% 34% 35% Permanent differences, including goodwill, meals and entertainment.................... 5 14 9 State taxes, net of federal benefit.......... 4 3 6 Utilization of previously unrecognized net operating losses........................... - (41) (48) Reduction of valuation allowances............ (217) - - ----- ---- ---- Effective tax rate........................... (173)% 10% 2% ===== ==== ====
Beginning in 1992, the Company implemented SFAS No. 109, the modified liability method of accounting for income taxes. Until the third quarter of 1996, the resulting net deferred tax asset had been fully reserved 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, 1996, and 1995 (in thousands):
Year Ended December 31, ------------------------- 1996 1995 ------------ ---------- Asset (Liability) ---------------- Property and equipment......................................... $ 1,952 $ 1,289 Reserves for bad debts, building write down, legal expenses............................................... 6,386 3,860 Intangible amortization........................................ 1,060 1,213 Bonus, unexercised restricted stock, deferred compensation................................................. 2,907 1,901 Partnership income............................................. 584 608 Debt modification.............................................. 1,871 1,549 Net operating loss and alternative minimum tax carryforwards... 65,257 77,600 -------- -------- Total deferred tax assets.................................... 80,017 88,020 Unconsolidated affiliates...................................... (218) (218) Acquisitions................................................... (1,435) - All other, net................................................. (582) (273) -------- -------- Total deferred tax liabilities............................... (2,235) (491) -------- -------- Net deferred tax asset before valuation allowances............. 77,782 87,529 Valuation allowances........................................... (26,379) (87,529) -------- -------- Net deferred tax asset....................................... $ 51,403 $ - ======== ========
44 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 Management evaluates the appropriateness of all or part of these valuation allowances on a periodic basis and if the Company concludes there is a change with respect to realizability, any necessary adjustments are made at that time. As of September 30, 1996, the Company had experienced continuing profitability due to a variety of reasons, including the strength of the commercial real estate markets. In addition, the Company had operated Westmark for one full year since acquiring Westmark in June 1995, and as a result had concluded that Westmark should make a positive contribution to the Company's consolidated taxable income. Finally, the acquisition of L.J. Melody in July 1996 is expected to make a positive contribution to the Company's consolidated taxable income. As a result of these factors, during the third quarter of 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $45.7 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income tax provision). During the fourth quarter of 1996, the Company further reduced its deferred tax asset valuation allowances by $15.5 million based on its ability to generate additional taxable income in the future through interest savings resulting from the paydown of part of its senior secured and senior subordinated debt with proceeds from the Offering. This reduction has also been recorded as a tax benefit resulting in a cumulative year-to-date tax benefit of $55.9 million. With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. For the year ended December 31, 1996, an $11.2 million provision for income taxes has been recorded without regard to the income tax benefit resulting from the reduction of the valuation allowance. Net income for the year ended December 31, 1996 was $70.5 million, which includes the current year provision of $11.2 million offset by the cumulative year-to-date tax benefit of $55.9 million or a net benefit for income tax of $44.7 million. 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 Offering and Recapitalization did 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 $96.7 million and $28.4 million at December 31, 1996, and 1995, 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, the Westmark and Melody Senior Notes, the Westmark Senior Subordinated Loan, and the Melody Contingent Note, including their respective maturities, are discussed in Note 6. Estimated fair values for these liabilities are not presented because the Company believes that the unique circumstances that include the Company's leverage, the terms of its loans, the timing of the interest and principal payments, the relative priorities of the senior and subordinated indebtedness and other terms and conditions associated with these loans require the expertise of an investment banker 45 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 to determine the fair values. The Company does not consider it practicable to incur the excessive costs to engage an investment banker to perform a fair value analysis of these liabilities. The effective interest rates associated with these loans at December 31, 1996 were not materially different from the stated value. 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. 46 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 12. INDUSTRY SEGMENTS The Company operates in two business segments--Property and User Services and Investor Services. Property and User Services including brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management and real estate market research. Investor Services includes mortgage banking (loan origination and servicing), investment management and advisory services, and valuation and appraisal services.
Year Ended December 31, ------------------------------ 1996 1995 1994 -------- -------- -------- (Dollars in thousands) Revenue Property and User Services.............. $513,071 $422,833 $400,250 Investor Services....................... 69,997 45,627 28,738 -------- -------- -------- $583,068 $468,460 $428,988 ======== ======== ======== Operating income Property and User Services.............. $ 40,102 $ 26,142 $ 25,118 Investor Services....................... 8,327 3,701 460 -------- -------- -------- 48,429 29,843 25,578 Interest income............................ 1,503 1,674 1,109 Interest expense........................... 24,123 23,267 17,362 -------- -------- -------- Income before provision for income taxes... $ 25,809 $ 8,250 $ 9,325 ======== ======== ======== Depreciation and amortization Property and User Services.............. $ 9,142 $ 8,889 $ 7,485 Investor Services....................... 4,432 2,742 606 -------- -------- -------- $ 13,574 $ 11,631 $ 8,091 ======== ======== ======== Capital expenditures (purchases) Property and User Services.............. $ 2,784 $ 1,987 $ 3,984 Investor Services....................... 218 156 266 -------- -------- -------- $ 3,002 $ 2,143 $ 4,250 ======== ======== ======== As of December 31, ------------------- 1996 1995 -------- -------- Identifiable assets Property and User Services.............. $ 88,116 $ 85,182 Investor Services....................... 73,971 58,800 Corporate............................... 116,857 46,972 -------- -------- $278,944 $190,954 ======== ========
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. 47 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 13. SUBSEQUENT EVENT On March 18, 1997 the Company announced that it had signed a non-binding letter of intent to merge with Koll Real Estate Services, Inc. ("Koll") in a tax-free reorganization to be accounted for as a purchase. The Company has agreed to issue 0.85 shares of its common stock for each share of Koll common stock, which will result in the issuance of approximately 6.0 million shares. The merger is subject to execution of a definitive agreement and the approval of stockholders of both companies as well as regulatory approval. 48 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Dollars in thousands)
December 31, -------------- 1996 1995 -------- --------- BALANCE SHEET - ------------- Advances to CB Commercial Real Estate Group, Inc............. $124,274 $ 42,918 Investment in CB Commercial Real Estate Group, Inc. and subsidiaries................................................ 62,124 62,124 -------- -------- Total assets.............................................. $186,398 $105,042 ======== ======== Dividends Payable............................................ $ 1,000 - Stockholders' Equity......................................... 185,398 105,042 -------- -------- Total Liabilities and Stockholders' Equity................ $186,398 $105,042 ======== ========
Year Ended December 31, --------------------------------- 1996 1995 1994 -------- --------- -------- INCOME STATEMENT - ---------------- Expenses - other............................................. $ - $ 39 $ (45) Provision for income tax..................................... 735 51 - -------- --------- -------- Net income (loss)......................................... $ (735) $ (90) $ 45 ======== ========= ========
Year Ended December 31, -------------------------------------- 1996 1995 1994 -------- --------- ------------- STATEMENT OF CASH FLOWS - ----------------------- Net income (loss)............................................ $ (735) $ (90) $ 45 Adjustments to reconcile net income (loss) to net cash used in operating activities..................... - - - Advances to CB Commercial...................... 735 90 (45) -------- --------- ------------- Net cash provided by operating activities............... - - - Cash flows from investing activities......................... - - - Cash flows from financing activities......................... - - - Net change in cash and cash equivalents...................... - - - Cash and cash equivalents, at beginning of period............ - - - -------- --------- ------------- Cash and cash equivalents, at end of period.................. $ - $ - $ - ======== ========= =============
NOTES TO CONDENSED FINANCIAL INFORMATION - ---------------------------------------- Note 1 - In connection with the Acquisition, the Company, together with all - ------ other CB Commercial subsidiaries, has guaranteed any and all obligations of CB Commercial Real Estate Group, Inc. 49 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Reserve for Allowance Employee for Bad Legal Loans Debts Reserve ------------ ---------- -------- 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 Charges to expense........ 600 1,257 7,686 Write-offs................ (425) (1,234) (1,820) ------ ------- ------- Balance, December 31, 1996... $1,710 $ 4,423 $ 9,321 ====== ======= =======
50 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES EXHIBIT XI - COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Dollars in thousands except per share data)
1996 1995 1994 ------------ ----------- ----------- PRIMARY EARNINGS PER SHARE - -------------------------- Applicable to common shares: Net income................................................ $ 70,549 $ 7,409 $ 9,173 Preferred dividends..................................... (1,000) - - ----------- ----------- ----------- Net income applicable to common stock................... $ 69,549 $ 7,409 $ 9,173 =========== =========== =========== Weighted average common stock outstanding at end of period.................................................... 13,595,820 13,128,296 12,892,839 Weighted average common stock equivalents outstanding at end of period.......................................... 61,443 40,679 40,713 Issuance of promotional shares............................. 188,062 371,566 371,566 Weighted average shares outstanding for primary earnings per share................................................. 13,845,325 13,540,541 13,305,118 =========== =========== =========== Primary earnings per share.............................. $5.02 $0.55 $ 0.69 =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE - -------------------------------- Net income................................................. $ 70,549 $ 7,409 $ 9,173 =========== =========== =========== Weighted average common stock outstanding at end of period................................................. 13,595,820 13,128,296 12,892,839 Weighted average common stock equivalents outstanding at end of period.......................................... 119,103 40,679 40,713 Issuance of promotional shares............................. 188,062 371,566 371,566 Effect of assumed conversions and exercises Dilutive effect of assumed conversion of preferred stock (a)............................................... 281,311 - - ----------- ----------- ----------- Weighted average shares outstanding for fully diluted earnings per share........................................ 14,184,296 13,540,541 13,305,118 =========== =========== =========== Fully diluted earnings per share........................ $4.97 $0.55 $ 0.69 =========== =========== ===========
(a) Convertible securities are not considered in the calculations if the effect of the conversion is anti-dilutive. 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The following is a description of the positions with the Company presently held by and the business experience for the past five years for each Director of the Company. Stanton D. Anderson, age 56. 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 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. 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. Gary J. Beban, age 50. 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 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. Richard C. Blum, age 61. 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; 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. Richard C. Clotfelter, age 59. 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 January 1993, 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. Daniel A. D'Aniello, age 50. 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. and also serves on the Board of Directors of International Technology Corporation. Mr. D'Aniello holds a B.S. degree from Syracuse University and an M.B.A. from the Harvard University Graduate School of Business. James J. Didion, age 57. 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 52 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 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. Hiroaki Hoshino, age 55. 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 and Chief Financial Officer of Kajima Capital of America, Inc. Mr. Hoshino holds a B.A. degree from Gakushuin University. George J. Kallis, age 54. 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. Takayuki Kohri, age 45. 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, age 51. 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 that specializes in international and domestic acquisitions and investments. He has been Managing Director of The Lone Cypress Company, the owner of Pebble Beach Company, since 1992 and Managing Director of Rancho Cielo Company, a developer in Rancho Santa Fe, California, since 1993. 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, age 60. 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 campaign. He also serves on the Board of Directors of American Management Systems, Inc.; Automatic Data Processing Corp.; Choice Hotels International, Inc.; FPL Group, Inc.; Manor Care, Inc.; National Educational 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. Lawrence J. Melody, age 59. Mr. Melody has served as a Director since August 1996. He is also President of L.J. Melody & Company, an indirect wholly-owned subsidiary of the Company since July 1996, 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 53 Industrial and Office Parks, the National Multi Housing Council, as well as other professional organizations. He is a member of the Board of Governors of the Mortgage Bankers Association of America and past President and Director of the Texas Mortgage Bankers Association, which awarded him their Distinguished Service Award in 1995. Mr. Melody holds a B.A. degree from the University of Notre Dame. Jeffrey S. Morgan, age 42. 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 ten 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). Peter V. Ueberroth, age 59. 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.; Candlewood Hotel Company, Inc.; Doubletree Hotels Corp; and Transamerica Corporation. Gary L. Wilson, age 57. 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. Mr. Wilson also serves on the Board of Directors of On Command Corporation and Veritas Holdings GmbH. 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. Frank C. Carlucci and Richard A. Pogue have resigned as directors of the Company. EXECUTIVE OFFICERS The following persons are executive officers in addition to the executive officers included above under "Directors." All executive officers hold their office at the pleasure of the Board of Directors. David A. Davidson, age 62. Mr. Davidson has been Senior Executive Vice President, Chief Financial Officer and Treasurer of the Company since November 1992. Mr. Davidson has announced his plans to retire and will leave the Company after a transition period following the employment of the Company's new chief financial officer. 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, age 54. 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. Charles O. McBride, age 55. 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 54 officer with PM Realty Corp, 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. Ronald J. Platisha, age 50. 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 service 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). Kenneth D. Sandstad, age 50. 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.S. degree from St. Olaf College and a J.D. degree from the University of Minnesota. Walter V. Stafford, age 56. 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. degree from the University of California, Berkeley and an L.L.B. degree from Boalt Hall. John L. Stanfill, age 55. 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. On April 1, 1997, John C. Haeckel, 38, will join the Company as Chief Financial Officer and Senior Executive Vice President. Since 1996, Mr. Haeckel has been President of Perdix Group, LLC, a management consulting firm that he founded. From 1993 to 1995, he was Chief Financial Officer and from 1994 to 1995 he was Executive Vice President of Broadway Stores, Inc. From 1987 to 1994 he was a General Partner and from 1984 to 1986 he was an Associate with Chilmark Partners, a merchant banking firm. Mr. Haeckel holds a B.A. degree and a Masters of Business and Public Management degree from Rice University. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission (the "Commission") thereunder require the Company's executive officers and directors to file reports of ownership and changes in ownership of the Company's securities with the Commission and to furnish the Company with copies of all such reports they file. Based on its review of such reports received by it and written representations from certain reporting persons, the Company believes that during 1996 all filing requirements applicable to its executive officers and directors were met except as follows. A Statement of Changes in Beneficial Ownership on Form 4 reporting a transfer of shares of the Company's Common Stock by Mr. Kallis to his former spouse was inadvertently filed late. 55 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation of the Company's chief executive officer and the Company's four most highly compensated executive officers for the three years ended December 31, 1996.
Annual Compensation Long Term Compensation ------------------------------------ ----------------------------------------- Other Securities Annual Restricted Underlying All Other Compen- Stock Stock Compen- Name and Principal Position Year Salary Bonus(1) sation(2) Awards Options sation(3) - ---------------------------------- ------------ --------- ----------- ---------- ------------- ---------- ------------ James J. Didion 1996 $400,000 $574,678 $ --- (4) --- $1,262 Chairman of the Board 1995 390,000 279,160 51,212 --- --- 1,520 and Chief Executive Officer 1994 390,000 300,000 82,005 --- --- 1,105 Gary J. Beban 1996 $325,000 $503,156 --- (4) --- 1,262 President 1995 300,000 190,527 --- --- --- 1,520 1994 300,000 236,118 --- --- 10,000 273 Walter V. Stafford 1996 $300,000 $359,798 --- (4) --- --- Senior Executive Vice 1995(5) 114,646 116,998 --- 167,000(6) --- --- President and General Counsel 1994 --- --- --- --- --- --- Thaddeus W. Jones 1996 $210,000 $309,826 --- --- --- --- Senior Executive Vice President 1995 210,000 173,079 --- --- --- --- Senior Executive Director- 1994 210,000 177,259 --- --- 20,000 --- CBC/Madison Advisory Group George J. Kallis 1996 $200,000 $294,835 --- (4) --- 567 Senior Executive Vice 1995 200,000 153,538 8,770 --- --- --- President--Brokerage 1994 200,000 177,944 10,129 32,500(6) --- 747
________________________ (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 1994, 1995 and 1996, Mr. Stafford elected to defer a substantial portion of his bonuses in 1995 and 1996, and Mr. Kallis elected to defer all or a substantial portion of his bonuses in 1994, 1995 and 1996. A substantial portion of such deferred amounts will be invested in shares of the Company's Common Stock. (2) With respect to bonuses payable for 1994 and 1995, under the Company's Deferred Compensation Plan, an individual who elected to defer any of such bonus for investment in shares of the Company's Common Stock was credited with such shares based on the appraised value of the 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. (3) 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 value of the stock at the time of contribution based on the appraised value of the Company's Common Stock. (4) Pursuant to the Company's Equity Incentive Plan, a restricted stock purchase plan, in 1996 shares of Common Stock were purchased by such individual for a purchase price of $10 per share (the appraised value of the Common Stock at the time of such purchase), which was paid by delivery of a full recourse promissory note. The aggregate number and value of such shares held by the individuals named above as of December 31, 1996 (based on the last reported sale price of the Common Stock on such date as reported by The Nasdaq Stock Market, which was $20.00) and net of the purchase price of such shares was as follows: Mr. Didion - 175,027 ($1,750,270); Mr. Beban - 53,910 ($539,100); Mr. Stafford - 70,750 ($707,500); and Mr. Kallis - 42,750 ($427,500). The shares vest at the rate of 5 percent per quarter commencing December 31, 1995. (5) Mr. Stafford's employment by the Company commenced in July 1995. 56 (6) Represents the appraised value of restricted stock awards at the date of grant. The aggregate number of shares and value of restricted stock (excluding stock issued pursuant to the Company's Equity Incentive Plan and stock issued in prior years and no longer subject to any specified vesting period) held by the individuals named above as of December 31, 1996 (based on the last reported sale price of the Common Stock on such date as reported by The Nasdaq Stock Market) was as follows: Mr. Kallis - 5,000 ($100,000); and Mr. Stafford - 20,000 ($400,000). The shares awarded to Mr. Stafford vest at the rate of 20 percent per year. Shares of restricted stock issued in prior years that are no longer subject to vesting are included in the table under "Principal Stockholders" above. 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. AGGREGATED OPTIONS TABLE. The following table sets forth information concerning unexercised options held as of December 31, 1996 by the persons named in the table under "Summary Compensation Table" above. No options have been exercised by any of such persons.
Value of Number of Securities Underlying Unexercised In-The-Money Unexercised Options at December 31, 1996 Options at December 31, 1996 ---------------------------------------- ----------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ------------------------- --------------- --------------- ----------- ------------- James J. Didion 75,000 0 $750,000 --- Gary J. Beban 65,000 5,000 650,000 $ 50,000 Walter V. Stafford 0 0 --- --- Thaddeus W. Jones 30,000 10,000 300,000 100,000 George J. Kallis 40,000 0 400,000 ---
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The members of the Compensation Committee of the Board of Directors, who are appointed by the Board of Directors, are Mr. Blum, Mr. Malek, Mr. Ueberroth and Mr. Wilson. Prior to September 1996, Mr. Malek was Co-Chairman of the Company. DIRECTORS FEES 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 1996 in excess of $27,500. 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's voting capital stock as of March 25, 1997 by: (i) each person who is known by the Company to own beneficially more than five percent of each class of the Company's voting stock; (ii) each of the Company's directors and nominees for directors; (iii) each of the Company's executive officers named under Item 11 - "Executive Compensation - Summary Compensation Table;" and (iv) all directors and executive officers of the Company as a group.
PERCENT TITLE OF CLASS NUMBER OF SHARES OF CLASS -------------------- ----------------- --------- Kajima U.S.A., Inc. Series A-1 Preferred 1,000,000 (1) 100% 320 Park Avenue Common 6,586 (2) 26th Floor New York, New York 10022 Fukoku Mutual Life Series A-2 Preferred 1,000,000 (1) 50% Insurance Company 1,989 (3) 2-2, Uchisaiwaicho 2-chome Chiyoda-ku, Tokyo 100 Japan S.R.E.S. - Fifth Avenue, Inc. Series A-2 Preferred 1,000,000 (1) 50% 666 Fifth Avenue Common 4,106 (4) New York, New York 10103 Kasen Development, Inc. Series A-3 Preferred 1,000,000 (1) 100% 3-2, Toyo 6-chome Koto-Ku, Tokyo 135 Japan Stanton D. Anderson (5) Common 27,351 * Gary J. Beban (5) Common 194,029 1.46% Richard C. Blum (5)(6) Common 439,167 3.30% Richard C. Clotfelter (5)(8) Common 113,835 * Daniel A. D'Aneillo (5)(7) Common 306,734 2.31% James J. Didion (5)(8)(9) Common 403,137 3.00% Hiroaki Hoshino (10) --- --- --- Thaddeus W. Jones (5) Common 77,233 * George J. Kallis (8) Common 114,934 * Takayuki Kohri (11) --- --- --- Paul C. Leach --- --- --- Frederic V. Malek (5) Common 318,808 2.40% Lawrence J. Melody (5) Common 6,092 *
58 Jeffrey S. Morgan Common 5,437 * Walter V. Stafford (5)(8) Common 90,750 * Peter V. Ueberroth (8) Common 11,667 * Gary L. Wilson (8) Common 1,667 --- All directors and executive officers as a group (22 persons)(12) Common 2,482,479 18.01%
______________________ * Less than 1%. (1) The Company's Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred Stock is convertible into Common Stock at the holder's option 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. The holders of Series A-3 Preferred Stock are not entitled to vote except as required by statute. (2) Represents options to purchase 6,586 shares of Common Stock issued to Kajima U.S.A., Inc. in respect of services rendered as a director by Mr. Hoshino and by Kajima U.S.A., Inc. (3) Represents options to purchase 1,989 shares of Common Stock issued to Fukoku Mutual Life Insurance Company in respect of services rendered. (4) 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. (5) 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 May 31, 1997, 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; Blum - 1,667; Clotfelter - 50,000; D'Aniello - 4,235 (options issued to the Carlyle Group, L.P.); Didion - 75,000; Jones - 30,000; Kallis -40,000; Malek - 5,934; Melody - 6,050; Ueberroth - 1,667; and Wilson - 1,667. 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. (6) Includes 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. (7) Includes 4,235 shares of Common Stock subject to outstanding options 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. (8) 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; Didion - 121,970; Kallis -10,991; Sandstad 1,506; and Stafford - 10,662. The foregoing amounts do not include any Common Stock units credited in respect of the deferred portion, if any, of bonuses payable for 1996. (9) Includes 6,000 shares held by a trust for the benefit of three members of Mr. Didion's immediate family. (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 435,455 shares of Common Stock subject to outstanding options exercisable on or before May 31, 1997. 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 assets of Prescott consisting 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 paid in full as of March 20, 1996. In February 1995 the Company retained the law firm of McDermott, Will & Emery, to which Mr. Anderson is counsel, to provide services to the Company consisting of legal counsel in connection with the Company's activities with certain Federal agencies. 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. His obligation as of December 31, 1996 was $33,363.50, which was repaid in March 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 (the "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 Common Stock. See Item 12 - "Security Ownership of Certain Beneficial Owners and Management." Pursuant to the Company's Equity Incentive Plan, a restricted stock purchase plan, in 1996 shares of Common Stock were purchased by the executive officers and Directors named below for a purchase price of $10 per share (the appraised value of the Common Stock at the time of such purchase), which was paid by delivery of a full recourse promissory note. The notes bear interest at the rate of 6.84% per annum which may be forgiven if the executive's performance produces a high enough level of bonus (approximately $7,500 in interest is forgiven for each $10,000 of bonus). The aggregate number of shares purchased and the amount of the promissory note delivered by the following individuals were: Mr. Beban - 53,910 ($539,100); Mr. Clotfelter - 33,750 ($337,500); Mr. Didion - 175,027 ($1,750,270); Mr. Kallis - 42,750 ($427,500); Mr. Stafford - 70,750 ($707,500); and Mr. Stanfill - 54,383 ($543,830). Richard C. Blum & Associates, Inc., of which Mr. Blum, a director of the Company, is Chairman and President, and the Company have tentatively agreed to form a joint venture to opportunistically acquire and develop property on behalf of mutual clients. The specifics of any venture are still to be determined. The Company and CB Commercial have entered into Indemnity Agreements with each of their present directors, some of whom are also officers of the Company. 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1. a. Financial Statements See Index to Consolidated Financial Statements b. Financial Statement Schedules See Index to Consolidated Financial Statements c. Exhibits See Exhibit Index 2. Reports on Form 8-K No reports on Form 8-K have been filed by Registrant during the quarter ended December 31, 1996 3. See Exhibit Index 4. See Index to Consolidated Financial Statements 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. (Registrant) By /s/ James J. Didion --------------------------- James J. Didion Chairman of the Board and Chief Executive Officer Date: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ James J. Didion Chief Executive Officer and Director March 28, 1997 - -------------------------- James J. Didion /s/ David A. Davidson Senior Executive Vice President, Chief March 28, 1997 - -------------------------- Financial Officer and Treasurer David A. Davidson /s/ Ronald J. Platisha Executive Vice President March 28, 1997 - -------------------------- Principal Accounting Officer Ronald J. Platisha /s/ Stanton D. Anderson Director March 28, 1997 - -------------------------- Stanton D. Anderson /s/ Gary J. Beban Director March 28, 1997 - -------------------------- Gary J. Beban /s/ Richard C. Blum Director March 28, 1997 - -------------------------- Richard C. Blum /s/ Richard C. Clotfelter Director March 28, 1997 - -------------------------- Richard C. Clotfelter
62 /s/ Daniel A. D'Aniello Director March 28, 1997 - -------------------------- Daniel A. D'Aniello /s/ Hiroaki Hoshino Director March 28, 1997 - ------------------------- Hiroaki Hoshino /s/ George J. Kallis Director March 28, 1997 - -------------------------- George J. Kallis /s/ Takayuki Kohri Director March 28, 1997 - -------------------------- Takayuki Kohri /s/ Paul C. Leach Director March 28, 1997 - --------------------------- Paul C. Leach /s/ Frederic V. Malek Director March 28, 1997 - --------------------------- Frederic V. Malek /s/ Lawrence J. Melody Director March 28, 1997 - --------------------------- Lawrence J. Melody /s/ Jeffrey S. Morgan Director March 28, 1997 - --------------------------- Jeffrey S. Morgan /s/ Peter V. Ueberroth Director March 28, 1997 - --------------------------- Peter V. Ueberroth /s/ Gary L. Wilson Director March 28, 1997 - --------------------------- Gary L. Wilson
63 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.1 Fourth Restated Certificate of Incorporation of CB Commercial Real Estate Services Group, Inc. (the "Company"). 3.2 Third Amended and Restated Bylaws of the Company. *4.1 Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration Statement (File No. 333- 12757). *4.2 Form of the Company's Restricted Stock Agreement between the Company and the Company's Officer or Employee, filed as Exhibit 4.8 to the Company's Form S-1 Registration Statement (File No. 33-29410). *4.3 First Amendment to the Company's Restricted Stock Agreement, filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. *10.1(i) CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Form S-1 Registration Statement (File No. 33-29410). *10.1(ii) First Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. *10.1(iii) Second Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *10.1(iv) Third Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *10.2(i) 1990 Stock Option Plan, filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. *10.2(ii) First Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.15(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *10.2(iii) Second Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.8(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *10.2(iv) Third Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.5(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *10.3 Form of Incentive Stock Option Agreement, filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. *10.4 Form of Nonstatutory Stock Option Agreement, filed as Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 64 10.5 Third Amended and Restated Senior Secured Credit Agreement dated as of November 25, 1996 between CB Commercial Real Estate Group, Inc., the lenders from time to time party thereto and The Sumitomo Bank, Limited, as agent. 10.6 Amended and Restated Senior Subordinated Credit Agreement dated as of November 25, 1996 among CB Commercial Real Estate Group, Inc., the Company and certain subsidiaries of CB Commercial Real Estate Group, Inc., as guarantors, and Sumitomo Finance (Dublin) Limited. *10.7 CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan, filed as Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 1, 1992. 10.8 CB Commercial Real Estate Services Group, Inc. Amended and Restated Deferred Compensation Plan. *10.9 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc., filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.10 CB Commercial Real Estate Services Group, Inc. L.J. Melody Acquisition Stock Option Plan. *10.11 Form of Indemnification Agreement between the Company, CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *10.12 Purchase Agreement dated as of May 15, 1995 among CB Commercial Real Estate Group, Inc., Westmark Real Estate Acquisition Partnership, L.P., and certain individuals signatory thereto, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 30, 1995. *10.13 Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (File No. 333-12757). *10.14 Registration Rights Agreement dated as of December 2, 1996 among the Company and Kajima U.S.A., Inc., Fukoku Mutual Life Insurance Company, Kasen Development, Inc. and S.R.E.S.-Fifth Avenue, Inc., filed as Exhibit 10.13 to the Company's Form S-1 Registration Statement (File No. 333-12757). 21 Subsidiaries of the Company. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule _________________________ * Incorporated by reference 65 EX-3.1 2 FOURTH RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 FOURTH RESTATED CERTIFICATE OF INCORPORATION OF CB COMMERCIAL HOLDINGS, INC. CB Commercial Holdings, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: The original name under which the Corporation was incorporated in the State of Delaware is CB Acquisition Corp. SECOND: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on March 9, 1989; the Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on March 15, 1989; the Second Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on April 17, 1989; and the Third Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on September 18, 1989. THIRD: The Fourth Restated Certificate of Incorporation of the Corporation in the form attached hereto as Exhibit A has been duly adopted in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of the State of Delaware by the directors and stockholders of the Corporation. FOURTH: The Fourth Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated herein by this reference. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by the Chief Executive Officer and the Secretary this 2nd day of December, 1996. CB COMMERCIAL HOLDINGS, INC. By /s/ James J. Didion --------------------------- Chief Executive Officer ATTEST: BY /s/ Karen A. Tallman ----------------------- Secretary EXHIBIT A FOURTH RESTATED CERTIFICATE OF INCORPORATION OF CB COMMERCIAL HOLDINGS, INC. FIRST: The name of the corporation is: ----- CB Commercial Real Estate Services Group, Inc. SECOND: The registered office of the corporation in the State of ------ Delaware is located at 1209 Orange Street, City of Wilmington, County of New Castle. The name of the registered agent of the corporation at such address is The Corporation Trust Company. THIRD: The purpose of the corporation is to engage in any lawful act or ----- activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. FOURTH: ------ A. The total number of shares of all classes of capital stock that the corporation is authorized to issue is 108,000,000, of which 8,000,000 shall be Preferred Stock ("Preferred Stock") and 100,000,000 shall be Common Stock ("Common Stock"). Both the Preferred Stock and Common Stock shall have a par value of $.01 per share. B. The Common Stock may be issued from time to time as follows: 1. Prior to Recapitalization Date . Prior to the Recapitalization Date ------------------------------- (as defined below), the Common Stock shall consist of three (3) classes: (a) 4,000,000 shares designated Class B-1 Common Stock ("B-1 Stock"), (b) 12,000,000 shares designated Class B-2 Common Stock ("B-2 Stock") and (c) 1,600,000 shares designated as Class C-1 Common Stock ("C-1 Stock"). The "Recapitalization Date" means the date, prior to March 31, 1997, of the closing of an IPO. An "IPO" means a sale of Common Stock for not less than $18.75 per share in an underwritten public offering registered under the Securities Act of 1933, as amended, completed on or prior to March 31, 1996, which results in aggregate proceeds to the corporation (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 Common Stock on the National Association of Securities Dealers Automated Quotation System or the listing of such Common Stock on the New York Stock Exchange. Prior to the Recapitalization Date, all outstanding shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges, except as provided below: a. Voting Rights. The holders of shares of B-1 Stock and B-2 Stock shall ------------- have the right to vote on all matters to be voted upon by the stockholders of the corporation. The holder of shares of B-1 Stock and B-2 Stock shall be entitled to one (1) vote per share, voting on each matter upon which such holders are entitled to vote. The holders of shares of C-1 Stock shall have no right to vote under any circumstances or for any purpose except as specifically required by the Delaware General Corporation Law. b. Dividend Rights. Subject to the payment of any dividends which the --------------- holders of Preferred Stock are entitled to receive in preference to the holders of Common Stock and subject to the provisions of the Certificates of Designation, Preferences and Rights related to the Series A-1, Series A-2 and Series A-3 Preferred Stock (the "Original Preferred Stock"), the holders of shares of B-1 Stock, B-2 Stock and C-1 Stock -2- shall be entitled to receive, as and when declared by the Board of Directors, out of any assets legally available therefor, such dividends as may be declared from time to time by the Board of Directors, allocated with respect to each share of B-1 Stock, B-2 Stock and C-1 Stock on a share-for-share basis. c. Liquidation. Upon any liquidation, dissolution or winding up of the ----------- corporation, whether voluntary or involuntary, each holder of shares of Common Stock shall be entitled to share (subject to the payment of any amounts which holders of Preferred Stock are entitled to receive in preference to or pari passu with the holders of Common Stock) in the remaining assets of the corporation to be distributed among the holders of shares of the capital stock of the corporation as follows: i. First, each holder of shares of B-1 Stock and B-2 Stock shall be entitled to receive an amount, reduced by any prior payments to such holder pursuant to this Section B.1.c. of Article Fourth, equal to $10 per share (as adjusted for any stock dividends, combinations or splits). ii. Second, each holder of shares of C-1 Stock shall be entitled to receive an amount, reduced by any prior payments to such holder pursuant to this Section B.1.c. of Article Fourth, equal to the par value of each such share (as adjusted for any stock dividends, combination or splits). iii. Third, each holder of shares of B-1 Stock, B-2 Stock and C-1 Stock shall be entitled to share the remaining assets of the corporation to be distributed among holders of shares of the corporation's capital stock on a share-for-share basis. 2. On or After Recapitalization Date. From and after the Recapitalization --------------------------------- Date, the Common Stock shall consist of a single class of 100,000,000 shares, each of which shall be identical. From and after the Recapitalization Date, there shall be no cumulative voting. 3. Automatic Conversion of Common Stock on Recapitalization Date. -------------------------------------------------------------- Immediately upon the closing of an IPO on the Recapitalization Date, (a) each share of B-1 Stock and B-2 Stock shall automatically be converted into one (1) share of Common Stock and (b) each share of C-1 Stock shall automatically be converted into shares of Common Stock at the C-1 Conversion Rate. The C-1 Conversion Rate is (a) the Conversion Price minus $10.00 per share, divided by (b) the Conversion Price. The Conversion Price means the greater of the price at which each share of Common Stock is offered by the Corporation to the public in an IPO and $22.00. Such conversion shall be deemed to have been made immediately upon the closing of an IPO. C. The Preferred Stock may be issued from time to time as follows: 1. Prior to Conversion of Original Preferred Stock. Prior to the date ------------------------------------------------ all of the Original Preferred Stock shall have been converted into Common Stock in accordance with the applicable Certificate of Designation, Preferences and Rights, each holder of shares of the Original Preferred Stock shall be entitled to the rights and privileges set forth in the applicable Certificates of Designation, Preference and Rights. 2. Authority of Board of Directors to Establish Series of Preferred Stock. ---------------------------------------------------------------------- The Preferred Stock shall consist of a single class of 8,000,000 shares and may be issued from time to time in one or more series. The Board of Directors of the corporation (the "Board of Directors") is expressly authorized to provide for the issue of all or any of the Preferred Stock in one or more series, to fix the designation and number of shares thereof and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock and as may be permitted by the General Corporation Law of the State of Delaware. The Board of Directors is also expressly authorized to increase or decrease (but not below the number of shares of such series then outstanding, plus the number of shares of such series issuable upon exercise of outstanding rights, options or warrants or upon -3- conversion of outstanding securities issued by the corporation) the number of shares of any series. If the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: A director of the corporation shall not be liable to the ----- corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any repeal or modification of the foregoing sentence shall not adversely affect any right or protection of a director of the corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. SIXTH: ----- A. The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans (an "Indemnitee"), against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such person. The corporation shall not be required to indemnify and hold harmless a person in connection with a Proceeding (or part thereof) initiated by such person unless the Proceeding (or the part thereof initiated by such person) was authorized by the Board of Directors. B. The right to indemnification conferred by this Article SIXTH shall be presumed to have been relied upon by the Indemnitee and shall be enforceable as a contract right. The corporation may enter into contracts to provide individual Indemnitees with specific rights of indemnification to the fullest extent permitted by applicable law and may create trust funds, grant security interests, obtain letters of credit or use other means to ensure the payment of such amounts as may be necessary to effect the rights provided in this Article SIXTH or in any such contract. C. Except for any Proceeding described in the last sentence of Section A of Article SIXTH, upon making a request for indemnification, the Indemnitee shall be presumed to be entitled to indemnification under this Article SIXTH and the corporation shall have the burden of proof to overcome that presumption in reaching any contrary determination. Such indemnification shall include the right to receive payment in advance of any reasonable expenses incurred by the Indemnitee in connection with any Proceeding (other than a Proceeding described in the last sentence of Section A of Article Sixth) consistent with the provisions of applicable law. D. Any repeal or modification of the foregoing provisions of this Article SIXTH shall not adversely affect any right or protection of any Indemnitee existing at the time of such repeal or modification. SEVENTH: The Board of Directors is authorized to adopt, amend or repeal ------- the by-laws of the corporation, without any action on the part of the stockholders, solely by the affirmative vote of at least a majority of the directors of the corporation then in office. -4- CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF OF SERIES A-1 PREFERRED STOCK OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- (formerly CB Commercial Holdings, Inc.) Pursuant to Section 151 of the General Corporation Law of the State of Delaware CB Commercial Real Estate Services Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that pursuant to the authority conferred upon the Board of Directors by Article FOURTH of the Certificate of Incorporation of the Corporation, and in accordance with Section 151 of the General Corporation Law of the State of Delaware, the said Board of Directors has adopted the following resolution creating a series of Preferred Stock, designated as Series A-1 Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation, effective upon the closing of an IPO, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. Designation and Amount. The shares of such series shall be designated ---------------------- as "Series A-1 Preferred Stock," par value $.01 per share, and the number of shares constituting such series shall be 1,000,000. Such number of shares may be decreased (but may not be increased) by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A-1 Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Automatic Conversion of Existing Series A-1 Preferred Stock on -------------------------------------------------------------- Recapitalization. Immediately upon the closing of an IPO on the - ---------------- Recapitalization Date, each existing share of Series A-1 Preferred Stock of the Corporation shall be converted automatically into one (1) share of Series A-1 Preferred Stock with the powers, preferences and relative, participating, optional and other special rights of such shares of such series and the qualifications, limitations or restrictions as set forth herein. 3. Dividends. --------- (a) Preference Dividend ------------------- (i) (A) The holders of the Series A-1 Preferred Stock shall be entitled to receive dividends at the rate of $.25 per quarter on each share of Series A-1 Preferred Stock, payable out of funds legally available therefor in cash within one year after the last day of the quarter to which it relates (the "Preference Dividend"). On the Recapitalization Date, the accrual of such dividend shall be retroactive to October 1, 1996. Such dividends shall be payable only when, as and if declared by the Board of Directors. -1- (B) 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 interest at a fixed rate of 8% per annum; provided, -------- however, that (i) if applicable law restricts or prohibits the declaration ------- or payment of the Preference Dividend, no dividend shall be required to be declared and paid and no interest shall accrue thereon or be paid to the extent so restricted or prohibited, and (ii) in the event a contractual restriction in a credit agreement with a third party to which the Corporation or one of its direct or indirect subsidiaries is a party restricts or prohibits the declaration or payment of the Preference Dividend, no dividend shall be required to be declared or paid other than in accordance with such contractual restriction, but the Preference Dividend shall accumulate and accrue as set forth above, interest shall be paid on the unpaid dividend to the extent permitted under applicable law and any interest which remains unpaid shall accrue as set forth above. (ii) Following the Recapitalization Date, until all accrued and unpaid Preference Dividends (and all accrued and unpaid interest thereon) on the Series A-1 Preferred Stock (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above) shall have been paid or declared and set apart during any fiscal year: (A) no shares of Common Stock shall be redeemed by the Corporation, other than shares of capital stock of the Corporation which were outstanding prior to the Recapitalization Date and other than shares of capital stock issued or issuable to officers, directors or employees of, or consultants to, the Corporation pursuant to stock option, stock purchase or similar plans and (B) no dividends (including dividends payable in the Common Stock of the Corporation, dividends payable in warrants to purchase Common Stock and dividends payable in securities convertible or exchangeable into shares of Common Stock of the Corporation) shall be paid or declared and set apart on any series of Preferred Stock or Common Stock of the Corporation (and in the case of Common Stock, no dividends shall accrue on such Common Stock) during that fiscal year. Nothing set forth in this Certificate shall limit the Corporation's ability to effect a stock split or reverse stock split. (iii) Preference Dividends paid on the Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred Stock in an amount less than the total amount of such Preference Dividends at the time accrued and payable on such shares and interest, if any, due on such Preference Dividend, shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (iv) Upon the conversion of any share of Series A-1 Preferred Stock into the Corporation's Common Stock pursuant to Section 6 below, the holder of such share of Series A-1 Preferred Stock shall be entitled to receive in cash an amount equal to all accrued and unpaid Preference Dividends with respect thereto and interest, if any, due thereon, subject to restrictions of applicable law and contractual restrictions as set forth in Paragraph 3(a)(i)(B) above. (b) Dividends in Excess of Preference Dividend. Whenever any dividend is ------------------------------------------ declared and paid with respect to Common Stock, the holders of the Series A-1 Preferred Stock shall be entitled to receive (in addition to any Preference Dividend and interest thereon in accordance with Paragraphs 3(a)(i)(A) and (B) above) out of any assets legally available therefore a dividend on each share of Series A-1 Preferred Stock equal to sixty percent (60%) of the dividend declared and paid on each share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). (c) Except as otherwise provided herein, no right shall accrue to holders of shares of Series A-1 Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue any interest. -2- 4. Liquidation. ----------- (a) Liquidation Preference. In the event of any liquidation, dissolution ---------------------- or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, all accrued but unpaid dividends and interest (if any) thereon (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above), then, to the extent any assets of the Corporation remain available for distribution to the stockholders of the Corporation, the holders of Preferred Stock and Common Stock shall be entitled to receive an amount equal to $10.00 per share (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares), reduced by any prior payments to such holder (not including all accrued but unpaid dividends and accrued interest thereon) in connection with any liquidation, dissolution or winding up. The Series A-1 Preferred Stock shall rank on a parity with the Corporation's Series A-2 and A-3 Preferred Stock as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. (b) Distributions in Excess of Liquidation Preference. With respect to ------------------------------------------------- the distribution of any remaining assets of the Corporation in connection with a liquidation, dissolution or winding up, the holders of the Series A-1 Preferred Stock shall be entitled (after distributions required by paragraph (a) above) to receive with respect to each share of Preferred Stock sixty percent (60%) of any distribution made with respect to a share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). 5. Voting Rights. The holders of Series A-1 Preferred Stock shall have ------------- the following voting rights: (a) Each share of Series A-1 Preferred Stock shall entitle the holder thereof to two (2) votes on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise expressly provided herein or required by law, the holders of Series A-1 Preferred Stock, the holders of the Series A-2 Preferred Stock and the holders of Common Stock entitled to vote shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as otherwise expressly provided herein, holders of Series A-1 Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 6. Conversion. The Series A-1 Preferred Stock shall not be convertible ---------- at any time during which the Market Price for a share of Common Stock into which each share of Preferred Stock is converted is less than $10.00 per share. Except as otherwise set forth above, any holder of Series A-1 Preferred Stock may elect from time to time to convert some or all of such holder's Preferred Stock into shares of Common Stock as follows: Market Price of Common Stock Conversion Ratio --------------- ---------------- $10.00 to $21.99 78.00% of a share of Common Stock for each share of Preferred Stock $22.00-$22.99 76.00% of a share of Common Stock for each share of Preferred Stock -3- $23.00-$23.99 74.00% of a share of Common Stock for each share of Preferred Stock $24.00-$24.99 72.00% of a share of Common Stock for each share of Preferred Stock $25.00-$25.99 70.00% of a share of Common Stock for each share of Preferred Stock $26.00-$26.99 68.00% of a share of Common Stock for each share of Preferred Stock $27.00-$27.99 66.00% of a share of Common Stock for each share of Preferred Stock $28.00-$28.99 64.00% of a share of Common Stock for each share of Preferred Stock $29.00-$29.99 62.00% of a share of Common Stock for each share of Preferred Stock $30.00 and above 60.00% of a share of Common Stock for each share of Preferred Stock The Market Price and the Conversion Ratio shall be adjusted as hereinafter provided. Any such election shall be made by written notice to the Corporation's Secretary and shall be effective on the first day on which the Common Stock is traded after such election is received by the Corporation's Secretary. Market Price for the conversion shall be determined by using as the last day of the period for determining Market Price the effective date of the election. (a) Adjustments to Market Price and Conversion Ratio for Certain Dividends ---------------------------------------------------------------------- and for Combinations or Subdivisions of Common Stock. In the event that this - ---------------------------------------------------- Corporation at any time or from time to time (i) shall declare or pay, without consideration, any dividend on each outstanding share of the Common Stock payable in Common Stock, (ii) shall issue Common Stock pursuant to the exercise of a Warrant Dividend which was exercised at less than Market Price existing at the time of the issuance of such Warrant Dividend, (iii) shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any warrant or right to acquire Common Stock) or (iv) in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Market Price and Conversion Ratio for the Series A-1 Preferred Stock in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate, so as to protect the conversion privileges of the Preferred Stock. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any warrant or right to acquire Common Stock exercisable for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such warrant or right to acquire Common Stock. A "Warrant Dividend" means a dividend declared or paid by the Corporation without consideration on each outstanding share of Common Stock and payable in a warrant or right to acquire Common Stock. Notwithstanding the foregoing, no adjustment for any Warrant Dividend shall be required until, and then only to the extent that, such Warrant Dividend has been actually exercised at less than the Market Price of Common Stock at the time of the issuance of such Warrant Dividend. (b) Adjustments for Reclassification and Reorganization. If the Common --------------------------------------------------- Stock issuable upon conversion of the Series A-1 Preferred Stock shall be changed into the same or a different number of shares of -4- any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 6 above), the Market Price and Conversion Ratio then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A-1 Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been received by the holders in the event of a conversion of the Series A-1 Preferred Stock immediately before that change. (c) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion provisions applicable to the Series A-1 Preferred Stock against impairment; provided, however, that notwithstanding any other provision hereof, the Corporation may at any time and from time to time take any of the foregoing actions without any adjustment to the Market Price or Conversion Ratio unless such adjustment is specifically and expressly provided for herein. (d) Certificates as to Adjustments. Upon the occurrence of each adjustment ------------------------------ or readjustment of any Market Price and Conversion Ratio pursuant to this Section 6 (other than adjustments pursuant to Section 6a(ii) with respect to the issuance of Common Stock pursuant to the exercise of a Warrant Dividend), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A-1 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. Upon the declaration and payment by the Corporation of a Warrant Dividend, in lieu of the certificate described above, the Corporation at its expense shall promptly prepare and furnish to each holder of Series A-1 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer stating that the Corporation has declared and paid a Warrant Dividend and describing the terms thereof. The Corporation shall, upon the written request at any time of any holder of Series A-1 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Ratio for such series of Preferred Stock at the time in effect, and (iii) the number of shares of Common Stock which at the time would be received upon the conversion of the Series A-1 Preferred Stock. (e) Reservation of Stock Issuable Upon Conversion. The Corporation shall --------------------------------------------- at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A-1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A-1 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A-1 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Certificate of Incorporation. (f) Fractional Shares. No fractional share shall be issued upon the ----------------- conversion of any share or shares of Series A-1 Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A-1 Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). -5- 7. Reacquired Shares. Any shares of Series A-1 Preferred Stock purchased ----------------- or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 8. Restrictions and Limitations. So long as any shares of Series A-1, ---------------------------- Series A-2 and Series A-3 Preferred Stock remain outstanding, the Corporation shall not, (i) issue any other equity security (including any security convertible into or exercisable for any equity security) senior to or on parity with the Series A-1, Series A-2 or Series A-3 Preferred Stock as to dividend rights or liquidation preferences or (ii) without the vote or written consent by the holders of a majority of the then outstanding shares of Series A-1, Series A-2 and Series A-3 Preferred Stock, voting together as a single class, amend its Certificate of Incorporation if such amendment would change any of the rights, preferences or privileges provided for herein for the benefit of any shares of that series of Preferred Stock. 9. Definitions. ----------- "IPO" means a sale of Common Stock for not less than $18.75 per share in an underwritten offering registered under the Securities Act of 1933, as amended, which is completed on or before March 31, 1997, which results in aggregate proceeds to the Corporation (prior to underwriters' discounts and expenses relating to the issuance) of $75,000,000 or more and which results in the listing of such Common Stock on the New York Stock Exchange or the approval for quotation of such Common Stock on the National Association of Securities Dealers Automated Quotation System. "Market Price" means (i) during the first 20 consecutive days in which the Common Stock is traded after the closing of an IPO, the price at which the common stock was offered to the public in the IPO and (ii) thereafter, the average closing price for a share of Common Stock as reported by the Wall Street ---- ------ Journal (West Coast Edition) for a period of 20 consecutive trading days - ------- immediately prior to the day as of which Market Price is being determined (ignoring for purposes of consecutiveness days on which the market or stock exchange on which such stock trades is not open). "Recapitalization Date" means the date, prior to March 31, 1997, of the closing of an IPO. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights of Series A-1 Preferred Stock to be duly executed by its Chief Executive Officer and attested to by its Secretary this 2nd day of December, 1996. /s/ James J. Didion -------------------- CHIEF EXECUTIVE OFFICER ATTEST: /s/ Karen A. Tallman --------------------- SECRETARY -6- CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF OF SERIES A-2 PREFERRED STOCK OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- (formerly CB Commercial Holdings, Inc.) Pursuant to Section 151 of the General Corporation Law of the State of Delaware CB Commercial Real Estate Services Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that pursuant to the authority conferred upon the Board of Directors by Article FOURTH of the Certificate of Incorporation of the Corporation, and in accordance with Section 151 of the General Corporation Law of the State of Delaware, the said Board of Directors has adopted the following resolution creating a series of Preferred Stock, designated as Series A-2 Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation, effective upon the closing of an IPO, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. Designation and Amount. The shares of such series shall be designated ---------------------- as "Series A-2 Preferred Stock," par value $.01 per share, and the number of shares constituting such series shall be 2,000,000. Such number of shares may be decreased (but may not be increased) by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A-2 Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Automatic Conversion of Existing Series A-2 Preferred Stock on -------------------------------------------------------------- Recapitalization. Immediately upon the closing of an IPO on the - ---------------- Recapitalization Date, each existing share of Series A-2 Preferred Stock of the Corporation shall be converted automatically into one (1) share of Series A-2 Preferred Stock with the powers, preferences and relative, participating, optional and other special rights of such shares of such series and the qualifications, limitations or restrictions as set forth herein. 3. Dividends. --------- (a) Preference Dividend ------------------- (i) (A) The holders of the Series A-2 Preferred Stock shall be entitled to receive dividends at the rate of $.25 per quarter on each share of Series A-2 Preferred Stock, payable out of funds legally available therefor in cash within one year after the last day of the quarter to which it relates (the "Preference Dividend"). On the Recapitalization Date, the accrual of such dividend shall be retroactive to October 1, 1996. Such dividends shall be payable only when, as and if declared by the Board of Directors. -1- (B) 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 interest at either (i) a fixed rate of 8% per annum or (ii) the LIBOR Rate plus 2-1/2% per annum until paid, as irrevocably designated by each holder of Preferred Stock pursuant to the Preferred Stockholder Agreement; provided, however, that (i) if applicable law -------- ------- restricts or prohibits the declaration or payment of the Preference Dividend, no dividend shall be required to be declared and paid and no interest shall accrue thereon or be paid to the extent so restricted or prohibited, and (ii) in the event a contractual restriction in a credit agreement with a third party to which the Corporation or one of its direct or indirect subsidiaries is a party restricts or prohibits the declaration or payment of the Preference Dividend, no dividend shall be required to be declared or paid other than in accordance with such contractual restriction, but the Preference Dividend shall accumulate and accrue as set forth above, interest shall be paid on the unpaid dividend to the extent permitted under applicable law and any interest which remains unpaid shall accrue as set forth above. (ii) Following the Recapitalization Date, until all accrued and unpaid Preference Dividends (and all accrued and unpaid interest thereon) on the Series A-2 Preferred Stock (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above) shall have been paid or declared and set apart during any fiscal year: (A) no shares of Common Stock shall be redeemed by the Corporation, other than shares of capital stock of the Corporation which were outstanding prior to the Recapitalization Date and other than shares of capital stock issued or issuable to officers, directors or employees of, or consultants to, the Corporation pursuant to stock option, stock purchase or similar plans and (B) no dividends (including dividends payable in the Common Stock of the Corporation, dividends payable in warrants to purchase Common Stock and dividends payable in securities convertible or exchangeable into shares of Common Stock of the Corporation) shall be paid or declared and set apart on any series of Preferred Stock or Common Stock of the Corporation (and in the case of Common Stock, no dividends shall accrue on such Common Stock) during that fiscal year. Nothing set forth in this Certificate shall limit the Corporation's ability to effect a stock split or reverse stock split. (iii) Preference Dividends paid on the Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred Stock in an amount less than the total amount of such Preference Dividends at the time accrued and payable on such shares and interest, if any, due on such Preference Dividend, shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (iv) Upon the conversion of any share of Series A-2 Preferred Stock into the Corporation's Common Stock pursuant to Section 6 below, the holder of such share of Series A-2 Preferred Stock shall be entitled to receive in cash an amount equal to all accrued and unpaid Preference Dividends with respect thereto and interest, if any, due thereon, subject to restrictions of applicable law and contractual restrictions as set forth in Paragraph 3(a)(i)(B) above. (b) Dividends in Excess of Preference Dividend. Whenever any dividend is ------------------------------------------ declared and paid with respect to Common Stock, the holders of the Series A-2 Preferred Stock shall be entitled to receive (in addition to any Preference Dividend and interest thereon in accordance with Paragraphs 3(a)(i)(A) and (B) above) out of any assets legally available therefore a dividend on each share of Series A-2 Preferred Stock equal to sixty percent (60%) of the dividend declared and paid on each share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). (c) Except as otherwise provided herein, no right shall accrue to holders of shares of Series A-2 Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue any interest. -2- 4. Liquidation. ----------- (a) Liquidation Preference. In the event of any liquidation, dissolution ---------------------- or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A-2 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, all accrued but unpaid dividends and interest (if any) thereon (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above), then, to the extent any assets of the Corporation remain available for distribution to the stockholders of the Corporation, the holders of Preferred Stock and Common Stock shall be entitled to receive an amount equal to $10.00 per share (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares), reduced by any prior payments to such holder (not including all accrued but unpaid dividends and accrued interest thereon) in connection with any liquidation, dissolution or winding up. The Series A-2 Preferred Stock shall rank on a parity with the Corporation's Series A-1 and A-3 Preferred Stock as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. (b) Distributions in Excess of Liquidation Preference. With respect to ------------------------------------------------- the distribution of any remaining assets of the Corporation in connection with a liquidation, dissolution or winding up, the holders of the Series A-2 Preferred Stock shall be entitled (after distributions required by paragraph (a) above) to receive with respect to each share of Preferred Stock sixty percent (60%) of any distribution made with respect to a share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). 5. Voting Rights. The holders of Series A-2 Preferred Stock shall have ------------- the following voting rights: (a) Each share of Series A-2 Preferred Stock shall entitle the holder thereof to one (1) vote on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise expressly provided herein or required by law, the holders of Series A-1 Preferred Stock, the holders of the Series A-2 Preferred Stock and the holders of Common Stock entitled to vote shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as otherwise expressly provided herein, holders of Series A-2 Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 6. Conversion. The Series A-2 Preferred Stock shall not be convertible ---------- at any time during which the Market Price for a share of Common Stock into which each share of Preferred Stock is converted is less than $10.00 per share. Except as otherwise set forth above, any holder of Series A-2 Preferred Stock may elect from time to time to convert some or all of such holder's Preferred Stock into shares of Common Stock as follows:
Market Price of Common Stock Conversion Ratio --------------- ---------------- $10.00 to $21.99 78.00% of a share of Common Stock for each share of Preferred Stock $22.00-$22.99 76.00% of a share of Common Stock for each share of Preferred Stock
-3- $23.00-$23.99 74.00% of a share of Common Stock for each share of Preferred Stock $24.00-$24.99 72.00% of a share of Common Stock for each share of Preferred Stock $25.00-$25.99 70.00% of a share of Common Stock for each share of Preferred Stock $26.00-$26.99 68.00% of a share of Common Stock for each share of Preferred Stock $27.00-$27.99 66.00% of a share of Common Stock for each share of Preferred Stock $28.00-$28.99 64.00% of a share of Common Stock for each share of Preferred Stock $29.00-$29.99 62.00% of a share of Common Stock for each share of Preferred Stock $30.00 and above 60.00% of a share of Common Stock for each share of Preferred Stock
The Market Price and Conversion Ratio shall be adjusted as hereinafter provided. Any such election shall be made by written notice to the Corporation's Secretary and shall be effective on the first day on which the Common Stock is traded after such election is received by the Corporation's Secretary. Market Price for the conversion shall be determined by using as the last day of the period for determining Market Price the effective date of the election. (a) Adjustments to Market Price and Conversion Ratio for Certain Dividends ---------------------------------------------------------------------- and for Combinations or Subdivisions of Common Stock. In the event that this - ---------------------------------------------------- Corporation at any time or from time to time (i) shall declare or pay, without consideration, any dividend on each outstanding share of the Common Stock payable in Common Stock, (ii) shall issue Common Stock pursuant to the exercise of a Warrant Dividend which was exercised at less than Market Price existing at the time of the issuance of such Warrant Dividend, (iii) shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any warrant or right to acquire Common Stock) or (iv) in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Market Price and Conversion Ratio for the Series A-2 Preferred Stock in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate, so as to protect the conversion privileges of the Preferred Stock. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any warrant or right to acquire Common Stock exercisable for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such warrant or right to acquire Common Stock. A "Warrant Dividend" means a dividend declared or paid by the Corporation without consideration on each outstanding share of Common Stock and payable in a warrant or right to acquire Common Stock. Notwithstanding the foregoing, no adjustment for any Warrant Dividend shall be required until, and then only to the extent that, such Warrant Dividend has been actually exercised at less than the Market Price of Common Stock at the time of the issuance of such Warrant Dividend. (b) Adjustments for Reclassification and Reorganization. If the Common --------------------------------------------------- Stock issuable upon conversion of the Series A-2 Preferred Stock shall be changed into the same or a different number of shares of -4- any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 6 above), the Market Price and Conversion Ratio then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A-2 Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been received by the holders in the event of a conversion of the Series A-2 Preferred Stock immediately before that change. (c) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion provisions applicable to the Series A-2 Preferred Stock against impairment; provided, however, that notwithstanding any other provision hereof, the Corporation may at any time and from time to time take any of the foregoing actions without any adjustment to the Market Price or Conversion Ratio unless such adjustment is specifically and expressly provided for herein. (d) Certificates as to Adjustments. Upon the occurrence of each adjustment ------------------------------ or readjustment of any Market Price and Conversion Ratio pursuant to this Section 6 (other than adjustments pursuant to Section 6a(ii) with respect to the issuance of Common Stock pursuant to the exercise of a Warrant Dividend), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A-2 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. Upon the declaration and payment by the Corporation of a Warrant Dividend, in lieu of the certificate described above, the Corporation at its expense shall promptly prepare and furnish to each holder of Series A-2 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer stating that the Corporation has declared and paid a Warrant Dividend and describing the terms thereof. The Corporation shall, upon the written request at any time of any holder of Series A-2 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Ratio for such series of Preferred Stock at the time in effect, and (iii) the number of shares of Common Stock which at the time would be received upon the conversion of the Series A-2 Preferred Stock. (e) Reservation of Stock Issuable Upon Conversion. The Corporation shall --------------------------------------------- at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A-2 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A-2 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A-2 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Certificate of Incorporation. (f) Fractional Shares. No fractional share shall be issued upon the ----------------- conversion of any share or shares of Series A-2 Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A-2 Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). -5- 7. Reacquired Shares. Any shares of Series A-2 Preferred Stock purchased ----------------- or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 8. Restrictions and Limitations. So long as any shares of Series A-1, ---------------------------- Series A-2 and Series A-3 Preferred Stock remain outstanding, the Corporation shall not, (i) issue any other equity security (including any security convertible into or exercisable for any equity security) senior to or on parity with the Series A-1, Series A-2 or Series A-3 Preferred Stock as to dividend rights or liquidation preferences or (ii) without the vote or written consent by the holders of a majority of the then outstanding shares of Series A-1, Series A-2 and Series A-3 Preferred Stock, voting together as a single class, amend its Certificate of Incorporation if such amendment would change any of the rights, preferences or privileges provided for herein for the benefit of any shares of that series of Preferred Stock. 9. Definitions. ----------- "IPO" means a sale of Common Stock for not less than $18.75 per share in an underwritten offering registered under the Securities Act of 1933, as amended, which is completed on or before March 31, 1997, which results in aggregate proceeds to the Corporation (prior to underwriters' discounts and expenses relating to the issuance) of $75,000,000 or more and which results in the listing of such Common Stock on the New York Stock Exchange or the approval for quotation of such Common Stock on the National Association of Securities Dealers Automated Quotation System. "LIBOR Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York or Los Angeles, California are authorized or required to close and any day on which banks are not open for dealings in dollar deposits in the London interbank market. "LIBOR Rate" means the rate per annum (rounded upwards, if any, to the next higher 1/16th of 1%) on the basis of the offered rate of deposits in U.S. dollars to The Sumitomo Bank, Limited in the London interbank market in amounts comparable to the aggregate amount of any dividend which was required to have been declared and paid and for a period of six months as of approximately 11:00 a.m. (London time) on the day any dividend was required to have been declared and paid or, if such day is not a LIBOR Business Day, the next succeeding LIBOR Business Day. "Market Price" means (i) during the first 20 consecutive days in which the Common Stock is traded after the closing of an IPO, the price at which the common stock was offered to the public in the IPO and (ii) thereafter, the average closing price for a share of Common Stock as reported by the Wall Street ---- ------ Journal (West Coast Edition) for a period of 20 consecutive trading days - ------- immediately prior to the day as of which Market Price is being determined (ignoring for purposes of consecutiveness days on which the market or stock exchange on which such stock trades is not open). "Recapitalization Date" means the date, prior to March 31, 1997, of the closing of an IPO. -6- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights of Series A-2 Preferred Stock to be duly executed by its Chief Executive Officer and attested to by its Secretary this 2nd day of December, 1996. /s/ James J. Didion ------------------------------------- Chief Executive Officer Attest: /s/ Karen A. Tallman ------------------------------------- Secretary -7- CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF OF SERIES A-3 PREFERRED STOCK OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- (formerly CB Commercial Holdings, Inc.) Pursuant to Section 151 of the General Corporation Law of the State of Delaware CB Commercial Real Estate Services Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that pursuant to the authority conferred upon the Board of Directors by Article FOURTH of the Certificate of Incorporation of the Corporation, and in accordance with Section 151 of the General Corporation Law of the State of Delaware, the said Board of Directors has adopted the following resolution creating a series of Preferred Stock, designated as Series A-3 Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation, effective upon the closing of an IPO, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. Designation and Amount. The shares of such series shall be designated ---------------------- as "Series A-3 Preferred Stock," par value $.01 per share, and the number of shares constituting such series shall be 1,000,000. Such number of shares may be decreased (but may not be increased) by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A-3 Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Automatic Conversion of Existing Series A-3 Preferred Stock on -------------------------------------------------------------- Recapitalization. Immediately upon the closing of an IPO on the - ---------------- Recapitalization Date, each existing share of Series A-3 Preferred Stock of the Corporation shall be converted automatically into one (1) share of Series A-3 Preferred Stock with the powers, preferences and relative, participating, optional and other special rights of such shares of such series and the qualifications, limitations or restrictions as set forth herein. 3. Dividends. --------- (a) Preference Dividend ------------------- (i) (A) The holders of the Series A-3 Preferred Stock shall be entitled to receive dividends at the rate of $.25 per quarter on each share of Series A-3 Preferred Stock, payable out of funds legally available therefor in cash within one year after the last day of the quarter to which it relates (the "Preference Dividend"). On the Recapitalization Date, the accrual of such dividend shall be retroactive to October 1, 1996. Such dividends shall be payable only when, as and if declared by the Board of Directors. (B) 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 interest at a fixed rate of 8% per annum; provided, -------- however, that (i) if applicable law restricts or prohibits the declaration ------- or payment of the Preference Dividend, no dividend shall be required to be declared and paid and no interest shall accrue thereon or be paid to the extent so restricted or prohibited, and (ii) in the event a contractual restriction in a credit agreement with a third party to which the Corporation or one of its direct or indirect subsidiaries is a party restricts or prohibits the declaration or payment of the Preference Dividend, no dividend shall be required to be declared or paid other than in accordance with such contractual restriction, but the Preference Dividend shall accumulate and accrue as set forth above, interest shall be paid on the unpaid dividend to the extent permitted under applicable law and any interest which remains unpaid shall accrue as set forth above. (ii) Following the Recapitalization Date, until all accrued and unpaid Preference Dividends (and all accrued and unpaid interest thereon) on the Series A-3 Preferred Stock (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above) shall have been paid or declared and set apart during any fiscal year: (A) no shares of Common Stock shall be redeemed by the Corporation, other than shares of capital stock of the Corporation which were outstanding prior to the Recapitalization Date and other than shares of capital stock issued or issuable to officers, directors or employees of, or consultants to, the Corporation pursuant to stock option, stock purchase or similar plans and (B) no dividends (including dividends payable in the Common Stock of the Corporation, dividends payable in warrants to purchase Common Stock and dividends payable in securities convertible or exchangeable into shares of Common Stock of the Corporation) shall be paid or declared and set apart on any series of Preferred Stock or Common Stock of the Corporation (and in the case of Common Stock, no dividends shall accrue on such Common Stock) during that fiscal year. Nothing set forth in this Certificate shall limit the Corporation's ability to effect a stock split or reverse stock split. (iii) Preference Dividends paid on the Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred Stock in an amount less than the total amount of such Preference Dividends at the time accrued and payable on such shares and interest, if any, due on such Preference Dividend, shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (iv) Upon the conversion of any share of Series A-3 Preferred Stock into the Corporation's Common Stock pursuant to Section 6 below, the holder of such share of Series A-3 Preferred Stock shall be entitled to receive in cash an amount equal to all accrued and unpaid Preference Dividends with respect thereto and interest, if any, due thereon, subject to restrictions of applicable law and contractual restrictions as set forth in Paragraph 3(a)(i)(B) above. (b) Dividends in Excess of Preference Dividend. Whenever any dividend is ------------------------------------------ declared and paid with respect to Common Stock, the holders of the Series A-3 Preferred Stock shall be entitled to receive (in addition to any Preference Dividend and interest thereon in accordance with Paragraphs 3(a)(i)(A) and (B) above)) out of any assets legally available therefore a dividend on each share of Series A-3 Preferred Stock equal to sixty percent (60%) of the dividend declared and paid on each share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). (c) Except as otherwise provided herein, no right shall accrue to holders of shares of Series A-3 Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue any interest. -2- 4. Liquidation. ----------- (a) Liquidation Preference. In the event of any liquidation, dissolution ---------------------- or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A-3 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, all accrued but unpaid dividends and interest (if any) thereon (subject to applicable law and contractual restrictions as set forth in Paragraphs 3(a)(i)(A) and (B) above), then, to the extent any assets of the Corporation remain available for distribution to the stockholders of the Corporation, the holders of Preferred Stock and Common Stock shall be entitled to receive an amount equal to $10.00 per share (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares), reduced by any prior payments to such holder (not including all accrued but unpaid dividends and accrued interest thereon) in connection with any liquidation, dissolution or winding up. The Series A-3 Preferred Stock shall rank on a parity with the Corporation's Series A-1 and A-2 Preferred Stock as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. (b) Distributions in Excess of Liquidation Preference. With respect to ------------------------------------------------- the distribution of any remaining assets of the Corporation in connection with a liquidation, dissolution or winding up, the holders of the Series A-3 Preferred Stock shall be entitled (after distributions required by paragraph (a) above) to receive with respect to each share of Preferred Stock sixty percent (60%) of any distribution made with respect to a share of Common Stock (as proportionately adjusted for any stock dividends, combinations or splits with respect to such shares). 5. Voting Rights. The holders of Series A-3 Preferred Stock shall have ------------- no right to vote under any circumstances or for any purpose except as specifically required by the Delaware General Corporations Law. 6. Conversion. The Series A-3 Preferred Stock shall not be convertible ---------- at any time during which the Market Price for a share of Common Stock into which each share of Preferred Stock is converted is less than $10.00 per share. Except as otherwise set forth above, any holder of Series A-3 Preferred Stock may elect from time to time to convert some or all of such holder's Preferred Stock into shares of Common Stock as follows:
Market Price of Common Stock Conversion Ratio --------------- ---------------- $10.00 to $21.99 78.00% of a share of Common Stock for each share of Preferred Stock $22.00-$22.99 76.00% of a share of Common Stock for each share of Preferred Stock $23.00-$23.99 74.00% of a share of Common Stock for each share of Preferred Stock $24.00-$24.99 72.00% of a share of Common Stock for each share of Preferred Stock $25.00-$25.99 70.00% of a share of Common Stock for each share of Preferred Stock $26.00-$26.99 68.00% of a share of Common Stock for each share of Preferred Stock
-3- $27.00-$27.99 66.00% of a share of Common Stock for each share of Preferred Stock $28.00-$28.99 64.00% of a share of Common Stock for each share of Preferred Stock $29.00-$29.99 62.00% of a share of Common Stock for each share of Preferred Stock $30.00 and above 60.00% of a share of Common Stock for each share of Preferred Stock
The Market Price and the Conversion Ratio shall be adjusted as hereinafter provided. Any such election shall be made by written notice to the Corporation's Secretary and shall be effective on the first day on which the Common Stock is traded after such election is received by the Corporation's Secretary. Market Price for the conversion shall be determined by using as the last day of the period for determining Market Price the effective date of the election. (a) Adjustments to Market Price and Conversion Ratio for Certain Dividends ---------------------------------------------------------------------- and for Combinations or Subdivisions of Common Stock. In the event that this - ---------------------------------------------------- Corporation at any time or from time to time (i) shall declare or pay, without consideration, any dividend on each outstanding share of the Common Stock payable in Common Stock, (ii) shall issue Common Stock pursuant to the exercise of a Warrant Dividend which was exercised at less than Market Price existing at the time of the issuance of such Warrant Dividend, (iii) shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any warrant or right to acquire Common Stock) or (iv) in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Market Price and Conversion Ratio for the Series A-3 Preferred Stock in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate, so as to protect the conversion privileges of the Preferred Stock. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any warrant or right to acquire Common Stock exercisable for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such warrant or right to acquire Common Stock. A "Warrant Dividend" means a dividend declared or paid by the Corporation without consideration on each outstanding share of Common Stock and payable in a warrant or right to acquire Common Stock. Notwithstanding the foregoing, no adjustment for any Warrant Dividend shall be required until, and then only to the extent that, such Warrant Dividend has been actually exercised at less than the Market Price of Common Stock at the time of the issuance of such Warrant Dividend. (b) Adjustments for Reclassification and Reorganization. If the Common --------------------------------------------------- Stock issuable upon conversion of the Series A-3 Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 6 above), the Market Price and Conversion Ratio then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A-3 Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been received by the holders in the event of a conversion of the Series A-3 Preferred Stock immediately before that change. (c) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be -4- observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion provisions applicable to the Series A-3 Preferred Stock against impairment; provided, however, that notwithstanding any other provision hereof, the Corporation may at any time and from time to time take any of the foregoing actions without any adjustment to the Market Price or Conversion Ratio unless such adjustment is specifically and expressly provided for herein. (d) Certificates as to Adjustments. Upon the occurrence of each adjustment ------------------------------ or readjustment of any Market Price and Conversion Ratio pursuant to this Section 6 (other than adjustments pursuant to Section 6a(ii) with respect to the issuance of Common Stock pursuant to the exercise of a Warrant Dividend), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A-3 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. Upon the declaration and payment by the Corporation of a Warrant Dividend, in lieu of the certificate described above, the Corporation at its expense shall promptly prepare and furnish to each holder of Series A-3 Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer stating that the Corporation has declared and paid a Warrant Dividend and describing the terms thereof. The Corporation shall, upon the written request at any time of any holder of Series A-3 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Ratio for such series of Preferred Stock at the time in effect, and (iii) the number of shares of Common Stock which at the time would be received upon the conversion of the Series A-3 Preferred Stock. (e) Reservation of Stock Issuable Upon Conversion. The Corporation shall --------------------------------------------- at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A-3 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A-3 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A-3 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Certificate of Incorporation. (f) Fractional Shares. No fractional share shall be issued upon the ----------------- conversion of any share or shares of Series A-3 Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A-3 Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). 7. Reacquired Shares. Any shares of Series A-3 Preferred Stock purchased ----------------- or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 8. Restrictions and Limitations. So long as any shares of Series A-1, ---------------------------- Series A-2 and Series A-3 Preferred Stock remain outstanding, the Corporation shall not, (i) issue any other equity security (including any security convertible into or exercisable for any equity security) senior to or on parity with the Series A-1, Series A-2 or Series A-3 Preferred Stock as to dividend rights or liquidation preferences or (ii) without the vote or written consent by the holders of a majority of the then outstanding shares of Series A-1, Series A-2 -5- and Series A-3 Preferred Stock, voting together as a single class, amend its Certificate of Incorporation if such amendment would change any of the rights, preferences or privileges provided for herein for the benefit of any shares of that series of Preferred Stock. 9. Definitions. ----------- "IPO" means a sale of Common Stock for not less than $18.75 per share in an underwritten offering registered under the Securities Act of 1933, as amended, which is completed on or before March 31, 1997, which results in aggregate proceeds to the Corporation (prior to underwriters' discounts and expenses relating to the issuance) of $75,000,000 or more and which results in the listing of such Common Stock on the New York Stock Exchange or the approval for quotation of such Common Stock on the National Association of Securities Dealers Automated Quotation System. "Market Price" means (i) during the first 20 consecutive days in which the Common Stock is traded after the closing of an IPO, the price at which the common stock was offered to the public in the IPO and (ii) thereafter, the average closing price for a share of Common Stock as reported by the Wall Street ---- ------ Journal (West Coast Edition) for a period of 20 consecutive trading days - ------- immediately prior to the day as of which Market Price is being determined (ignoring for purposes of consecutiveness days on which the market or stock exchange on which such stock trades is not open). "Recapitalization Date" means the date, prior to March 31, 1997, of the closing of an IPO. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights of Series A-3 Preferred Stock to be duly executed by its Chief Executive Officer and attested to by its Secretary this 2nd day of December, 1996. /s/ James J. Didion --------------------------------------- Chief Executive Officer Attest: /s/ Karen A. Tallman --------------------------------------- Secretary -6- EX-3.2 3 THIRD AMENDED AND RESTATED BYLAWS OF THE COMPANY EXHIBIT 3.2 THIRD AMENDED AND RESTATED B Y - L A W S OF CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. (FORMERLY CB COMMERCIAL HOLDINGS, INC.) (A DELAWARE CORPORATION) TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 Offices....................................................... 1 1.1 Registered Office.............................................. 1 1.2 Additional Offices............................................. 1 ARTICLE 2 Meeting of Stockholders....................................... 1 2.1 Place of Meeting............................................... 1 2.2 Annual Meeting................................................. 1 2.3 Special Meetings............................................... 1 2.4 Notice of Meetings............................................. 1 2.5 Business Matter of a Special or Annual Meeting................. 2 2.6 List of Stockholders........................................... 2 2.7 Organization and Conduct of Business........................... 2 2.8 Quorum and Adjournments........................................ 2 2.9 Voting Rights.................................................. 2 2.10 Majority Vote................................................. 2 2.11 Proxies....................................................... 3 2.12 Inspectors of Election........................................ 3 ARTICLE 3 Directors..................................................... 3 3.1 Number; Qualifications......................................... 3 3.2 Resignation and Vacancies...................................... 3 3.3 Removal of Directors........................................... 3 3.4 Powers......................................................... 4 3.5 Place of Meetings.............................................. 4 3.6 Annual Meetings................................................ 4 3.7 Regular Meetings............................................... 4 3.8 Special Meetings............................................... 4 3.9 Quorum and Adjournments........................................ 4 3.10 Action Without Meeting........................................ 4 3.11 Telephone Meetings............................................ 4 3.12 Waiver of Notice.............................................. 4 3.13 Fees and Compensation of Directors............................ 4 3.14 Rights of Inspection.......................................... 5 ARTICLE 4 Committees of Directors....................................... 5 4.1 Selection...................................................... 5 4.2 Power.......................................................... 5 4.3 Executive Committee............................................ 5 4.4 Committee Minutes.............................................. 5 ARTICLE 5 Officers...................................................... 5 5.1 Officers Designated............................................ 5 5.2 Appointment of Officers........................................ 6 5.3 Subordinate Officers........................................... 6 5.4 Removal and Resignation of Officers............................ 6 5.5 Vacancies in Offices........................................... 6 5.6 Compensation................................................... 6 5.7 The Chairman of the Board...................................... 6 5.8 The Chief Executive Officer.................................... 6
5.9 The President............................................... 6 5.10 The Vice President.......................................... 6 5.11 The Secretary............................................... 7 5.12 The Assistant Secretary..................................... 7 5.13 The Chief Financial Officer................................. 7 5.14 The Treasurer............................................... 7 5.15 The Assistant Treasurer..................................... 7 5.16 Powers and Duties........................................... 7 ARTICLE 6 Stock Certificates.......................................... 7 6.1 Certificates for Shares...................................... 7 6.2 Signatures on Certificates................................... 8 6.3 Transfer of Stock............................................ 8 6.4 Registered Stockholders...................................... 8 6.5 Record Date.................................................. 8 6.6 Lost, Stolen or Destroyed Certificates....................... 9 ARTICLE 7 Notices..................................................... 9 7.1 Notice....................................................... 9 7.2 Waiver....................................................... 9 ARTICLE 8 General Provisions.......................................... 9 8.1 Dividends.................................................... 9 8.2 Dividend Reserve............................................. 9 8.3 Corporate Seal............................................... 9 8.4 Execution of Corporate Contracts and Instruments............. 10 ARTICLE 9 Amendments.................................................. 10
THIRD AMENDED AND RESTATED -------------------------- B Y - L A W S ------------- OF -- CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- (FORMERLY CB COMMERCIAL HOLDINGS, INC.) (A DELAWARE CORPORATION) ARTICLE 1 --------- Offices ------- 1.1 Registered Office. The registered office of the Corporation shall be ----------------- 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent in charge thereof is The Corporation Trust Company. 1.2 Additional Offices. The Corporation may also have offices at such ------------------ other places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time designate or the business of the Corporation may require. ARTICLE 2 --------- Meeting of Stockholders ----------------------- 2.1 Place of Meeting. All meetings of the stockholders for the election of ---------------- directors shall be held at the principal office of the Corporation, at such place as may be fixed from time to time by the Board or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board and stated in the notice of the meeting. Meetings of stockholders for any purpose may be held at such time and place within or without the State of Delaware as the Board may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2.2 Annual Meeting. Annual meetings of stockholders shall be held each -------------- year at such date and time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such annual meet ings, the stockholders shall elect a Board and transact such other business as may properly be brought before the meetings. 2.3 Special Meetings. Special meetings of the stockholders may be called ---------------- for any purpose or purposes, unless otherwise prescribed by the statute or by the Certificate of Incorporation, at the request of the Chairman of the Board, the Chief Executive Officer or the Board or the holders of shares entitled to cast not less than ten percent (10%) of the votes at that meeting. Such request shall state the purpose or purposes of the proposed meeting. 2.4 Notice of Meetings. Written notice of stockholders' meetings, stating ------------------ the place, date and time of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 2.5 Business Matter of a Special or Annual Meeting. Business transacted at ---------------------------------------------- any special meeting of stockholders shall be limited to the purposes stated in the notice. Business transactions at an annual meeting shall not be limited to the purposes stated in the notice. 2.6 List of Stockholders. The officer in charge of the stock ledger of the -------------------- Corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting or the principal executive offices of the Corporation, shall be specified in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 2.7 Organization and Conduct of Business. The Chairman of the Board or, in ------------------------------------ his absence, the Chief Executive Officer of the Corporation or, in his absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the Secretary of the meeting shall be such person as the chairman of the meeting appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 2.8 Quorum and Adjournments. Except where otherwise provided by law or the ----------------------- Certificate of Incorporation or these By-Laws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 2.9 Voting Rights. Unless otherwise provided in the Certificate of ------------- Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 2.10 Majority Vote. When a quorum is present at any meeting, the vote of ------------- the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of -2- Incorporation or of these By-Laws a different vote is required in which case such express provision shall govern and control the decision of such question. 2.11 Proxies. Every person entitled to vote for directors or on any other ------- matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by such person or such person's attorney- in-fact and filed with the Secretary of the Corporation. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of the proxy, unless otherwise provided in the proxy. 2.12 Inspectors of Election. Before any meeting of stockholders the Board ---------------------- may appoint any person other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. ARTICLE 3 --------- Directors --------- 3.1 Number; Qualifications. The Board shall consist of one or more ---------------------- members, the number thereof to be determined from time to time by resolution of the Board. The initial number of directors shall be seventeen (17). The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.2, and each director so elected shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. 3.2 Resignation and Vacancies. Unless otherwise provided in the ------------------------- Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with General Corporation Law of the State of Delaware. Unless otherwise provided in the Certificate of Incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of other vacancies. 3.3 Removal of Directors. Unless otherwise restricted by law, the -------------------- Certificate of Incorporation or these By-Laws, any director or the entire Board may be removed, with or without cause, by the holders of at least a majority of the shares entitled to vote at an election of directors. Notwithstanding the foregoing, if the Board of Directors is elected by cumulative voting and less than the entire Board of Directors is to be removed, no director -3- may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. 3.4 Powers. The business of the Corporation shall be managed by or under ------ the direction of the Board which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. 3.5 Place of Meetings. The Board may hold meetings, both regular and ----------------- special, either within or without the State of Delaware. 3.6 Annual Meetings. The annual meeting of the Board shall be held --------------- immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. Annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 3.7 Regular Meetings. Regular meetings of the Board may be held without ---------------- notice at such time and place as may be determined from time to time by the Board. 3.8 Special Meetings. Special meetings of the Board may be called by the ---------------- Chairman of the Board, the Chief Executive Officer or any five (5) directors upon three (3) days' notice to each director, such notice to be delivered personally or by telephone, voice messaging system, telegraph, facsimile, electronic mail or other electronic means. 3.9 Quorum and Adjournments. At all meetings of the Board, a majority of ----------------------- the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise be specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the Board, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 3.10 Action Without Meeting. Unless otherwise restricted by the ---------------------- Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.11 Telephone Meetings. Unless otherwise restricted by the Certificate of ------------------ Incorporation or these By-Laws, any member of the Board or any committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.12 Waiver of Notice. Notice of a meeting need not be given to any ---------------- director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 3.13 Fees and Compensation of Directors. Unless otherwise restricted by ---------------------------------- the Certificate of Incorporation or these By-Laws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance -4- at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.14 Rights of Inspection. Every director shall have the absolute right at -------------------- any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. ARTICLE 4 --------- Committees of Directors ----------------------- 4.1 Selection. The Board may, by resolution passed by a majority of the --------- entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 4.2 Power. Any such committee, to the extent provided in the resolution of ----- the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending the By-Laws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. 4.3 Executive Committee. The Executive Committee shall have and may ------------------- exercise such powers and authority as the Board may from time to time determine in accordance with these By-Laws. 4.4 Committee Minutes. Each committee shall keep regular minutes of its ----------------- meetings and report the same to the Board when required. ARTICLE 5 --------- Officers -------- 5.1 Officers Designated. The officers of the Corporation shall be a ------------------- Chairman, a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer. The officers of the Corporation may also include one or -5- more Vice Presidents, a Treasurer, one or more assistant Secretaries and assistant Treasurers and such other officers as the Board of Directors may determine. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. 5.2 Appointment of Officers. The Chairman, Chief Executive Officer, ----------------------- President and Chief Financial Officer of the Corporation shall be appointed by the Board, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. The Chief Executive Officer shall appoint the -------------------- Secretary, the Treasurer and such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-Laws or as the Board may from time to time determine. 5.4 Removal and Resignation of Officers. Subject to the rights, if any, of ----------------------------------- an officer under any contract of employment, any officer may be removed, either with or without cause, in the case of an officer chosen by the Board, by an affirmative vote of the majority of the Board, at any regular or special meeting of the Board, or, in case of an officer chosen by the Chief Executive Officer, by the Chief Executive Officer. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. A vacancy in any office because of death, -------------------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office. 5.6 Compensation. The salaries of the Chairman of the Board and the Chief ------------ Executive Officer shall be fixed from time to time by the Board. The salaries of the President (if the President is neither the Chairman nor the Chief Executive Officer) and the Chief Financial Officer shall be fixed from time to time by the Board after taking account of the recommendation of the Chief Executive Officer. The salaries of all other officers of the Corporation shall be fixed from time to time by the Chief Executive Officer. No officer shall be prevented from receiving a salary because he is also a director of the Corporation. 5.7 The Chairman of the Board. The Chairman of the Board shall be any ------------------------- director who is selected by a majority of the directors. The Chairman of the Board shall preside, when present, at all meetings of the stockholders and the Board. He shall counsel the Chief Executive Officer and other officers of the corporation and shall exercise such powers and perform such duties as shall be assigned to or required of them from time to time by the Board, or as provided in these By-Laws (which duties shall not be changed without the approval of a majority of the directors). 5.8 The Chief Executive Officer. Subject to such supervisory powers, if --------------------------- any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the Chief Executive Officer shall preside, in the absence of the Chairman of the Board, at all meetings of the stockholders and the Board, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. 5.9 The President. The President, in the absence of the Chief Executive ------------- Officer or his disability or refusal to act, shall perform the duties of the Chief Executive Officer and when so acting shall have the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as may from time to time be prescribed by the Board, the Chief Executive Officer or the Chairman of the Board. -6- 5.10 The Vice President. The Vice President (or in the event there be more ------------------ than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, the Chief Executive Officer, the President, the Chairman of the Board or these By-Laws. 5.11 The Secretary. The Secretary shall attend all meetings of the Board ------------- and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board or the President, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his or her signature. 5.12 The Assistant Secretary. The Assistant Secretary or, if there be more ----------------------- than one, the Assistant Secretaries in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.13 The Chief Financial Officer. The Chief Financial Officer shall have --------------------------- the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as the Chief Financial Officer and of the financial condition of the Corporation. 5.14 The Treasurer. The Treasurer shall, in the absence of the Chief ------------- Financial Officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Chief Financial Officer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.15 The Assistant Treasurer. The Assistant Treasurer, or if there shall ----------------------- be more than one, the Assistant Treasurers in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.16 Powers and Duties. The officers of the Corporation shall have such ----------------- powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board. -7- ARTICLE 6 --------- Stock Certificates ------------------ 6.1 Certificates for Shares. The shares of the Corporation shall be ----------------------- represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the Corporation by, the Chairman of the Board, or the Chief Executive Officer or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 6.2 Signatures on Certificates. Any or all of the signatures on a -------------------------- certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.3 Transfer of Stock. Upon surrender to the Corporation or the transfer ----------------- agent of the Corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be canceled and issuance of new equiva lent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. 6.4 Registered Stockholders. The Corporation shall be entitled to ----------------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.5 Record Date. (a) In order that the Corporation may determine the ----------- stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board may fix a new record date -------- for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate -8- action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law of the State of Delaware, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. 6.6 Lost, Stolen or Destroyed Certificates. The Corporation may issue a -------------------------------------- new certificate or certificates to replace any certificate or certificates theretofore issued by it alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When issuing a new certificate or certificates, the Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. ARTICLE 7 --------- Notices ------- 7.1 Notice. Whenever, under the provisions of the statutes or of the ------ Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or telephone. 7.2 Waiver. Whenever any notice is required to be given under the ------ provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 8 --------- General Provisions ------------------ 8.1 Dividends. Dividends upon the capital stock of the Corporation, --------- subject to any restrictions contained in the General Corporation Laws of Delaware or the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. -9- 8.2 Dividend Reserve. Before payment of any dividend, there may be set ---------------- aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Corporate Seal. The Board may provide a suitable seal, containing the -------------- name of the Corporation, which seal shall be in the charge of the Secretary. 8.4 Execution of Corporate Contracts and Instruments. The Board, except as ------------------------------------------------ otherwise provided in these By-Laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee (other than the Chief Executive Officer) shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. ARTICLE 9 --------- Amendments ---------- These By-Laws may be altered, amended or repealed or new By-Laws may be adopted as provided for in the Certificate of Incorporation. -10- CERTIFICATE OF SECRETARY ------------------------ I, the undersigned, hereby certify: 1. That I am the duly elected, acting and qualified Secretary of CB Commercial Real Estate Services Group, Inc., a Delaware corporation (the "Corporation"); and 2. That the foregoing Third Amended and Restated By-Laws constitute the Third Amended and Restated By-Laws of the Corporation as duly adopted by the Board of Directors of the Corporation effective December 2, 1996. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Corporation as of this 2nd day of December, 1996. _____________________________ Karen A. Tallman, Secretary -11- EX-10.5 4 THIRD AMENDED AND RESTATED CREDIT AGREEMENT EXECUTION COPY EXHIBIT 10.5 - -------------------------------------------------------------------------------- THIRD AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT Dated as of November 25, 1996 AMONG CB COMMERCIAL REAL ESTATE GROUP, INC., THE LENDERS FROM TIME TO TIME PARTY HERETO and THE SUMITOMO BANK, LIMITED, as Agent - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- ARTICLE I. DEFINITIONS AND RELATED MATTERS......................................... 1 Section 1.01. Definitions.......................................................... 1 Section 1.02. Construction......................................................... 27 Section 1.03. Accounting Terms and Determinations.................................. 27 Section 1.04. Exhibits............................................................. 27 Section 1.05. Other Definitions.................................................... 27 ARTICLE II. AMOUNTS AND TERMS OF THE LOANS......................................... 28 Section 2.01. Facilities........................................................... 28 Section 2.02. Interest............................................................. 34 Section 2.03. Notes................................................................ 36 Section 2.04. Fees................................................................. 37 Section 2.05. Payments and Prepayments............................................. 38 Section 2.06. Manner of Payment.................................................... 42 Section 2.07. Mandatory Suspension and Conversion of Euro-Dollar Rate Loans........ 42 Section 2.08. Regulatory Changes................................................... 42 Section 2.09. Taxes................................................................ 43 Section 2.10. Lending Office....................................................... 44 Section 2.11. Compensation for Funding Losses...................................... 44 Section 2.12. Determinations....................................................... 44 ARTICLE III. CONDITIONS TO LOANS.................................................. 45 Section 3.01. Conditions Precedent to Effective Date............................... 45 Section 3.02. Conditions Precedent to all Revolving Loans and Letters of Credit.... 47 ARTICLE IV. REPRESENTATIONS AND WARRANTIES......................................... 49 Section 4.01. Organization, Powers and Good Standing............................... 49
Third Amended and Restated Senior Secured Credit Agreement i TABLE OF CONTENTS -----------------
Page ---- Section 4.02. Authorization, Binding Effect, No Conflict, Etc...................... 49 Section 4.03. Collateral Documents................................................. 51 Section 4.04. Financial Information................................................ 51 Section 4.05. No Material Adverse Changes.......................................... 52 Section 4.06. Litigation........................................................... 52 Section 4.07. Agreements; Applicable Law........................................... 52 Section 4.08. Taxes................................................................ 52 Section 4.09. Governmental Regulation.............................................. 52 Section 4.10. Margin Regulations................................................... 52 Section 4.11. Employee Benefit Plans............................................... 53 Section 4.12. Title to Property; Liens............................................. 53 Section 4.13. No Materially Adverse Agreements; No Defaults........................ 54 Section 4.14. Capitalization and Ownership......................................... 54 Section 4.15. Licenses, Trademarks, Etc............................................ 54 Section 4.16. Environmental Condition.............................................. 54 Section 4.17. Absence of Certain Restrictions...................................... 55 Section 4.18. Location of Assets and Chief Executive Offices....................... 55 Section 4.19. No Defaults.......................................................... 55 Section 4.20. Disclosure........................................................... 55 ARTICLE V. AFFIRMATIVE COVENANTS OF THE BORROWER.................................. 56 Section 5.01. Financial Statements and Other Reports............................... 56 Section 5.02. Records and Inspection............................................... 58 Section 5.03. Corporate Existence, Etc............................................. 58 Section 5.04. Payment of Taxes..................................................... 58 Section 5.05. Maintenance of Properties............................................ 59
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Page ---- Section 5.06. Maintenance of Insurance............................................. 59 Section 5.07. Conduct of Business.................................................. 59 Section 5.08. Further Assurances................................................... 60 Section 5.09. Additional Collateral................................................ 60 Section 5.10. Future Information................................................... 61 Section 5.11. Proceeds of Asset Dispositions By Subsidiaries....................... 61 Section 5.12. Subordination of Intercompany Loans and Advances to the Borrower..... 61 Section 5.13. Deposit Accounts..................................................... 61 ARTICLE VI. NEGATIVE COVENANTS OF THE BORROWER..................................... 62 Section 6.01. Liens................................................................ 62 Section 6.02. Indebtedness......................................................... 63 Section 6.03. Restricted Payments.................................................. 64 Section 6.04. Investments.......................................................... 65 Section 6.05. Capital Expenditures................................................. 66 Section 6.06. Financial Covenants.................................................. 66 Section 6.07. Restriction on Fundamental Changes................................... 67 Section 6.08. Asset Dispositions................................................... 67 Section 6.09. Transactions with Affiliates......................................... 67 Section 6.10. Payments with Respect to Subordinated Debt........................... 68 Section 6.11. ERISA................................................................. 68 Section 6.12. Amendments of or Waivers Under Subordinated Debt Documents........... 69 Section 6.13. Issuance of Capital Stock............................................ 69 Section 6.14. Event of Illegality under the Senior Subordinated Credit Agreement... 69 ARTICLE VII. EVENTS OF DEFAULT..................................................... 70 Section 7.01. Events of Default.................................................... 70
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Page ---- Section 7.02. Remedies............................................................. 73 ARTICLE VIII. THE AGENT AND THE LENDERS............................................ 74 Section 8.01. Authorization and Action............................................. 74 Section 8.02. Exculpation; Agent's Reliance, Etc................................... 75 Section 8.03. Agent and Affiliates................................................. 75 Section 8.04. Lender Credit Decision............................................... 75 Section 8.05. Indemnification...................................................... 76 Section 8.06. Successor Agent...................................................... 76 Section 8.07. Excess Payments...................................................... 76 Section 8.08. Lenders.............................................................. 76 Section 8.09. Collateral and Guaranty Matters...................................... 77 Section 8.10. Payments; Availability of Funds; Certain Notices..................... 77 Section 8.11. Obligations of Lender Parties Several; Enforcement by the Agent...... 78 ARTICLE IX. MISCELLANEOUS.......................................................... 79 Section 9.01. Expenses............................................................. 79 Section 9.02. Indemnity............................................................ 79 Section 9.03. Waivers; Modifications in Writing.................................... 80 Section 9.04. Failure or Delay..................................................... 81 Section 9.05. Notices, Etc......................................................... 81 Section 9.06. Successors and Assigns............................................... 81 Section 9.07. Confidentiality...................................................... 82 Section 9.08. Governing Law and Venue; Waiver of Trial By Jury..................... 83 Section 9.09. Severability of Provisions........................................... 83 Section 9.10. Independence of Covenants............................................ 83 Section 9.11. Set Off.............................................................. 83
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Page ---- Section 9.12. Changes in Accounting Principles..................................... 83 Section 9.13. Publicity............................................................ 84 Section 9.14. Survival of Agreements, Representations and Warranties............... 84 Section 9.15. Headings............................................................. 84 Section 9.16. Execution in Counterparts............................................ 84 Section 9.17. Complete Agreement................................................... 84 Section 9.18. Knowledge of Borrower................................................ 84 Section 9.19. Waiver of Anti-Deficiency Protection................................. 84
v THIRD AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT ---------------------------------------------------------- THIRD AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT dated as of November 25, 1996 (as amended, supplemented or modified from time to time, the "Agreement") among CB COMMERCIAL REAL ESTATE GROUP, INC., a Delaware corporation (the "Borrower"), and THE SUMITOMO BANK, LIMITED, a banking corporation organized under the laws of Japan (the "Lender", and, together with the Revolving Credit Facility B Lender and any additional Lenders party to this Agreement from time to time, the "Lenders", and, in its capacity as such, the "Issuing Bank"), and THE SUMITOMO BANK, LIMITED, as agent for the Lenders (in such capacity, together with any successor in such capacity, the "Agent"). R E C I T A L S --------------- A. The Borrower and the Lender desire to amend and restate the terms and provisions of the Second Amended and Restated Senior Secured Credit Agreement dated as of June 30, 1994, as amended to the date hereof, between the Borrower and the Lender upon the terms and subject to the conditions set forth in this Agreement. B. There are outstanding, as of the date hereof, a Senior Term Loan in an aggregate principal amount of $106,565,623.20 and accrued and unpaid interest thereon, a Mortgage Term Loan in an aggregate principal amount of $18,000,000, and accrued and unpaid interest thereon (such outstanding Loans being referred to herein as the "Outstanding Loans"). After the payment of a portion of IPO Net Proceeds to the Agent required under Section 3.01 hereof and application thereof to prepay in part the Senior Term Loan, on the Effective Date, there will be outstanding a Senior Term Loan in an aggregate principal amount of $37,414,724.63. There are no Revolving Credit Facility A Loans or Revolving Credit Facility B Loans outstanding on the date hereof. There is $3,377,270.00 in Letter of Credit Liability in respect of Revolving Credit Facility A Letters of Credit outstanding on the date hereof. There is no Letter of Credit Liability in respect of Revolving Credit Facility B Letters of Credit on the date hereof. In addition, there are outstanding on the date hereof certain deferred interest and fees payable by the Borrower to the Lender, including without limitation, the Deferred Interest, the Deferred Amendment Fee and the Deferred Letter of Credit Fee, all of which shall be paid in full on or prior to the Effective Date. AGREEMENT ARTICLE I DEFINITIONS AND RELATED MATTERS ------------------------------- SECTION 1.01 DEFINITIONS. Terms used in this Agreement shall have ----------- the meanings set forth in this Section 1.01, in the sections of this Agreement or the other Loan Documents referred to in this Section 1.01 or as specified in Section 1.05. "Acquisition Advance" means any Revolving Credit Facility B Loan the ------------------- proceeds of which are applied, in whole or in part, directly or indirectly, by the Borrower or a Subsidiary to make any cash payment in respect of an Investment that constitutes a Permitted Acquisition. "Affiliate" means, with respect to a Person, any other Person that, --------- directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person other than, in the case of the Borrower, a Wholly Owned Subsidiary. The term "control" means the possession, directly or indirectly, of the power, whether or not exercised, (i) to vote five percent (5%) or more of the securities having voting power for the election of directors of such Person or (ii) to direct or cause the Third Amended and Restated Senior Secured Credit Agreement direction of the management or policies of a Person, whether through the ownership of voting securities or other equity interests, by contract or otherwise, and the terms "controlled" and "common control" shall have correlative meanings. Notwithstanding the foregoing provisions of this definition, in no event shall any Lender or any Affiliate of any Lender be deemed to be an Affiliate of Holdings, the Borrower or any Subsidiary of the Borrower. "Agent" shall have the meaning ascribed to it in the preamble hereto. ----- "Agreement" shall have the meaning ascribed to it in the preamble --------- hereto. "Amended and Restated Security Agreement" means the Second Amended and --------------------------------------- Restated Security Agreement dated as of November 25, 1996 between the Borrower and the Agent, for the benefit of the Lenders, encumbering the Collateral thereunder, together with the exhibits thereto and financing statements delivered by the Borrower to the Agent in connection therewith, as the same may from time to time be amended, supplemented or otherwise modified. "Amended and Restated Senior Subordinated Credit Agreement" means the --------------------------------------------------------- Amended and Restated Senior Subordinated Credit Agreement dated as of November 25, 1996 among the Borrower, Holdings and the other guarantors identified therein and Sumitomo Finance (Dublin) Limited, as the same thereafter may be amended, modified or supplemented in accordance with the terms hereof and thereof. "Amended and Restated Westmark Subordinated Credit Agreement" means ----------------------------------------------------------- the Amended and Restated Senior Subordinated Credit Agreement dated as of November 7, 1996 between WREAP and 399 Venture Partners, Inc. "Applicable Law" means all applicable provisions of all (i) -------------- constitutions, treaties, statutes, laws, rules, regulations, ordinances and orders of any Governmental Authority, (ii) Governmental Approvals, and (iii) orders, decisions, judgments, awards and decrees of any Governmental Authority. "Applicable Margin" means (i) in respect of Loans other than Revolving ----------------- Credit Facility B Loans, (a) 1.50% per annum in respect of Prime Rate Loans, and (b) 2.50% per annum in respect of Euro-Dollar Rate Loans, and (ii) in respect of Revolving Credit Facility B Loans, (x) 2.00% per annum in respect of Prime Rate Loans and (y) 3.00% per annum in respect of Euro-Dollar Rate Loans. "Assessment Rate" means, for any Interest Period, the annual --------------- assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%), for determining the then current net annual assessment payable by the Lender to the Federal Deposit Insurance Corporation (or any successor) for insuring Dollar time deposits of the Lender in the United States. "Asset Disposition" means any sale, assignment, transfer, lease or ----------------- other disposition (including a Sale-Leaseback Transaction and any such sale or other disposition effected by way of merger or consolidation (other than a merger or consolidation permitted pursuant to Section 6.07 hereof), sale of Capital Stock or otherwise) of any asset to any Person, except (i) the sale, ------ liquidation or disposition of any Permitted Investment, (ii) sales or other dispositions of inventory held or purchased for sale to others, or other property that has become obsolete or worn out, in each case in the ordinary course of business, (iii) sales or other dispositions of assets by any Subsidiary to the Borrower or a Wholly Owned Subsidiary (sales or other dispositions described in clauses (i), (ii) and (iii) of this definition being referred to herein collectively as "Excluded Dispositions"), (iv) any other --------------------- sales or other dispositions of assets if the aggregate amount of Net Cash Proceeds and the fair value of Non-Cash Proceeds of such sale or other disposition, together with the Net Cash Proceeds and the fair value of Non-Cash Proceeds of any other such sale or other disposition of assets of the Borrower or any Subsidiary in a series of related transactions (other than such proceeds derived from Excluded Dispositions), does not exceed $1,000,000 in the aggregate, and if, after giving effect to such Third Amended and Restated Senior Secured Credit Agreement 2 transaction, there shall not have been within the immediately preceding twelve (12) month period sales or other dispositions of assets of the Borrower or any Subsidiary (other than Excluded Dispositions) with an aggregate sales consideration of more than $1,000,000 of Net Cash Proceeds and fair value of Non-Cash Proceeds (provided, that, if such consideration in any such -------- transaction or transactions exceeds such amount, the entire amount of such consideration shall be subject to Section 2.05(b)(i) hereof, and provided -------- further that to the extent that any sale or other disposition of an asset that - ------- would not otherwise be an Asset Disposition for purposes hereof shall be treated as an asset disposition giving rise to a requirement to make a payment pursuant to the Senior Subordinated Credit Agreement or under any other agreement or other document pursuant to which Indebtedness is outstanding (other than Indebtedness described in Section 6.02(f) or (g) or (i) hereof), such asset disposition shall, notwithstanding any other provision of this Agreement, be an Asset Disposition hereunder for which a Mandatory Prepayment shall be required to be made pursuant to Section 2.05(b) hereof) or (v) the sale, assignment, transfer or other disposition of mortgage loans and the related mortgages in connection with Mortgage Banking Activities (provided that -------- this clause (v) shall not exclude from "Asset Disposition" any sale, assignment or liquidation of (x) the Borrower's or any Subsidiary's interest, if any, in any Person that has purchased or is to purchase mortgage loans from the Borrower or a Mortgage Banking Subsidiary in connection with Mortgage Banking Activities or (y) the Borrower's or any Subsidiary's servicing rights with respect to mortgage loans originated in connection with Mortgage Banking Activities). "Bankruptcy Code" shall mean Title 11 of the United States Code (11 --------------- U.S.C. 101 et seq.), as amended from time to time, or any successor statute. "Book Value" means, with respect to any assets of the Borrower or any ---------- Subsidiary, the value at which such assets are carried on its books for financial accounting purposes, in accordance with GAAP. "Borrower" shall have the meaning ascribed to it in the preamble -------- hereto. "Business Day" means any day which is not a Saturday, Sunday or other ------------ day on which banks in New York, New York or Los Angeles, California are authorized or obligated to close. "California Mortgages" means all of the deeds of trust, assignments of -------------------- lease, environmental indemnities and any and all similar agreements entered into between the Borrower or any of its Subsidiaries and the Agent (or for the benefit of Agent) that from time to time encumber the interests of the Borrower or any of its Subsidiaries in Real Property that is situated in the State of California. "Capital Expenditures" means, for any period, the aggregate of all -------------------- expenditures (whether paid in cash or accrued as liabilities during that period and including Capitalized Lease Obligations of the Borrower and its Subsidiaries during such period) that, in conformity with GAAP, are required to be capitalized and reflected in the property, plant and equipment or similar fixed asset accounts in the consolidated balance sheet of the Borrower and its Subsidiaries (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by the Borrower or its Subsidiaries to the extent of (i) the gross amount of such purchase price less (ii) the Book Value ---- of the equipment being traded in at such time) or are otherwise required to be capitalized in conformity with GAAP (other than capitalized interest); provided -------- that, notwithstanding classification thereof in accordance with GAAP, "Capital Expenditures" shall not include any expenditure designated by the Borrower in writing to the Lender as an "Investment" or a "Permitted Acquisition" made in conformity herewith at least ten days prior to consummation thereof. "Capital Stock" of any Person means any and all (i) shares, interests, ------------- participations, or other equivalents (however designated) of capital stock and all other equity interests of such Person (including without limitation, with respect to any limited liability company, any membership interest therein, and with respect to any partnership, any general or limited partnership interest therein) and (ii) any rights (other than Third Amended and Restated Senior Secured Credit Agreement 3 debt securities convertible into capital stock), warrants or options to acquire such capital stock or other equity interests. "Capitalized Lease" means any lease (or other agreement conveying the ----------------- right to use) of property (real, personal or mixed) by a Person as lessee or guarantor which would, in conformity with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" means all obligations under ----------------------------- Capitalized Leases of a Person that would, in conformity with GAAP, appear on a balance sheet of that Person. "CBC Partners Program" means a program established and operated by the -------------------- Borrower pursuant to which (i) the Borrower or a Subsidiary enters into agreements with commercial real estate brokerage firms granting such firms (x) the right to use the name "CB Commercial" and certain other service marks and slogans in an agreed upon territory, (y) certain rights to access the Borrower's technology, databases and educational programs, and (z) certain rights to referrals from Borrower and other participants in the CBC Partners Program, and (ii) the Borrower or a Subsidiary acquires an equity interest in such firms. "CBCREG Capital Stock" means all outstanding Capital Stock of the -------------------- Borrower and all dividends, securities and any other property distributed in respect of or in exchange for such Capital Stock. "CBCREG Pledge Agreement" means the Restated Stock Pledge Agreement ----------------------- dated as of November 25, 1996 between the Borrower and the Agent, for the benefit of the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Change of Control" shall be deemed to have occurred (a) with respect ----------------- to Holdings, (i) at such time as any person (as defined in Section 13(d)(3) of the Exchange Act ) (other than the Holdings Capital Accumulation Plan) at any time shall directly or indirectly acquire more than twenty-five percent (25%) of the total voting power of all classes of Capital Stock of Holdings (provided, -------- however, that the acquisition of voting stock of Holdings by underwriters in the - ------- Initial Public Offering named in the prospectus relating thereto shall not be deemed to be a Change of Control pursuant to this clause (a)(i)), or (ii) at such time as during any one year period, individuals who at the beginning of such period constitute the Borrower's Board of Directors cease to be a majority of the Board of Directors and (b) with respect to the Borrower, at such time as Holdings ceases to own 100% of the issued and outstanding Capital Stock of the Borrower. "Code" means the Internal Revenue Code of 1986, as amended from time ---- to time, or any successor or superseding tax laws of the United States of America, together with all regulations promulgated thereunder. "Collateral" means the collateral under, and as defined in, each of ---------- the Collateral Documents. "Collateral Documents" means the Security Agreements, the Pledge -------------------- Agreements, the Mortgages and any and all other documents, agreements, assignments, financing statements or instruments executed or delivered from time to time in connection therewith or otherwise to secure the Borrower's or any Guarantor's obligations under this Agreement or other Loan Documents as the same may from time to time be amended, supplemented or otherwise modified. "Commitments" means the Revolving Credit Facility A Commitment and the ----------- Revolving Credit Facility B Commitment. "Consolidated EBITDA" means, for any period, an amount equal to (i) ------------------- Consolidated Net Income for such period, plus (ii) Consolidated Interest Expense ---- for such period, plus (iii) the amount of Taxes, based on or measured by income, ---- deducted in the determination of Consolidated Net Income for such period, Third Amended and Restated Senior Secured Credit Agreement 4 plus (iv) the amount of depreciation and amortization expense deducted in the - ---- determination of Consolidated Net Income for such period, minus (v) ----- extraordinary gains and interest income for such period, all on a consolidated basis for Borrower and its Subsidiaries determined in accordance with GAAP. "Consolidated Interest Expense" means, for any period, total interest ----------------------------- expense of the Borrower and its Subsidiaries on a consolidated basis, determined in accordance with GAAP, including Revolving Credit Facility A Commitment Fees and Revolving Credit Facility B Commitment Fees, and the portion of any Capitalized Lease Obligations allocable to interest expense, but excluding amortization or write-off of debt discount and expense. "Consolidated Net Income" means, for any period, the net earnings (or ----------------------- loss) after taxes of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period, determined in accordance with GAAP, provided that there shall be excluded therefrom (i) the income (or -------- loss) of any Person (other than a Subsidiary of the Borrower) in which any other Person (other than the Borrower and its Subsidiaries) has an equity interest, except to the extent of dividends or other distributions actually paid to the Borrower or its Subsidiaries by such Person during such period, (ii) portions of income properly attributable to minority interests, if any, in the stock and surplus of such Subsidiaries held by anyone other than the Borrower or any of its Subsidiaries, (iii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged with or into the Borrower or any of its Subsidiaries or such Person's assets are acquired by the Borrower or any of its Subsidiaries, and (iv) the undistributed earnings of any Subsidiary of the Borrower (other than Westmark and its Subsidiaries) to the extent that, and so long as, the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of its charter or Contractual Obligations or Applicable Law binding on such Subsidiary. "Consolidated Net Worth" means, at any date, the consolidated ---------------------- stockholders' equity of the Borrower and its Subsidiaries, excluding any amounts attributable to mandatorily redeemable preferred stock. "Consolidated Rental Payments" means, for any period, payments made ---------------------------- with respect to Capitalized Lease Obligations (other than the portion of such payments allocable to interest expense) plus the aggregate of all rents paid ---- during such period under Operating Leases that are not cancelable upon notice of thirty (30) days or less by the lessee thereunder, determined on a consolidated basis for the Borrower and its Subsidiaries in accordance with GAAP. "Consolidated Total Debt" means, at any date, without duplication, all ----------------------- Indebtedness and all Contingent Obligations of the Borrower and its Subsidiaries then outstanding or existing. "Contingent Obligation" means, as to any Person, and without --------------------- duplication, any obligation, direct or indirect, contingent or otherwise, of such Person (i) with respect to any Indebtedness or other obligation or liability of another Person, including without limitation any direct or indirect guarantee of such Indebtedness, obligation or liability, endorsement (other than for collection or deposit in the ordinary course of business) thereof or discount or sale thereof by such Person with recourse to such Person, or any other direct or indirect obligation, by agreement or otherwise, to purchase or repurchase any such Indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge of any such Indebtedness, obligation or liability (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (ii) to provide funds to maintain working capital or equity capital of another Person (other than a Wholly-Owned Subsidiary, to the extent that Investments therein are permitted under Section 6.04(c)) or otherwise to maintain the net worth, solvency or financial condition of the other Person, (iii) to make payment for any products, property, securities or services regardless of non-delivery thereof, if the purpose of any agreement so to do is to provide assurance that any Indebtedness, obligation or liability of another Person (other than a Wholly-Owned Subsidiary, to the extent that Investments therein are permitted under Section 6.04(c)) will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of another Person's Indebtedness, obligation or liability will be protected (in whole or in part) against Third Amended and Restated Senior Secured Credit Agreement 5 loss in respect thereof, or (iv) otherwise to assure or hold harmless the holders of Indebtedness or other obligation or liability or another Person against loss in respect thereof; provided that indemnities given by Borrower or -------- its Subsidiaries to employees or independent contractors in the ordinary course of business and consistent with past practices shall not be considered Contingent Obligations; provided, further that the provisions in the By-laws of -------- ------- the Borrower, its Subsidiaries or Holdings holding harmless and indemnifying their respective officers and directors shall not be considered Contingent Obligations so long as such provisions are not materially different from such provisions in the Borrower's By-laws in effect on the Effective Date; provided, -------- further, that the term "Contingent Obligation" shall not include any obligation - ------- of a Mortgage Banking Subsidiary relating to unfunded mortgage loans or under any indemnity made by a Mortgage Banking Subsidiary in a purchase and sale agreement with respect to any mortgage loan, which guaranty or indemnity is made, and which obligations are incurred, in connection with Mortgage Banking Activities. The amount of any Contingent Obligation shall be an amount equal to the amount of the indebtedness, obligation or liability guaranteed or otherwise supported thereby. "Contractual Obligation" means, as applied to any Person, any ---------------------- provision of any security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement, or other written instrument to which that Person is a party or by which it or any of its owned properties is bound or to which it or any of its owned properties is subject. "Controlled Group" means all domestic and foreign members of a ---------------- controlled group of corporations under Section 1563(a) of the Code (determined without regard to Section 1563(b)(2)(C) of the Code) and all trades or businesses (irrespective of whether incorporated) which are under common control of Borrower or its Subsidiaries. With regard to all Plans and Multiemployer Plans, "Controlled Group" shall also include all ERISA Affiliates. "Customary Permitted Liens" shall mean (i) Liens (other than ------------------------- Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority or claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than any Lien imposed under ERISA) imposed by law and created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP or in respect of which a payment or performance bond has been obtained; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of the Borrower or its Subsidiaries and which do not materially detract from the value of the property to which they attach or materially impair the use thereof to the Borrower or its Subsidiaries; and (v) building restrictions, zoning laws and other statutes, laws, rules, regulations, ordinances and restrictions, and any amendments thereto, now or at any time hereafter adopted by any Governmental Authority having jurisdiction. "Default" means any condition or event which, with the giving of ------- notice or lapse of time or both, would, unless cured or waived, become an Event of Default. "Deferred Amendment Fee" shall have the meaning ascribed to it in the ---------------------- Second Amended and Restated Senior Secured Credit Agreement. Third Amended and Restated Senior Secured Credit Agreement 6 "Deferred Interest" shall have the meaning ascribed to it in the ----------------- Second Amended and Restated Senior Secured Credit Agreement. "Deferred Letter of Credit Fee" shall have the meaning ascribed to it ----------------------------- in the Second Amended and Restated Senior Secured Credit Agreement. "Dollars and '$'" means lawful money of the United States of America. --------------- "Domestic Lending Office" means the office, branch or affiliate of ----------------------- each Lender identified on the signature page hereto as its Domestic Lending Office or such other office, branch or affiliate as such Lender may hereafter designate as its Domestic Lending Office by notice to the Borrower. "Domestic Loans" means Prime Rate Loans. -------------- "Domestic Mortgage Loan" means any portion of the Mortgage Term Loan ---------------------- that bears interest at a rate determined by reference to the Prime Rate. "Domestic Mortgage Term Note" means the promissory note or notes of --------------------------- the Borrower, in substantially the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Domestic Mortgage Loan, and shall include any note issued in exchange or substitution therefor. The Domestic Mortgage Term Note amends and restates the Domestic Mortgage Term Note dated April 18, 1989 in the original principal amount of $18,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Domestic Notes" means, collectively, the Domestic Senior Term Note, -------------- the Domestic Mortgage Term Note, the Domestic Revolving Credit Facility A Note and the Domestic Revolving Credit Facility B Note. "Domestic Revolving Credit Facility A Loan" means any Revolving Credit ----------------------------------------- Facility A Loan, or any portion thereof, that bears interest at a rate determined by reference to the Prime Rate. "Domestic Revolving Credit Facility A Note" means the promissory note ----------------------------------------- or notes of the Borrower, in substantially the form of Exhibit B hereto, evidencing the obligation of the Borrower to repay the Domestic Revolving Facility A Loans, and shall include any Note issued in exchange or substitution therefor. The Domestic Revolving Credit Facility A Note amends and restates the Domestic Revolving Note dated April 18, 1989 in the original principal amount of $20,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Domestic Revolving Credit Facility B Loan" means any Revolving ----------------------------------------- Facility B Loan, or any portion thereof, that bears interest at a rate determined by reference to the Prime Rate. "Domestic Revolving Credit Facility B Note" means the promissory note ----------------------------------------- or notes of the Borrower, in substantially the form of Exhibit C hereto, evidencing the obligation of the Borrower to repay the Domestic Revolving Facility B Loans, and shall include any note issued in exchange or substitution therefor. The Domestic Revolving Credit Facility B Note amends and restates the Domestic Revolving Credit Facility B Note dated October 10, 1991 and amended and restated June 30, 1994 in the original principal amount of $20,000,000. "Domestic Senior Term Loan" means any portion of the Senior Term Loan ------------------------- that bears interest at a rate determined by reference to the Prime Rate. Third Amended and Restated Senior Secured Credit Agreement 7 "Domestic Senior Term Note" means the promissory note of the Borrower, ------------------------- in substantially the form of Exhibit D hereto, evidencing the obligation of the Borrower to repay the Domestic Senior Loans, and shall include any note issued in exchange or substitution therefor. The Domestic Senior Term Note amends and restates the Domestic Senior Term Note dated April 18, 1989 in the original principal amount of $152,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Earn-out Payment Obligations" means, with respect to any Permitted ---------------------------- Acquisition, the Westmark Acquisition and the Melody Acquisition, any and all deferred payment obligations (other than Permitted Seller Indebtedness) of the Borrower or any of its Subsidiaries incurred in connection therewith (including non-competition payments). "Effective Date" means the date on which all conditions precedent set -------------- out in Section 3.01 are satisfied or waived in writing by the Agent. "Environmental Damages" means all claims, judgments, damages, losses, --------------------- penalties, fines, liabilities (including strict liability), costs and expenses of defense of any claim and of any settlement of claims, including without limitation reasonable attorneys' fees and consultants' fees, which are incurred at any time as a result of the existence of Hazardous Material upon, about, or beneath the Real Property or migrating or threatening to migrate to or from the Real Property, or arising in any manner whatsoever out of the violation of Environmental Requirements pertaining to the Real Property and the activities thereon, or the breach of any warranty or covenant or the inaccuracy of any representation of Borrower contained in the Mortgages pertaining to environmental matters, unless and to the extent such Environmental Damages were caused solely by the Lender or its agents or employees, including, without limitation: (i) damages for personal injury, or injury to property or natural resources occurring upon or off of the Real Property, foreseeable or unforeseeable, including, without limitation, lost profits, consequential damages, interest and penalties including but not limited to claims brought by or on behalf of employees of the Borrower; (ii) diminution in the value of the Real Property and damages for the loss of or restriction on the use of or adverse impact on the marketing of rentable or usable space or of any amenity of the Real Property; and (iii) fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs and liabilities (including liabilities to indemnity any Person for costs) incurred in connection with the investigation or remediation of such Hazardous Materials or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remedial, removal, containment, restoration or monitoring work required by any federal, state or local governmental agency or political subdivision, or reasonably necessary to make full economic use of the Real Property or any other property or otherwise expended in connection with such conditions. "Environmental Lien" shall mean a Lien in favor of any Governmental ------------------ Authority for (i) any liability under federal or state environmental laws or regulations or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment. "Environmental Requirements" means all Applicable Laws relating to the -------------------------- protection of human health or the environment, including, without limitation: (i) all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, releases or threatened releases of Hazardous Materials into the air, Third Amended and Restated Senior Secured Credit Agreement 8 surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; and (ii) all requirements pertaining to the protection of the health and safety of employees or the public. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- the same may from time to time be amended or supplemented, including any rules or regulations issued in connection therewith. "ERISA Affiliate" means any trade or business (irrespective of whether --------------- incorporated) which is a member of a group of which the Borrower is a member (determined immediately following the Initial Funding Date and thereafter) treated as a single employer under subsection (b), (c), (m) or (o) of Section 414 of the Code or the regulations promulgated thereunder. "Euro-Dollar Business Day" means any Business Day on which commercial ------------------------ banks are open for international business (including dealings in interbank Dollar deposits) in London, England. "Euro-Dollar Lending Office" means the office, branch or affiliate of -------------------------- each Lender identified on the signature page hereto as its Euro-Dollar Lending Office or such other office, branch or affiliate as such Lender may hereafter designate as its Euro-Dollar Leading Office by notice to the Borrower. "Euro-Dollar Mortgage Term Note" means the promissory note or notes of ------------------------------ the Borrower, in substantially the form of Exhibit E hereto, evidencing the obligation of the Borrower to repay the Euro-Dollar Rate Mortgage Loans, and shall include any note issued in exchange or substitution therefor. The Euro- Dollar Mortgage Term Note amends and restates the Euro-Dollar Rate Mortgage Term Note dated April 18, 1989 in the original principal amount of $18,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Euro-Dollar Notes" means, collectively, the Euro-Dollar Senior Term ----------------- Note, the Euro-Dollar Mortgage Term Note, the Euro-Dollar Revolving Credit Facility A Note and the Euro-Dollar Revolving Credit Facility B Note. "Euro-Dollar Rate" means, with respect to any Interest Period, a rate ---------------- per annum equal to the quotient obtained (rounded upwards, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Reserve Requirement for Euro-Dollar Loans for such period (expressed as a decimal). The Euro-Dollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement for Euro-Dollar Loans. "Euro-Dollar Rate Loans" means Euro-Dollar Rate Senior Loans, Euro- ---------------------- Dollar Rate Mortgage Loans, Euro-Dollar Rate Revolving Credit Facility A Loans and Euro-Dollar Rate Revolving Credit Facility B Loan or any or all of such Loans. "Euro-Dollar Rate Mortgage Loan" means any portion of the Mortgage ------------------------------ Term Loan that bears interest at a rate determined by reference to a Euro-Dollar Rate and as to which a single Interest Period is applicable. "Euro-Dollar Rate Revolving Credit Facility A Loan" means any ------------------------------------------------- Revolving Credit Facility A Loan, or any portion thereof, that bears interest at a rate determined by reference to a Euro-Dollar Rate and as to which a single Interest Period is applicable. Third Amended and Restated Senior Secured Credit Agreement 9 "Euro-Dollar Rate Revolving Credit Facility B Loan" means any ------------------------------------------------- Revolving Credit Facility B Loan, or any portion thereof, that bears interest at a rate determined by reference to a Euro-Dollar Rate and as to which a single Interest Period is applicable. "Euro-Dollar Rate Senior Loan" means any portion of the Senior Term ---------------------------- Loan that bears interest at a rate determined by reference to a Euro-Dollar Rate and as to which a single Interest Period is applicable. "Euro-Dollar Revolving Credit Facility A Note" means the promissory -------------------------------------------- note or notes of the Borrower, in substantially the form of Exhibit F hereto, evidencing the obligation of the Borrower to repay the Euro-Dollar Rate Revolving Credit Facility A Loans, and shall include any note issued in exchange or substitution therefor. The Euro-Dollar Revolving Credit Facility A Note amends and restates the Euro-Dollar Revolving Note dated April 18, 1989 in the original principal amount of $20,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Euro-Dollar Revolving Credit Facility B Note" means the promissory -------------------------------------------- note of the Borrower, in substantially the form of Exhibit G hereto, evidencing the obligation of the Borrower to repay the Euro-Dollar Rate Revolving Credit Facility B Loans, and shall include any Note issued in exchange or substitution therefor. The Euro-Dollar Revolving Credit Facility B Note amends and restates the Euro-Dollar Revolving Credit Facility B Note dated October 10, 1991 in the original principal amount of $20,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Euro-Dollar Senior Term Note" means the promissory note or notes of ---------------------------- the Borrower, in substantially the form of Exhibit H hereto, evidencing the obligation of the Borrower to repay the Euro-Dollar Rate Senior Loans, and shall include any Note issued in exchange or substitution therefor. The Euro-Dollar Senior Term Note amends and restates the Euro-Dollar Senior Term note dated April 18, 1989 in the original principal amount of $152,000,000, as amended and restated June 30, 1994, previously executed by the Borrower. "Event of Default" means any of the events specified in Section 7.01 ---------------- hereof. "Event of Loss" means, with respect to any of the Collateral, the ------------- actual or constructive loss thereof or of the use thereof due to theft, destruction, damage beyond repair or damage to an extent which makes repair uneconomical, or the condemnation, confiscation or seizure thereof, or requisition of title to or to the use thereof by any Governmental Authority or any other Person, whether or not acting under color of governmental authorization, provided that no such event shall constitute an Event of Loss, -------- unless the property which is the subject of such Event of Loss has a replacement value of $250,000 or more. "Excess Proceeds of Issuance of Stock" means net cash proceeds ------------------------------------ received by Holdings, the Borrower or any Subsidiary of the Borrower on account of the issuance and sale of Capital Stock of such corporation, but excluding (x) proceeds of shares of Capital Stock issued to, and of contributions to the capital of the Borrower or any Subsidiary made by, Holdings or the Borrower or any other Subsidiary (to the extent permitted by Section 6.04 of this Agreement), (y) proceeds received by Holdings on account of the Initial Public Offering, and (z) net cash proceeds received by Holdings from stock option, stock purchase and similar plans that are part of an overall compensation program for employees, officers, individuals employed by the Borrower or any Subsidiary that elect "independent contractor" status under Section 3508(a) of the Code, and directors. As used herein, "net" shall mean net of all transaction costs, commissions and underwriters' discount. "Exchange Act" means the Securities Exchange Act of 1934, as amended ------------ from time to time, and any successor statute, and the rules and regulations thereunder. Third Amended and Restated Senior Secured Credit Agreement 10 "Existing Indebtedness" means, with respect to the Borrower and its --------------------- Subsidiaries, the Indebtedness set forth and described on Schedule 6.02 hereto. "Existing Liens" means, with respect to the Borrower and its -------------- Subsidiaries, (i) Liens on computers and related equipment, telecommunications equipment and copy and facsimile equipment leased by the Borrower and its Subsidiaries in the ordinary course of business and (ii) those Liens set forth and described on Schedule 6.01 hereto. "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be -------- determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Lender on such day as such transactions as determined by the Lender. "Federal Reserve Board" means the Board of Governors of the Federal --------------------- Reserve System, or any successor thereto. "Fee Letter" shall have the meaning ascribed to it in Section 2.04(c) ---------- hereof. "Fees" means, collectively, the Senior Term Loan Fees, the Mortgage ---- Term Loan Fees, the Revolving Credit Fees, the Revolving Credit Facility A Extension Fee, the Term Loan Extension Fee, the Deferred Amendment Fee, and the Deferred Letter of Credit Fees. "Fiscal Quarter" means the three month period ending on March 31, June -------------- 30, September 30 or December 31 in any year. "Fiscal Year" means the fiscal year of the Borrower, which shall be ----------- the twelve (12) month period ending on December 31 in each year. "Fixed Charges" means, for any period, the sum of the amounts for such ------------- period, without duplication, of (i) scheduled payments of principal of the Term Loans and other Indebtedness permitted under Section 6.02 hereof to be incurred, (ii) interest expense in respect of the Loans and such other Indebtedness during such period, (iii) Consolidated Rental Payments during such period, (iv) income tax payments paid in cash during such period, (v) Capital Expenditures paid in cash during such period, (vi) dividends paid in cash by the Borrower to Holdings to permit Holdings to pay in cash dividends on Holdings Preferred Stock that are payable in such period and (vii) payments made pursuant to Earn-Out Payment Obligations in such period. "Fixed Charges Coverage Ratio" means, as of the last day of any Fiscal ---------------------------- Quarter of the Borrower, the ratio of (i) the sum of (a) Consolidated EBITDA for the four (4) consecutive Fiscal Quarters ended on such day plus (b) Consolidated ---- Rental Payments for such period, to (ii) Fixed Charges for such period. "Funding Date" means a date on which a Revolving Loan is made pursuant ------------ to Section 2.01 hereof, including the Effective Date. "GAAP" means generally accepted accounting principles as in effect in ---- the United States of America (as such principles may change from time to time); provided that for purposes of Section 6.06 of this - -------- Third Amended and Restated Senior Secured Credit Agreement 11 Agreement, and the terms used therein which are defined "in accordance with GAAP", "GAAP" means generally accepted accounting principles in the United States of America as in effect on the Effective Date. "Governmental Approval" means an authorization, consent, approval, --------------------- permit, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation any governmental authority, court, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof, and any tribunal or arbitrator(s) of competent jurisdiction. "Guaranties" means, collectively, the Holdings Guaranty, the ---------- Subsidiary Guaranty, and the Westmark Guaranty. "Hazardous Materials" means any chemical substance: ------------------- (i) the presence of which requires investigation or remediation under any Applicable Law; or (ii) which is or becomes defined as a "hazardous waste" or "hazardous substance" under any Applicable Law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation and Recovery Act (42 U.S.C. -- --- Section 6901 et seq.); or -- --- (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any Governmental Authority; or (iv) the presence of which on the Real Property causes or threatens to cause a nuisance upon the Real Property or to adjacent properties or poses or threatens to pose a hazard to Real Property or to the health or safety of Persons on or about the Real Property; or (v) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without limitation which contains polychlorinated biphenyls (PCBs) or asbestos. "Holdings" means CB Commercial Real Estate Services Group, Inc. -------- (formerly CB Commercial Holdings, Inc.), a Delaware corporation. "Holdings Capital Accumulation Plan" means the CB Commercial Holdings ---------------------------------- Inc. Capital Accumulation Plan, a plan intended to be qualified under Section 401(a) of the Code, as in effect on the Effective Date. "Holdings Common Stock" means all series or classes of the common --------------------- stock, par value $0.01 per share, of Holdings designated as "Common Stock" in the Certificate of Incorporation of Holdings, and any other class of Capital Stock of Holdings now or hereafter authorized having the right to participate in distributions either of earnings or assets of Holdings upon liquidation, dissolution or winding up of Holdings without limit as to amount or percentage of par value, but has no preferential right to participate in distribution of such earnings or assets. Third Amended and Restated Senior Secured Credit Agreement 12 "Holdings Guaranty" means the Amended and Restated Guaranty dated as ----------------- of November __, 1996, made by Holdings in favor of the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Holdings Pledge Agreement" means the Amended and Restated Stock ------------------------- Pledge Agreement dated as of November 25, 1996, between Holdings and the Agent, for the benefit of the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Holdings Preferred Stock" means all series or classes of Preferred ------------------------ Stock, par value $0.01 per share, of Holdings designated as "Preferred Stock" in, and having the preferences and relative, participating, optional and other special rights and the qualifications, limitations and restrictions of such rights set out in, the Certificate of Incorporation of Holdings, as in effect on the Effective Date. "Holdings Security Agreement" means the Security Agreement dated as of --------------------------- November 25, 1996 made by Holdings, in favor of the Agent, for the benefit of the Lenders, as it may be from time to time amended, supplemented or otherwise modified. "Indebtedness" means, with respect to any Person, the aggregate amount ------------ of, without duplication: (i) all obligations for borrowed money; (ii) all obligations evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations to pay the deferred purchase price of property or services (including without limitation Earn-out Payment Obligations), except trade accounts payable, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case arising in the ordinary course of business; (iv) all Capitalized Lease Obligations; (v) all obligations or liabilities of others secured by a Lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed by such Person; (vi) all obligations of such Person, contingent or otherwise, in respect of any letters of credit or bankers' acceptances, and (vii) all Contingent Obligations. "Indemnitees" has the meaning ascribed to it in Section 9.02 hereof. ----------- "Initial Funding Date" means April 19, 1989. -------------------- "Initial Public Offering" shall have the meaning ascribed to it in ----------------------- Section 3.01 hereof. "Installment Payment Dates" means the last day of March, June, ------------------------- September and December in each year, commencing March 31, 1997. "Intercompany Indebtedness" means any Indebtedness of the Borrower or ------------------------- any Subsidiary of the Borrower which, in the case of the Borrower, is owed to any Wholly-Owned Subsidiary of the Borrower and which, in the case of any Subsidiary, is owed to the Borrower or any other Wholly-Owned Subsidiary of the Borrower. "Intercreditor Agreement" means the Intercreditor Agreement dated as ----------------------- of July 23, 1990, among Holdings, the Borrower, Sumitomo Finance (Dublin) Limited and the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Interest Coverage Ratio" means, as of the last day of any Fiscal ----------------------- Quarter of the Borrower, the ratio of (i) Consolidated EBITDA for the four (4) consecutive Fiscal Quarters ended on such day to (ii) Consolidated Interest Expense for such period. "Interest Payment Date" means (i) in the case of Prime Rate Loans, the --------------------- last day of March, June, September and December in each year, and (ii) in the case of Euro-Dollar Rate Loans, the last day of each Interest Period applicable thereto, provided that in the case of an Interest Period applicable to a Euro- -------- Third Amended and Restated Senior Secured Credit Agreement 13 Dollar Rate Loan that is longer in duration than three (3) months, from the date such Interest Period commenced, then the last day of such third month or, if such date is not a Business Day, the next succeeding Business Day, also shall be an Interest Payment Date. "Interest Period" means, with respect to each Euro-Dollar Loan, the --------------- period commencing on the date specified in the Notice of Borrowing delivered by the Borrower pursuant to Section 2.01(e) hereof, or the Notice of Conversion/Continuation with respect thereto delivered by the Borrower pursuant to Section 2.02(g)(iii) hereof, and ending one (1), two (2), three (3) or six (6) months thereafter, as the Borrower may elect in such Notice of Conversion/Continuation, provided that (a) any such Interest Period that would -------- otherwise end on a day that is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such succeeding Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the Calendar month at the end of such Interest Period) shall end on the last Euro- Dollar Business Day of a calendar month. "Investment" means, as applied to any Person, (i) any direct or ---------- indirect purchase or other acquisition by that Person of (x) any interest in Capital Stock of any other Person, including, without limitation, any record or beneficial interest in stock or securities of, or any partnership interest (whether general or limited) in, any other Person, or (y) all or any substantial portion of the business or assets of any other Person or any business unit of such other Person, (ii) any direct or indirect loan, advance or capital contribution by that Person to any other Person, including all indebtedness and accounts receivable or trade credits from that other Person which are not current assets arising from transactions entered into in a manner that is substantially consistent with past practices or did not arise from sales to that other Person in the ordinary course of business (provided that interim draws paid by the Borrower or its Subsidiaries to its brokers in the ordinary course of business substantially consistent with past practices as an advance against commissions payable or to become payable shall not constitute an Investment), and (iii) any Contingent Obligation undertaken by that Person with respect to Indebtedness of any other Person. "Investment" shall include any expenditure made by the Borrower or any of its Subsidiaries in connection with any Permitted Acquisition, including an expenditure that would be classified as a capital expenditure in accordance with GAAP that is not a "Capital Expenditure" as a result of designation by the Borrower in writing to the Agent at least ten days prior to consummation thereof. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, together with, in the case of a Permitted Acquisition, any related Earn-out Payment Obligations (in an amount equal to the maximum amount thereof, or if there is no prescribed maximum amount, then the greater of (x) the Borrower's reasonable estimate of its future liability with respect thereto (estimated on the basis of reasonable financial projections at the time of consummation of such Permitted Acquisition) and (y) the aggregate amount of payments actually made with respect thereto), but excluding any amounts capitalized in accordance with GAAP to reflect probable severance, office closing and similar payments and expenses. "IPO Net Proceeds" shall mean the cash proceeds received by or for the ---------------- account of Holdings or any of its Subsidiaries attributable to the Initial Public Offering, minus amounts expended in connection with the Initial Public ----- Offering for (a) underwriters' discounts and commissions, (b) prospectus and stock certificate printing and distribution fees, (c) fees and reimbursed expenses of the Borrower's counsel and independent public accountants, (d) fees and reimbursed expenses of the underwriters' counsel relating to compliance with the blue sky laws of the various states, (e) fees and reimbursed expenses of counsel to the Agent, (f) fees payable to the SEC, and minus the Revolving ----- Credit Facility A Extension Fee, the Revolving Credit Facility B Extension Fee and the Term Loan Extension Fee. Third Amended and Restated Senior Secured Credit Agreement 14 "Issuing Bank" shall mean, with respect to a Revolving Credit Facility ------------ A Letter of Credit, The Sumitomo Bank, Limited, and with respect to a Revolving Credit Facility B Letter of Credit, the Revolving Credit Facility B Lender. "Lenders" shall have the meaning ascribed to it in the preamble to ------- this Agreement. "Lending Office" means the Lender's Domestic Lending Office or its -------------- Euro-Dollar Lending Office, as the context may require. "Letter of Credit Amount" means $10,000,000. ----------------------- "Letter of Credit Application" shall have the meaning set forth in ---------------------------- Section 2.01(h)(ii) of this Agreement. "Letter of Credit Fee" shall have the meaning set forth in Section -------------------- 2.01(h)(viii) of this Agreement. "Letter of Credit Liability" means Revolving Credit Facility A Letter -------------------------- of Credit Liability and Revolving Credit Facility B Letter of Credit Liability. "Leverage Ratio" means, at any date of determination thereof, the -------------- ratio of (i) Consolidated Total Debt existing as at such date to (ii) Consolidated EBITDA for the period of four consecutive fiscal quarters ended on the last day of the last quarter ended prior to such date. "Lien" means any lien, mortgage, pledge, security interest, charge, or ---- encumbrance of any kind (including any conditional sale or other title retention agreement or any lease in the nature thereof) and any agreement to give or refrain from giving any lien, mortgage, pledge, security interest, charge, or other encumbrance of any kind. "Loan" means any portion of either of the Term Loans or any Revolving ---- Loan (i) as to which the rate at which interest accrues is determined by reference to the Prime Rate, or (ii) as to which (a) the rate at which interest accrues is determined by reference to a Euro-Dollar Rate and (b) a single Interest Period is applicable thereto. The continuation of a Loan from Interest Period to Interest Period or the conversion of a Loan in whole or in part from one interest rate option to another shall not be deemed to be the making of a Loan. "Loan Documents" means, collectively, this Agreement, the Notes, the -------------- Collateral Documents, the Guaranties, the Intercreditor Agreement, and any supplemental agreement, instrument or other writing executed or delivered by Holdings, the Borrower or any of its Subsidiaries in connection herewith, and all amendments, modifications or supplements, and appendices, exhibits and schedules to, any of the foregoing. "London Interbank Offered Rate" means, with respect to any Interest ----------------------------- Period, the rate per annum (rounded upwards, if any, to the next higher 1/16th of 1%) at which deposits in Dollars are offered to the Agent in the London interbank market in amounts comparable to the Euro-Dollar Loan to which such Interest Period is to apply and for a period equal to such Interest Period, at approximately 11:00 a.m. (London time) two (2) Euro-Dollar Business Days before the first day of such Interest Period. "Mandatory Prepayment" means each prepayment required pursuant to -------------------- Section 2.05(b)(i). "Margin Regulations" means Regulations G, T, U and X of the Board of ------------------ Governors of the Federal Reserve System, as in effect from time to time. Third Amended and Restated Senior Secured Credit Agreement 15 "Margin Stock" means "margin stock" as defined in Regulation U. ------------ "Maturity Date" means December 31, 2001. ------------- "Melody" shall mean L.J. Melody & Company, a Texas corporation and a ------ Wholly-Owned Subsidiary of the Borrower. "Melody Acquisition" shall mean, collectively, (i) the purchase by CB ------------------ Commercial Mortgage Company, Inc., a California corporation that is a wholly- owned Subsidiary of the Borrower ("CB Mortgage"), of (x) all of the issued and outstanding capital stock of Melody pursuant to and in accordance with the terms of the Melody Stock Purchase Agreement and (y) all of the issued and outstanding capital stock of Melody California pursuant to and in accordance with the terms of the Melody California Stock Purchase Agreement, and (ii) consummation of the merger (the "Melody Merger") of CB Mortgage with and into Melody, a wholly-owned Subsidiary of CB Mortgage, pursuant to and in accordance with the terms of the Melody Merger Agreement and the subsequent merger of Melody California with and into Melody. "Melody California" shall mean L.J. Melody & Company of California, a ----------------- Texas corporation and a Wholly-Owned Subsidiary of Melody. "Melody California Stock Purchase Agreement" means the Stock Purchase ------------------------------------------ Agreement dated as of June 27, 1996 among the Borrower, CB Mortgage and the Melody Stockholders party thereto, and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in the Limited Waiver, Consent and Amendment No. 2 dated as of June 30, 1996 (the "Second Amendment") to the Second Amended and Restated Senior Secured Credit Agreement). "Melody Loan Arbitrage Facility" means a credit facility provided to ------------------------------ Melody by any depository bank in which Melody deposits payments made on mortgage loans for which Melody is servicer prior to distribution of such payments to or for the benefit of the holders of such loans, so long as (i) Melody applies all proceeds of loans made under such credit facility to purchase Permitted Investments, and (ii) all Permitted Investments purchased by Melody with the proceeds of loans thereunder (and proceeds thereof and distributions thereon) are pledged to the depository bank providing such credit facility, and such bank has a first priority perfected security interest therein, to secure loans made under such credit facility. "Melody Merger Agreement" means the Agreement and Plan of Merger ----------------------- between CB Mortgage and Melody providing for the merger of CB Mortgage with and into Melody, and the articles or certificate of merger, if any, required to be in the office of the secretary of state, or other public official, in any jurisdiction in order to effect the Melody Merger. "Melody Mortgage Warehousing Facility" means the credit facility ------------------------------------ provided by Residential Funding Corporation ("RFC") or any substantially similar facility, pursuant to which RFC or another lender makes loans to Melody, the proceeds of which loans are applied by Melody to fund commercial mortgage loans originated and owned by Melody subject to an unconditional, irrevocable commitment to purchase such mortgage loans by the Federal Home Loan Mortgage Corporation, so long as loans made by RFC or such other lender to Melody thereunder are secured by a pledge of commercial mortgage loans made by Melody with the proceeds of such loans, and RFC or such other lender has a perfected first priority security interest therein, to secure loans made under such credit facility. "Melody Permitted Indebtedness" shall mean Indebtedness of Melody ----------------------------- under the Melody Loan Arbitrage Facility, the Melody Mortgage Warehousing Facility and the Melody Working Capital Facility, and in respect of the Melody Seller Senior Notes and the Melody Seller Contingent Notes. Third Amended and Restated Senior Secured Credit Agreement 16 "Melody Pledge Agreement" means the Pledge Agreement dated as of ----------------------- November 25, 1996 by and between Melody and the Agent, for the benefit of the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Melody Seller Contingent Notes" means the Contingent Promissory Notes ------------------------------ due July 1, 2001 issued by CB Mortgage to the Melody Stockholders, in substantially the form attached as Exhibit B to the Melody Stock Purchase Agreement, in an aggregate principal amount not in excess, at any time, of $3,000,000 less the aggregate amount of payments of principal thereof required ---- to be made in respect thereof at or prior to such time in accordance with the terms thereof. "Melody Seller Senior Notes" means the Senior Promissory Notes due -------------------------- July 1, 1998 issued by CB Mortgage, to the Melody Stockholders, in substantially the form attached as Exhibit A to the Melody Stock Purchase Agreement, in an aggregate principal amount not in excess, at any time, of $3,000,000 less the ---- aggregate amount of payments of principal required to be made in respect thereof at or prior to such time in accordance with the terms thereof. "Melody Stock Purchase Agreement" means the Stock Purchase Agreement ------------------------------- dated as of June 27, 1996 among the Borrower, CB Mortgage and the Melody Stockholders party thereto, and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in the Second Amendment). "Melody Stockholders" means, together, Lawrence J. Melody and John M. ------------------- Bradley. "Melody Working Capital Facility" means a credit facility provided by ------------------------------- a financial institution to Melody, so long as (i) the proceeds of loans thereunder are applied only to provide working capital to Melody, (ii) loans under such credit facility are unsecured, and (iii) the aggregate principal amount of loans outstanding under such credit facility at no time exceeds $1,000,000. "Mortgage Banking Activities" means the origination by a Mortgage --------------------------- Banking Subsidiary of mortgage loans in respect of commercial and multi-family residential real property, and the sale or assignment of such mortgage loans and the related mortgages to another Person (other than the Borrower or another of its Subsidiaries) within 60 days after the origination thereof; provided, -------- however, that in each case prior to origination of any mortgage loan, the - ------- Borrower or a Mortgage Banking Subsidiary, as the case may be, shall have entered into a legally binding and enforceable purchase and sale agreement with respect to such mortgage loan with a Person that purchases such loans in the ordinary course of its business. "Mortgage Banking Subsidiary" means Melody and its Subsidiaries that --------------------------- are engaged in Mortgage Banking Activities. "Mortgage Term Loan" means the Term Loan outstanding pursuant to ------------------ Section 2.01(b) of this Agreement. "Mortgages" means the California Mortgages and the Other Mortgages. --------- "Multiemployer Plan" means a "multiemployer plan" as defined in ------------------ Section 3(37) and Section 4001(a)(3)(A) of ERISA to which the Borrower or any of its ERISA Affiliates is making or accruing an obligation to make contributions or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" shall mean "a single employer plan," as ---------------------- defined in Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the Borrower or an ERISA Affiliate and at least one Person other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of Third Amended and Restated Senior Secured Credit Agreement 17 which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Net Cash Proceeds" means, with respect to any sale, assignment, ----------------- lease, transfer or other disposition of assets (including, without limitation, an Asset Disposition), the sum of: (i) the cash and cash equivalent proceeds received by or for the account of the Borrower or any of its Subsidiaries attributable to such sale or other disposition; (ii) the amount of cash and cash equivalents received by or for the account of the Borrower or any of its Subsidiaries upon the sale, conversion, collection or other liquidation of any Non-Cash Proceeds attributable to such sale or other disposition; and (iii) the amount of cash and cash equivalents in respect of any run- off of receivables or in respect of dispositions of inventory, in each case retained in connection with a sale or other disposition constituting a sale of all or substantially all of the other assets or a line of business of the Person making the disposition; in each case net of any amount required to be paid to any Person (other than Holdings, the Borrower or any Subsidiary) owning a beneficial interest in the stock or other assets disposed of, any amount applied to the repayment of Indebtedness (other than the Obligations) secured by a Lien permitted under Section 6.01 hereof on the asset disposed of, any transfer taxes paid or payable as a result of such sale or other disposition and professional fees and expenses, broker's commissions and other out-of-pocket costs of sale actually paid to any Person (other than Holdings, the Borrower or any Subsidiary) attributable to such sale or other disposition up to the limit, if any, set forth in a relevant Collateral Document. "Non-Cash Proceeds" means any notes, debt securities, other rights to ----------------- payment, equity securities and any other consideration received from any sale, assignment, lease, transfer or other disposition of assets (including, without limitation, an Asset Disposition), except consideration initially received as Net Cash Proceeds. "Notes" means, collectively, the Domestic Notes and the Euro-Dollar ----- Notes. "Notice of Borrowing" means an irrevocable notice, executed by a ------------------- Responsible Officer of the Borrower, in substantially the form of Exhibit I hereto. "Notice of Conversion/Continuation" means a notice to convert or --------------------------------- continue a Fixed Rate Loan as the same or to another type of Loan given by the Borrower pursuant to Section 2.02(e)(iii) hereof, in substantially the form of Exhibit J hereto. "Obligated Party" shall have the meaning ascribed to it in Section --------------- 2.01(f) hereof. "Obligations" means, collectively, the Senior Secured Obligations and ----------- the Specified Mortgage Loan Obligations. "Operating Lease" means, as applied to any Person, any lease of any --------------- property (whether real, personal, or mixed) which is not a Capitalized Lease other than any such lease under which that Person is the lessor. "Other Mortgages" means all of the deeds of trust, assignments of --------------- leases, environmental indemnities and any and all similar agreements with respect to Real Property (other than California Mortgages) entered between the Borrower or any of its Subsidiaries and the Agent, in form satisfactory to the Third Amended and Restated Senior Secured Credit Agreement 18 Agent, encumbering the interests of the Borrower or such Subsidiary in and to any Real Property, as amended, supplemented or modified from time to time. "Outstanding Loans" shall have the meaning set forth in the recitals ----------------- hereto. "PBGC" means the Pension Benefit Guaranty Corporation as defined in ---- Title IV of ERISA, or any successor thereto. "Permitted Acquisition" means the acquisition by the Borrower or any --------------------- of its Subsidiaries after the Effective Date of assets constituting an entire business or division of any Person that is not already a Subsidiary of the Borrower or any of its Subsidiaries, or the acquisition by Borrower or any of its Subsidiaries of one hundred percent (100%) of the capital stock (except for directors' qualifying shares) of any such Person, including by any merger or consolidation permitted under Section 6.07 hereof, so long as (i) such acquisition and all transactions related thereto are consummated in accordance with Applicable Law; (ii) such acquisition, in the case of a Permitted Acquisition of capital stock, results in such domestic corporation becoming a Wholly-Owned Subsidiary; (iii) the Borrower shall have delivered to the Agent a certificate demonstrating in reasonable detail compliance with Sections 6.01, 6.02, 6.03, 6.04, 6.05 and 6.06 of this Agreement immediately after giving effect to such acquisition and giving pro forma effect thereto as if such --------- acquisition had been consummated, and any Indebtedness incurred in connection therewith had been incurred, on the first day of the period of four consecutive fiscal quarters most recently ended prior to the date on which such acquisition is completed (provided, however, that with respect to any such acquisition -------- ------- consummated by Borrower during the 1997 calendar year, such pro forma compliance --------- with Section 6.06(a) shall be determined after giving effect to the prepayment of the Term Loans from IPO Net Proceeds contemplated by Section 3.01(c)); (iv) no capital stock or other assets acquired in connection with such acquisition shall be subject to any Lien (other than Liens permitted by Section 6.01); and (v) no Default or Event of Default shall have occurred and be continuing on the date such acquisition is completed or shall result therefrom. "Permitted Investments" means (i) marketable direct obligations issued --------------------- by the United States Government and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and having, at the time of acquisition, the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) commercial paper having, at the time of acquisition, the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iv) certificates of deposit, other time deposits, and bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank operating under the laws of the United States of America or any state thereof or the District of Columbia which has combined capital and surplus of not less than $500,000,000, (v) institutional money market funds organized under the laws of the United States of America or any state thereof that invest solely in any of the Investments permitted under clauses (i), (ii), (iii) and (iv) hereof, or (vi) repurchase agreements with respect to Investments permitted under clause (i) or (ii) with counterparties acceptable to the Lender. "Permitted Seller Indebtedness" means Indebtedness of the Borrower, a ----------------------------- Subsidiary of the Borrower, or a Subsidiary of the Borrower acquired in, or formed in connection with, a Permitted Acquisition, owing to the Seller therein and constituting a portion of the aggregate consideration paid with respect to such Permitted Acquisition; provided, that (x) such Indebtedness shall not be --------- guaranteed by any other Subsidiary of the Borrower, and (y) unless (i) such Permitted Acquisition consists of an acquisition of a business or assets directly by the Borrower, or (ii) the acquired Subsidiary (or, in the case of a Permitted Acquisition involving the acquisition of assets, the acquiring Subsidiary) has executed and delivered to the Agent the Subsidiary Guaranty and the Subsidiary Security Agreement, any such Indebtedness shall constitute the obligation only of the Subsidiary of the Borrower acquired or formed in connection with the related Permitted Acquisition, and shall not be guaranteed by the Borrower. Third Amended and Restated Senior Secured Credit Agreement 19 "Permitted Liens" means, collectively, the Customary Permitted Liens --------------- and the Existing Liens. "Permitted Tax Payment" means, for any taxable year of the Borrower in --------------------- which it joins in filing a consolidated federal income tax return with Holdings, a payment by the Borrower to Holdings in an amount not in excess of the lesser of (i) the separate return federal income tax liability (if any) of the affiliated group (within the meaning of Section 1504 of the Code) of which the Borrower would be the parent (the "Borrower Group") if it were not a member of --------------- another affiliated group for that or any other taxable year, and (ii) the portion of the actual tax liability (if any) of the affiliated group of which the Borrower is actually a member (the "Holdings Group") for such year allocable to the Borrower Group under the rules set forth in Section 1552(a)(1) of the Code and the Department of the Treasury regulations promulgated thereunder; provided that such payment can be made by the Borrower no earlier than the date - -------- on which the Holdings Group is required to make federal income tax payments for such year to the Internal Revenue Service, and provided, further, that for -------- ------- purposes of clause (ii) above actual tax liability of the Holdings Group shall be computed without regard to any income, gain, loss, deduction or credit generated by a corporation other than Holdings, the Borrower or a Subsidiary of the Borrower. In the event that Holdings and any member of the Borrower Group join in filing any combined or consolidated (or similar) state or local income or franchise tax returns, then "Permitted Tax Payment" shall include payments with respect to such state or local income or franchise taxes determined in a manner as similar as possible to that provided in the preceding sentence for federal income taxes. "Person" means an individual, a corporation, a partnership, a trust, ------ an unincorporated organization or any other entity or organization, including a government or any agency or political subdivision thereof and, for the purpose of the definition of "ERISA Affiliate," a trade or business. "Plan" means any pension, retirement, disability, defined benefit, ---- defined contribution, profit sharing, deferred compensation, employee stock ownership, employee stock purchase, or other employee benefit plan or arrangement, other than a Multiemployer Plan, irrespective of whether any of the foregoing is funded, including without limitation any employee benefit plan as defined in Section 3(3) of ERISA which was (within six (6) years prior to the date of this Agreement), is or will be sponsored or maintained by Borrower or its ERISA Affiliates, in which any personnel of the Borrower or its ERISA Affiliates participates or from which any such personnel may derive a benefit. "Pledge Agreements" means the Holdings Pledge Agreement, the CBCREG ----------------- Pledge Agreement and the Melody Pledge Agreement. "Post-Default Rate" means, at any time, a rate per annum equal to the ----------------- rate of interest otherwise in effect at such time pursuant to the terms hereof, plus two percent (2%); provided that as to any amount not paid when due (whether of principal, interest, Fees, expenses or otherwise) the Post-Default Rate shall be the Prime Rate plus two percent (2%) per annum. "Prime Rate" means, as of any date, a rate per annum equal to the ---------- greater of (i) the Federal Funds Rate as in effect at such time plus 0.5% or (ii) the per annum rate of interest most recently announced by the Lender publicly as its prime rate for domestic commercial loans. The prime rate is not necessarily the lowest rate of interest charged by the Lender in connection with extensions of credit. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate (or any component thereof) shall take effect at the time of such change in the Prime Rate. "Prime Rate Loan" means a Loan that bears interest by reference to the --------------- Prime Rate. "Pro Forma Fixed Charges Coverage Ratio" means, with respect to any -------------------------------------- Indebtedness proposed to be incurred in connection with a Permitted Acquisition, the ratio of (i) the sum of (a) Consolidated Third Amended and Restated Senior Secured Credit Agreement 20 EBITDA for the four (4) consecutive Fiscal Quarters ended on the last day of the last quarter ended prior to the date on which such Indebtedness is proposed to be incurred plus (b) Consolidated Rental Payments for such period, to (ii) Fixed Charges for such period determined giving pro forma effect to the incurrence of such Indebtedness (and the incurrence of all other Indebtedness incurred, and the repayment of all Indebtedness repaid (to the extent that no commitment exists to permit re-incurrence of such Indebtedness) after the first day of such four-quarter period) as though it had been incurred on the first day of such four-quarter period. "Prohibited Transaction" means a transaction which is prohibited under ---------------------- Section 4975 of the Code or Section 406 of ERISA and not exempt under Section 4975 of the Code or Section 408 of ERISA. "Pro Rata Share" means (i) with respect to the Revolving Credit -------------- Facility A Commitment, and with respect to any Lender, a number equal to the percentage of such Lender's portion of the Revolving Credit Facility A Commitment (as set forth on Schedule 1.01A hereto); and (ii) with respect to the Term Loans, and with respect to any Lender, a number equal to the percentage of such Lender's portion of the Term Loans (as set forth on Schedule 1.01B hereto). "Real Property" means each of those parcels (or portions thereof) of ------------- real property, improvements and fixtures thereon and appurtenances thereto now or hereafter owned or leased by the Borrower or any of its Subsidiaries. "Regulation D" means Regulation D of the Board of Governors of the ------------ Federal Reserve System and any successor regulation, in each case as in effect from time to time. "Regulation U" means Regulation U of the Board of Governors of the ------------ Federal Reserve System or any successor regulation, in each case as in effect from time to time. "Regulatory Change" means (i) the adoption after the date hereof of ----------------- any new, or any change in any existing, treaty or Federal, state, local or foreign law, rule, regulation (including but not limited to Regulation D) or guideline (whether or not having the force of law), (ii) the adoption or making after the date hereof of, or compliance by any Lender with, any interpretation, directive, request, order or decree (whether or not having the force of law) applicable to any Lender by any court or Governmental Authority or central bank or other monetary authority, or compliance after the date hereof by the Leader with any such law, rule, regulation, guideline, interpretation, directive, request, order or decree (whether adopted, made or issued before or after the date hereof), or (iii) any change in the administration or enforcement of or under any such law, rule, regulation or guideline by any court or Governmental Authority or central bank or other monetary authority charged with the interpretation or administration thereof. "Reportable Event" means any of the events set forth in Section ---------------- 4043(b) of ERISA or the regulations thereunder, except any such event as to which the provision for thirty (30) days' notice to the PBGC is waived under applicable regulations. "Reporting Subsidiary" means any Subsidiary that has, on any date of -------------------- determination, total assets in excess of $25,000 or total liabilities in excess of $50,000, as determined in accordance with GAAP. "Required Lenders" means (i) Lenders holding Pro Rata Shares equal to ---------------- or greater than 50% of the aggregate unpaid principal amount of the Term Loans, (ii) Lenders having Pro Rata Shares equal to or greater than 50% of the aggregate amount of the Revolving Credit Facility A Commitment, and (iii) the Revolving Credit Facility B Lender. "Reserve Requirement" means, with respect to any Euro-Dollar Loan for ------------------- any Interest Period, the maximum rate for which reserves (including any marginal, supplemental, special or emergency reserve) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Third Amended and Restated Senior Secured Credit Agreement 21 Reserve System in New York City with deposits comparable in amount to those of the Lender against "Euro-Currency Liabilities," as that term is used in Regulation D (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of the Lender to United States residents). "Responsible Officer" means the Chairman of the Board of Directors, ------------------- the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, the Secretary, the Treasurer or any Vice President in charge of a principal business unit or division. "Restricted Payment" means (i) any dividend or other distribution, ------------------ direct or indirect, on account of any shares of CBCREG Capital Stock now or hereafter outstanding, except a dividend payable solely in shares of a class of CBCREG Capital Stock to the holders of that class of CBCREG Capital Stock, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of CBCREG Capital Stock now or hereafter outstanding or (iii) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of CBCREG Capital Stock or any class of Capital Stock of its Subsidiaries now or hereafter outstanding (other than the issuance to the extent permitted by this Agreement of shares of the relevant CBCREG Capital Stock or of Capital Stock of any Subsidiary upon the exercise of any warrants, options or rights to acquire such stock). "Revolving Credit Commitments" means, collectively, the Revolving ---------------------------- Credit Facility A Commitment and the Revolving Credit Facility B Commitment. "Revolving Credit Facility A Commitment" means the Lender's -------------------------------------- commitment, in accordance with the terms of this Agreement, to make Revolving Credit Facility A Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000 or such lesser amount to which such commitment may be reduced pursuant to this Agreement. "Revolving Credit Facility A Commitment Fee" has the meaning ascribed ------------------------------------------ to it in Section 2.04(a) hereof. "Revolving Credit Facility A Extension Fee" shall have the meaning ----------------------------------------- ascribed to it in Section 2.04(e) hereof. "Revolving Credit Facility A Letter of Credit" means a Letter of -------------------------------------------- Credit issued upon satisfaction of the conditions set forth in Section 2.01(h)(iii)(B) hereof. "Revolving Credit Facility A Letter of Credit Liability" means all ------------------------------------------------------ liabilities of the Borrower to the Lenders in respect of Revolving Credit Facility A Letters of Credit, whether or not such liability is contingent, and shall consist of the sum of (i) the amount available to be drawn or which may become available to be drawn under any and all outstanding Revolving Credit Facility A Letters of Credit (regardless whether any conditions precedent to such drawing have been satisfied), and (ii) all amounts which have been paid by the Lenders thereunder, if and to the extent that the Lenders have not received reimbursement therefor. "Revolving Credit Facility A Loan" has the meaning ascribed to it in -------------------------------- Section 2.01(c) hereof and shall include Outstanding Loans of that type. "Revolving Credit Facility A Termination Date" has the meaning -------------------------------------------- ascribed to it in Section 2.05(a)(ii) hereof. Third Amended and Restated Senior Secured Credit Agreement 22 "Revolving Credit Facility B Borrowing Date" means each Business Day ------------------------------------------ on and after the Effective Date and prior to the Revolving Credit Facility B Termination Date. "Revolving Credit Facility B Commitment" means the Lender's -------------------------------------- commitment, in accordance with the terms of this Agreement, to make Revolving Credit Facility B Loans in an aggregate principal amount at any time outstanding not to exceed $10,000,000 or such lesser amount to which such commitment may be reduced pursuant to this Agreement. "Revolving Credit Facility B Commitment Fee" has the meaning ascribed ------------------------------------------ to in Section 2.04(b) hereof. "Revolving Credit Facility B Extension Fee" shall have the meaning ----------------------------------------- ascribed to it in Section 2.04(e) hereof. "Revolving Credit Facility B Lender" means The Sumitomo Bank, Limited ---------------------------------- and its successors and assigns in such capacity. "Revolving Credit Facility B Letter of Credit" means a Letter of -------------------------------------------- Credit issued upon satisfaction of the conditions set forth in Section 2.01(h)(iii)(C) hereof. "Revolving Credit Facility B Letter of Credit Liability" shall mean ------------------------------------------------------ all liabilities of the Borrower to the Revolving Credit Facility B Lender in respect of Revolving Credit Facility B Letters of Credit, whether or not such liability is contingent, and shall consist of the sum of (i) the amount available to be drawn or which may become available to be drawn under any and all outstanding Revolving Credit Facility B Letters of Credit (regardless whether any conditions precedent to such drawing have been satisfied), and (ii) all amounts which have been paid by the Revolving Credit Facility B Lender thereunder, if and to the extent that the Revolving Credit Facility B Lender has not received reimbursement therefor. "Revolving Credit Facility B Loan" has the meaning ascribed to it in -------------------------------- Section 2.01(d) hereof. "Revolving Credit Facility B Maturity Date" has the meaning ascribed ----------------------------------------- to it in Section 2.05(a)(iii) hereof. "Revolving Credit Facility B Termination Date" has the meaning -------------------------------------------- ascribed to it in Section 2.05(a)(iii) hereof. "Revolving Credit Fees" means, collectively, the Revolving Credit --------------------- Facility A Commitment Fee and the Revolving Credit Facility B Commitment Fee. "Revolving Loan" means, individually, each Revolving Credit Facility A -------------- Loan and Revolving Credit Facility B Loan. "Revolving Loans" means, --------------- collectively, all Revolving Credit Facility A Loans and Revolving Credit Facility B Loans. "Sale-Leaseback Transaction" means any arrangement with any Person -------------------------- providing for the leasing by the Borrower or any Subsidiary of any real or personal property that, or of any property similar to and used for substantially the same purposes as any other property that, has been or is to be sold or otherwise transferred by the Borrower or any of the Subsidiaries to such Person with the intention of entering into such a lease, other than transactions with respect to computer and related equipment entered into in the ordinary course of business. "SEC" means the United States Securities and Exchange Commission, and --- any successor thereto. Third Amended and Restated Senior Secured Credit Agreement 23 "Second Amended and Restated Senior Secured Credit Agreement" means ----------------------------------------------------------- the Second Amended and Restated Senior Secured Credit Agreement dated as of June 30, 1994 between Borrower and Lender, as amended by Amendment No. 1 thereto dated as of June 30, 1995 and Amendment No. 2 thereto dated as of June 30, 1996. "Securities Act" means the Securities Act of 1933, as amended from -------------- time to time, and any successor statute. "Security Agreements" means the Amended and Restated Security ------------------- Agreement, the Subsidiary Security Agreement and the Holdings Security Agreement. "Senior Loan Debt Service Coverage Ratio" means, at any date of --------------------------------------- determination thereof, the ratio of (i) Consolidated EBITDA less all ---- contributions thereto of Subsidiaries except to the extent actually received as dividends by the Borrower, for the period of four consecutive fiscal quarters ended on the last day of the last quarter ended prior to such date, to (ii) scheduled principal payments under the Term Loan Installment Payment Schedule and projected interest expense (at the interest rate in effect at the date of determination) on the Loans, for the period of four consecutive fiscal quarters beginning on the last day of the last quarter ended prior to such date. "Senior Secured Obligations" means all present and future obligations -------------------------- and liabilities of the Borrower of every type and description arising under or in connection with this Agreement (other than liability for payment of principal of or interest on the Mortgage Term Loan and the Mortgage Term Loan Fees) or any other Loan Document (other than the Domestic Mortgage Term Note and the Euro- Dollar Mortgage Term Note and the California Mortgages), due or to become due to the Lenders or any Person entitled to indemnification pursuant to Section 9.02 hereof, or any of their respective successors, transferees or assigns, and shall include, without limitation, (i) all liability of the Borrower for payment of principal of and interest on the Senior Term Loan and the Revolving Loans and under the Domestic Senior Term Note, the Euro-Dollar Senior Term Note, the Domestic Revolving Credit Facility A Note, the Euro-Dollar Revolving Credit Facility A Note, the Domestic Revolving Credit Facility B Note and the Euro- Dollar Revolving Credit Facility B Note, (ii) all liability of the Borrower hereunder or under the Loan Documents (other than the Domestic Mortgage Term Note and the Euro-Dollar Mortgage Term Note and the California Mortgages) for any fees, expense reimbursements and indemnifications, and (iii) any and all other debts, obligations and liabilities of the Borrower to the Lenders heretofore, now or hereafter incurred or created (and all renewals, extensions, modifications and rearrangements thereof), under, in connection with, in respect of, or evidenced or created by this Agreement (other than liability for payment of principal of or interest on the Mortgage Term Loan and the Mortgage Term Loan Fees) or any or all of the other Loan Documents (other than the Domestic Mortgage Term Note and the Euro-Dollar Mortgage Term Note and the California Mortgages), whether voluntary or involuntary, however arising, and whether due or not due, absolute or contingent, secured or unsecured, liquidated or unliquidated, determined or undetermined, direct or indirect, and whether the Borrower may be liable individually or jointly with others, provided, however, -------- ------- that the term "Senior Secured Obligations" shall not in any event include any of the Specified Mortgage Loan Obligations. "Senior Term Loan" means the Term Loan made pursuant to Section ---------------- 2.01(a) hereof. "Single Employer Plan" means a Plan which is not a Multiemployer Plan. -------------------- "Solvent" means, with respect to any Person, that: ------- (i) the total present fair salable value of such Person's assets on a going concern basis is in excess of the total amount of such Person's liabilities; (ii) such Person is able to pay its debts as they become due; and Third Amended and Restated Senior Secured Credit Agreement 24 (iii) such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person is about to engage. "Specified Mortgage Loan Obligations" means (i) all liability of the ----------------------------------- Borrower for payment of principal of and interest on the Mortgage Term Loan and under the Domestic Mortgage Term Note and the Euro-Dollar Mortgage Term Note, (ii) all liability of the Borrower for payment of the Mortgage Term Loan Fees payable hereunder, and (iii) all present and future obligations and liabilities of the Borrower of every type and description arising under or in connection with any of the California Mortgages, including without limitation all liability of the Borrower for any fees, expense reimbursements and indemnifications due or to become due under Sections 1.04, 1.05, 1.07(a), 1.08(e), 1.11, 1.12, 1.17, 1.22, 1.25 and 6.07 of the California Mortgages or are otherwise payable thereunder, in each case whether now or hereafter incurred or created (and all renewals, extensions, modifications and rearrangements thereof, whether voluntary or involuntary, however arising, and whether due or not due, absolute or contingent, secured or unsecured, liquidated or unliquidated, determined or undetermined, direct or indirect and whether the Company may be liable individually or jointly with others. "Stated Amount" means, with respect to a Letter of Credit, the maximum ------------- amount available to be drawn thereunder, without regard to whether any conditions to drawing could be met. "Subordinated Debt" means Indebtedness outstanding under the Senior ----------------- Subordinated Credit Agreement and any refinancing thereof permitted by Section 6.10 hereof, and any additional Indebtedness hereafter incurred by the Borrower that is subordinated in right of payment to the Obligations on terms that are satisfactory to the Agent. "Subsidiary" means any corporation or other entity (i) of which more ---------- than fifty percent (50%) of the total voting power of the shares of capital stock or other securities or other ownership interests entitled to vote in the election of the Board of Directors or other persons performing similar functions are at any time directly or indirectly owned by the Borrower or (ii) of which more than fifty percent (50%) of the outstanding shares of stock of any class (or of any other class of ownership interests), is owned, beneficially or of record, directly or indirectly, by the Borrower or any of its Subsidiaries; provided, however, that the term "Subsidiary" shall not include any of the - ----------------- Persons set forth on Schedule 1.01(C). "Subsidiary Guaranty" means the Amended and Restated Joint and Several ------------------- General Continuing Guaranty dated as of November 25, 1996 made by certain Subsidiaries of the Borrower, including the Westmark Guarantors (the "Subsidiary Guarantors") in favor of the Agent, for the benefit of the Lenders, as it may be from time to time amended, supplemented or otherwise modified. "Subsidiary Security Agreement" means the Amended and Restated ----------------------------- Subsidiary Security Agreement dated as of November 25, 1996 made by certain of the Subsidiary Guarantors in favor of the Agent, for the benefit of the Lenders, as it may be from time to time amended, supplemented or otherwise modified. "Taxes" means any income, stamp and other taxes, charges, fees, ----- levies, duties, imposts, withholdings or other assessments, together with any interest and penalties, additions to tax and additional amounts imposed by any federal, state, local or foreign taxing authority upon any Person, including without limitation those assessed, levied or collected on or in respect of a Loan solely as a result of the interest rate being determined by reference to the Euro-Dollar Rate or the provisions of this Agreement relating to the Euro- Dollar Rate, but excluding income taxes imposed on the Lender or its Euro-Dollar Lending Office by the jurisdiction under the laws of which the Lender is organized or the jurisdiction in which the Lender's Euro-Dollar Lending Office is located. "Term Loan Extension Fee" shall have the meaning ascribed to it in ----------------------- Section 2.04(e) hereof. Third Amended and Restated Senior Secured Credit Agreement 25 "Term Loan Installment Payment Schedule" shall have the meaning set -------------------------------------- forth in Section 2.05(a). "Term Loans" means, collectively, the Senior Term Loan and the ---------- Mortgage Term Loan made pursuant to Section 2.01 hereof. "Termination Event" means: (a) a Reportable Event or an event ----------------- described in Section 4068(f) of ERISA; (b) the withdrawal of Borrower or any of its ERISA Affiliates from a Multiple Employer Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or the cessation of operations at a facility in the circumstances described in Section 4068(f) of ERISA; (c) the filing of a notice of intent to terminate a Plan (including any such notice with respect to a Plan amendment referred to in Section 4041(e) of ERISA) or the termination of a Plan excluding, for purposes of this clause (c), any standard termination under Section 4041(b) of ERISA; (d) the institution of proceedings to terminate a Plan by the PBGC; (e) the appointment of a trustee to administer any Plan; or (f) any other event or condition which might reasonably constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Trademarks" means trademarks, servicemarks and trade names, all ---------- registrations and applications to register such trademarks, servicemarks and trade names and all renewals thereof, and the goodwill of the business associated with or relating to such trademarks, servicemarks and trade names, including without limitation any and all licenses and rights granted to use any trademark, servicemark or trade name owned by any other person. "Voting Stock" shall mean Capital Stock, the holders of which are ------------ entitled to vote on matters generally submitted for a vote of the stockholders of a corporation. "Westmark" shall mean, collectively, WREAP and Westmark Realty -------- Advisors L.L.C., a Delaware limited liability company and a Wholly-Owned Subsidiary of WREAP. "Westmark Acquisition Agreement" shall mean the Purchase Agreement ------------------------------ dated as of May 15, 1995 among Westmark Acquisition Partnership, the Borrower, and Vincent F. Martin, Jr., Stanton H. Zarrow, Bruce L. Ludwig, Sol L. Rabin, Roger C. Schultz and certain other individuals (together, the "Westmark Sellers"), and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in the Limited Waiver, Consent and Amendment No. 1 hereto dated as of June 30, 1995 (the "First Amendment")). "Westmark Acquisition" shall mean the transactions contemplated by the -------------------- Westmark Acquisition Documents. "Westmark Acquisition Documents" means, collectively, the Agreement of ------------------------------ Limited Partnership of WREAP, dated as of May 15, 1995, the Westmark Acquisition Agreement, the Realty Advisors Management Agreement, and each agreement ancillary thereto, in each case together with all schedules and exhibits thereto. "Westmark Guaranty" shall mean the Continuing Guaranty dated as of ----------------- November 25, 1996, made by Westmark Real Estate Acquisition Partnership, L.P., a Delaware partnership, in favor of the Lenders, as it may from time to time be amended, supplemented or otherwise modified. "Westmark Guarantors" shall mean the entities set forth on Schedule ------------------- 1.01D. "Westmark Sellers" has the meaning ascribed to it in the definition of ---------------- Westmark Acquisition. Third Amended and Restated Senior Secured Credit Agreement 26 "Wholly Owned Subsidiary" means any Subsidiary all the shares of ----------------------- Capital Stock or other ownership interests of which (except for directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. "WREAP" means Westmark Real Estate Acquisition Partnership, L.P., a ----- Delaware partnership, of which the Borrower and one or more Subsidiaries of the Borrower are the only partners. SECTION 1.02 CONSTRUCTION. Unless the context of this Agreement ------------ clearly requires otherwise, references herein to the plural include the singular, the singular includes the plural, the part includes the whole, and the word "including" is not limiting. References in this Agreement to any "determination" by the Lender include good faith estimates by the Lender, as applicable (in the case of quantitative determinations), and good faith beliefs by the Lender, as applicable (in the case of qualitative determinations). The words "hereof," "herein," '"hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Article, section, subsection, exhibit and schedule references are to this Agreement unless otherwise specified. SECTION 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the audited consolidated financial statements of the Borrower and its consolidated Subsidiaries referred to in Section 4.04. SECTION 1.04 EXHIBITS. All of the exhibits and schedules attached to -------- this Agreement shall be deemed incorporated herein by reference. SECTION 1.05 OTHER DEFINITIONS. Terms otherwise defined in the ----------------- description of the parties, the Recitals, within another definition in Section 1.01 hereof and in any other provisions of this Agreement or any of the other Loan Documents not defined or referenced in Section 1.01 hereof shall have their respective defined meanings when used herein or therein. Third Amended and Restated Senior Secured Credit Agreement 27 ARTICLE II AMOUNTS AND TERMS OF THE LOANS ------------------------------ SECTION 2.01 FACILITIES ---------- (a) Senior Term Loan Commitment. The Lender made a term loan (the --------------------------- "Senior Term Loan") to the Borrower in a single borrowing on the Initial Funding Date, in the principal amount of $152,000,000, of which $106,565,623.20 in principal is outstanding on the date hereof, and not more than $37,414,724.63 shall be outstanding on the Effective Date. (b) Mortgage Term Loan Commitment. The Lender made a term loan (the ----------------------------- "Mortgage Term Loan") to the Borrower in a single borrowing on the Initial Funding Date, in the principal amount of $18,000,000, all of which is outstanding on the date hereof. (c) Revolving Credit Facility A Commitment. -------------------------------------- (i) Each Lender agrees, upon the terms and subject to the conditions set forth in this Agreement, to make to the Borrower, from time to time until the Business Day next preceding the Revolving Credit Facility A Termination Date, revolving loans (each individually, a "Revolving Credit Facility A Loan" and collectively, the "Revolving Credit Facility A Loans"), in an amount which shall not exceed, in the aggregate at any time outstanding, such Lender's Pro Rata Share of the then Revolving Credit Facility A Commitment less such Lender's ---- Pro Rata Share of the amount of Revolving Credit Facility A Letter of Credit Liability then existing. (ii) Revolving Credit Facility A Loans may be voluntarily prepaid pursuant to Section 2.05(c)(ii) and, subject to the provisions of this Agreement, any amounts so prepaid, or prepaid pursuant to Section 2.05(b) if the Revolving Credit Facility A Commitment is not reduced as a result thereof pursuant hereto, may be re-borrowed, up to the amount available under this Section 2.01(c) at the time of such re-borrowing. (d) Revolving Credit Facility B Commitment. -------------------------------------- (i) The Revolving Credit Facility B Lender agrees, upon the terms and subject to the conditions set forth in this Agreement, to make to the Borrower, on each Revolving Credit Facility B Borrowing Date occurring from time to time on and after the date hereof until the Business Day next preceding the Revolving Credit Facility B Termination Date, revolving loans (each individually, a "Revolving Credit Facility B Loan" and collectively, the "Revolving Credit Facility B Loans"), in an amount which shall not exceed, in the aggregate at any time outstanding, the then Revolving Credit Facility B Commitment less the ---- amount of Revolving Credit Facility B Letter of Credit Liability then existing. (ii) Revolving Credit Facility B Loans may be voluntarily prepaid pursuant to Section 2.05(c) and, subject to the provisions of this Agreement, any amounts so prepaid, or prepaid pursuant to Section 2.05(a) or Section 2.05(b) if the Revolving Credit Facility B Commitment is not reduced as a result thereof pursuant hereto, may be re-borrowed, up to the amount available under this Section 2.01(d) at the time of such re-borrowing. (e) Notice of Borrowing ------------------- (i) When the Borrower desires to borrow Revolving Credit Facility A Loans, it shall deliver to the Agent a Notice of Borrowing no later than 10:00 a.m. (Los Angeles time) (A) at least two Third Amended and Restated Senior Secured Credit Agreement 28 (2) Business Days in advance of the proposed Funding Date, in the case of a borrowing of Prime Rate Loans, and (B) at least three (3) Euro-Dollar Business Days in advance of the proposed Funding Date, in the case of a borrowing of Euro-Dollar Rate Loans. (ii) When the Borrower desires to borrow Revolving Credit Facility B Loans, it shall deliver to the Agent a Notice of Borrowing no later than 10:00 a.m. (Los Angeles time) (A) on the Revolving Credit Facility B Borrowing Date, in the case of a borrowing of Prime Rate Loans, and (B) at least three (3) Euro- Dollar Business Days in advance of the proposed Revolving Credit Facility Borrowing Date, in the case of a borrowing of Euro-Dollar Rate Loans. (iii) A Notice of Borrowing delivered pursuant to Section 2.01(e)(i) or (ii) shall specify (A) whether the proposed Revolving Loan is a Revolving Credit Facility A Loan or a Revolving Credit Facility B Loan, (B) the Funding Date (which shall be a Business Day and, in the case of a borrowing of Euro- Dollar Rate Loans, a Euro-Dollar Business Day) in respect of the Revolving Loan, (C) the amount of the proposed borrowing (which shall not in any event be less than Five Hundred Thousand Dollars ($500,000), (D) whether the proposed borrowing will be of Prime Rate Loans or Euro-Dollar Rate Loans, (E) in the case of Euro-Dollar Rate Loans, the requested Interest Period; and (F) in the case of a proposed borrowing of Revolving Credit Facility B Loans, whether the proposed borrowing shall constitute an Acquisition Advance. (iv) The Borrower shall notify the Agent in writing of the names of its officers and employees authorized to request Revolving Loans on behalf of the Borrower and shall provide the Agent with a specimen signature of each such officer or employee. The Agent shall be entitled to rely conclusively on such officer's or employee's authority to request a Revolving Loan on behalf of the Borrower until the Agent receives written notice to the contrary. The Agent shall not have any duty to verify the authenticity of the signature appearing on any Notice of Borrowing. (v) Any Notice of Borrowing delivered pursuant to this Section 2.01(e) shall be irrevocable. (f) Funding of Revolving Loans. -------------------------- (i) Upon receipt of a Notice of Borrowing delivered pursuant to Section 2.01(e) that proposes a Revolving Loan that is a Revolving Credit Facility A Loan, the Agent shall promptly notify each Lender with a Pro Rata Share of the Revolving Credit Facility A Commitment of the contents thereof and of such Lender's Pro Rata Share of such borrowing. Upon receipt of a Notice of Borrowing delivered pursuant to Section 2.01(e) that proposes a Revolving Loan that is a Revolving Credit Facility B Loan, the Agent shall promptly notify the Revolving Credit Facility B Lender of the contents thereof. (ii) If a Notice of Borrowing delivered pursuant to Section 2.01(e) proposes a Revolving Loan that is a Revolving Credit Facility A Loan, then not later than 12:00 noon (Los Angeles time) on the Funding Date specified in such Notice of Borrowing delivered pursuant to Section 2.01(e), each Lender shall make available its Pro Rata Share of such borrowing, in immediately available funds, to the Agent. If a Notice of Borrowing delivered pursuant to Section 2.01(e) proposes a Revolving Loan that is a Revolving Credit Facility B Loan, then not later than 12:00 noon (Los Angeles time) on the Funding Date specified in such Notice of Borrowing delivered pursuant to Section 2.01(e), the Revolving Credit Facility B Lender shall make available the aggregate principal amount of such borrowing, in immediately available funds, to the Agent. (iii) If a Notice of Borrowing delivered pursuant to Section 2.01(e) proposes a Revolving Loan that is a Revolving Credit Facility A Loan, then not later than 2:00 p.m. (Los Angeles time) on the Funding Date specified in such Notice of Borrowing delivered pursuant to Third Amended and Restated Senior Secured Credit Agreement 29 Section 2.01(e), and subject to and upon fulfillment of the applicable conditions set forth in Article III hereof, the Agent shall make the aggregate principal amount of such borrowing available to the Borrower in Dollars in immediately available funds. If a Notice of Borrowing delivered pursuant to Section 2.01(e) proposes a Revolving Loan that is a Revolving Credit Facility B Loan, then not later than 2:00 p.m. (Los Angeles time) on the Funding Date specified in such Notice of Borrowing delivered pursuant to Section 2.01(e), and subject to and upon fulfillment of the applicable conditions set forth in Article III hereof, the Agent shall make the aggregate principal amount of such borrowing available to the Borrower in Dollars in immediately available funds. (iv) Unless (a) the Agent shall have been notified by a Lender prior to the date upon which a Loan is to be made or (b) the Agent shall have been notified by the Borrower prior to the date on which the Borrower is required to make any payment hereunder that such Lender or the Borrower, as the case may be (the "Obligated Party"), does not intend to make available to the Agent the Obligated Party's portion of such Loan or such payment, the Agent may assume that the Obligated Party will make such amount available to the Agent on such date and the Agent may, in reliance upon such assumption (but shall not be required to), make available to the Borrower (in the case of a Loan) or the Lenders (in the case of a payment by the Borrower) a corresponding amount. If such corresponding amount is not in fact made available to the Agent by the Obligated Party, the Agent shall be entitled to recover such amount on demand from the Obligated Party (or, in the case of a Loan, if the Lender that is the Obligated Party fails to pay such amount forthwith upon such demand, from the Borrower). Such amount shall be payable together with interest thereon from the day on which such corresponding amount was made available by the Agent to the Lender or the Borrower, as applicable, to the date of payment by the Obligated Party (or the Borrower, as applicable), at a rate of interest equal to (i) in the case of any payment by any other Lender, the Federal Funds Rate, and (ii) in the case of any payment by the Borrower, the interest rate applicable to the Loan. (g) Use of Proceeds of Revolving Loans. ---------------------------------- (i) The proceeds of Revolving Credit Facility A Loans may be used for general corporate purposes of the Borrower; provided, that the proceeds of any -------- Revolving Credit Facility A Loan made on the date of a drawing under a Revolving Credit Facility A Letter of Credit and referred to in Section 2.01(h)(v)(B) hereof shall be applied to satisfy the reimbursement obligation of the Borrower to the Issuing Bank in respect of such drawing. (ii) The proceeds of Revolving Credit Facility B Loans may be used for general corporate purposes of the Borrower, including without limitation Permitted Acquisitions; provided, that the proceeds of any Revolving Credit -------- Facility B Loans made on the date of a drawing under a Revolving Credit Facility B Letter of Credit and referred to in Section 2.01(h)(v)(B) hereof shall be applied to satisfy the reimbursement obligation of the Borrower to the Revolving Credit Facility B Lender in respect of such drawing. (iii) No part of the proceeds of Revolving Loans shall be used directly or indirectly for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock or maintaining or extending credit to others for such purpose or for any other purpose which otherwise violates the Margin Regulations. (h) Letters of Credit. ----------------- (i) Issuance. Letters of Credit outstanding on the Effective Date -------- under the Second Amended and Restated Senior Secured Credit Agreement shall be deemed to have been issued under this Agreement. Subject to the provisions of this Section 2.01(h) and Sections 3.02 and 3.03 hereof, the Borrower may request that the Issuing Bank issue for the account of the Borrower one or more Letters of Third Amended and Restated Senior Secured Credit Agreement 30 Credit as provided herein with expiry dates not later than 365 days from the date of issuance and in any event, in the case of a Revolving Credit Facility A Letter of Credit, not later than thirty (30) days prior to the Revolving Credit Facility A Termination Date and in the case of a Revolving Credit Facility B Letter of Credit, not later than thirty (30) days prior to the Revolving Credit Facility B Maturity Date. (ii) Procedure. The Borrower shall have delivered to the Issuing Bank --------- and the Agent at least five (5) Business Days prior to the date on which the Letter of Credit is requested to be issued a letter of credit application and a letter of credit reimbursement agreement (collectively, a "Letter of Credit Application") and such other documents and materials as may be required pursuant to the terms thereof, and each of such documents shall be in form and substance satisfactory to the Issuing Bank and the Agent. In the event of a conflict between the terms of any Letter of Credit Application and this Agreement, the terms of this Agreement shall govern. Upon receipt by the Agent of a Letter of Credit Application, the Agent shall promptly notify each Lender of the consents thereof and such Lender's Pro Rata Share of such Letter of Credit. (iii) Additional Conditions Precedent to Issuance of Letters of --------------------------------------------------------- Credit. - ------ (A) In addition to the issuance of any Letter of Credit being subject to the satisfaction of the conditions precedent set forth in Sections 3.02 and 3.03 hereof, the Issuing Bank shall not be obligated to issue any Letter of Credit hereunder if, as of the date of issuance of the proposed Letter of Credit, any order, judgment or decree of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain the Issuing Bank from issuing the Letter of Credit or any law, rule or regulation applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit or request that the Issuing Bank refrain from the issuance of letters of credit generally or such Letter of Credit or shall impose upon the Issuing Bank with respect to that Letter of Credit any restriction or reserve requirement not in effect on the date of this Agreement or any unreimbursed cost or expense which was not applicable, in effect or known to the Issuing Bank on or as of the date of this Agreement and which the Issuing Bank in good faith deems materially adverse to it in respect of circumstances known to it as of the date of this Agreement; (B) In addition to the conditions precedent set forth in Section 2.01(h)(iii)(A) above and the conditions precedent set forth in Section 3.02 hereof, the Issuing Bank shall not be obligated to issue any Revolving Credit Facility A Letter of Credit hereunder if the maximum amount available for drawing under the proposed Revolving Credit Facility A Letter of Credit, when added to the aggregate existing Letter of Credit Liability, would exceed the lesser of (i) the Letter of Credit Amount, or (ii) the then effective Revolving Credit Facility A Commitment less the aggregate ---- amount of Revolving Credit Facility A Loans then outstanding and Revolving Credit Facility A Loans, if any, requested to be made simultaneously with the issuance of such proposed Revolving Credit Facility A Letter of Credit; (C) In addition to the conditions precedent set forth in Section 2.01(h)(iii)(A) above and the conditions precedent set forth in Sections 3.02 and 3.03 hereof, the Issuing Bank shall not be obligated to issue any Revolving Credit Facility B Letter of Credit if the maximum amount available for drawing under the proposed Revolving Credit Facility B Letter of Credit, when added to the aggregate existing Revolving Credit Facility B Letter of Credit Liability, would exceed the Revolving Credit Facility B Commitment less the aggregate amount of Revolving Credit Facility B Loans ---- then outstanding and Revolving Credit Facility B Loans, if any, requested to be made simultaneously with the issuance of such proposed Revolving Credit Facility B Letter of Credit. (D) The requirements of this Section 2.01(h) and the provisions of Sections 3.02 and 3.03 shall also apply to any extension, renewal or increase of a Letter of Credit. Third Amended and Restated Senior Secured Credit Agreement 31 (iv) Participations in Revolving Credit Facility A Letters of Credit. --------------------------------------------------------------- (A) Immediately upon the issuance of a Revolving Credit Facility A Letter of Credit, each Lender with a Revolving Credit Facility A Commitment shall be deemed to have irrevocably purchased from the relevant Issuing Bank a participation in such Letter of Credit and any drawing thereunder in an amount equal to such Lender's Pro Rata Share of the Stated Amount of such Letter of Credit. (B) If the Issuing Bank shall not be reimbursed for any drawing under any Revolving Credit Facility A Letter of Credit issued by it as provided in Section 2.01(h)(v), the Issuing Bank shall promptly notify the Agent, and the Agent shall promptly notify each Lender of the unreimbursed amount of such drawing and of such Lender's respective participation therein. Each Lender shall make available to the Issuing Bank an amount equal to its respective participation in immediately available funds, at the office of such Issuing Bank specified in such notice, not later than the Business Day after the date on which the Agent gives such notice. Each Lender's obligations under this Section 2.01(h)(iv)(B): (a) shall not be subject to any set-off, counterclaim or defense to payment that the Lender may have against the Borrower or against the Issuing Bank and (b) shall be absolute, unconditional and irrevocable, and as a primary obligor, not as a surety, notwithstanding any circumstance or event whatsoever, including (i) the occurrence of an Event of Default or Default, (ii) the failure of any other Lender to fund its participation as required hereby, (iii) the financial condition of the Borrower or any Lender or any set-off, counterclaim or defense to payment that the Borrower may have, or (iv) the termination or cancellation of the Revolving Credit Facility A Commitment. If any Lender fails to make available to the Issuing Bank the amount of such Lender's participation in the Letter of Credit as provided in this Section 2.01(h)(iv)(B), such amount shall bear interest at the Federal Funds Rate from the day on which the Agent's notice referred to above is given until paid. The Issuing Bank shall pay to the Agent, and the Agent shall distribute to each Lender that has paid all amounts payable by it under this Section (iv)(B), such Lender's Pro Rata Share of all payments received by the Issuing Bank from the Borrower in reimbursement of drawings honored by the Issuing Bank under a Letter of Credit, as and when such payments are received. (v) Reimbursement Obligations. Notwithstanding any provisions to the ------------------------- contrary in any Letter of Credit Application: (A) Any reimbursement obligation owing with respect to a drawing under any Letter of Credit shall be due and payable on the date of such drawing. In the case of a Revolving Credit Facility A Letter of Credit, such reimbursement obligation shall be first paid with the proceeds of a Revolving Credit Facility A Loan which the Borrower shall be deemed to have requested pursuant to Section 2.01(e) hereof, which Revolving Credit Facility A Loan shall be made on the date of such drawing without regard to satisfaction of conditions precedent to the making of Revolving Loans set out in Section 3.02 hereof. In the case of a Revolving Credit Facility B Letter of Credit, such reimbursement obligation shall be paid with the proceeds of a Revolving Credit Facility B Loan which the Borrower shall be deemed to have requested pursuant to Section 2.01(e) hereof, which Revolving Credit Facility B Loan shall be made on the date of such drawing without regard to the satisfaction of conditions precedent to the making of Revolving Loans set out in Sections 3.02 and 3.03 hereof; (B) All Letter of Credit Liability shall constitute part of the Senior Secured Obligations and shall be secured by the Collateral securing the Senior Secured Obligations. All payments and proceeds of such Collateral at any time available for application to the payment of the Obligations may be applied, at the sole discretion of the Agent, to pay any past due Revolving Credit Facility B Letter of Credit Liability, to fund any deposit to secure any Revolving Credit Facility B Letter of Credit Liability, to pay any Revolving Credit Facility B Loans, to pay any past due Third Amended and Restated Senior Secured Credit Agreement 32 Revolving Credit Facility A Letter of Credit Liability or to fund any deposit to secure any Revolving Credit Facility A Letter of Credit Liability. (vi) Indemnification; Nature of Issuing Bank's Duties. The Borrower ------------------------------------------------ hereby agrees to protect, indemnify and save any Issuing Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Issuing Bank may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit, other than as a result of the willful misconduct or gross negligence of the Issuing Bank, as determined by a court of competent jurisdiction, or (B) the failure of the Issuing Bank to honor a drawing under such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority having jurisdiction over the Issuing Bank. As between the Borrower and the Issuing Bank, the Borrower assumes all risks of the acts and omissions of, or misuse of such Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of any of the Letter of Credit Applications, the Issuing Bank shall not be responsible: (I) For the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted to the Issuing Bank by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (II) For the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (III) For failure of the beneficiary of a Letter of Credit to comply fully with conditions required by the Letter of Credit in order to draw upon such Letter of Credit; (IV) For errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; (V) For errors in interpretation of technical terms; (VI) For any loss or delay in the transmission of any document required in order to make a drawing under any Letter of Credit or of the Proceeds thereof; (VII) For the misapplication by the beneficiary of a Letter of Credit of the Proceeds of any drawing under such Letter of Credit; or (VIII) For any consequences arising from causes beyond the control of the Issuing Bank. None of the above shall affect, impair, or prevent the vesting of any of the Issuing Bank's rights or powers hereunder, or limit the liability of the Issuing Bank in the event of willful misconduct by or gross negligence of the Issuing Bank or its officers, directors, employees or agents. The indemnity described in this Section 2.01(h)(vi) shall be subject to the procedures set out in Section 9.02(b) hereof. (vii) Increased Capital. If either (A) the introduction of or any ----------------- change in the interpretation of any law or regulation or (B) compliance by the Issuing Bank or any Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by the Issuing Bank or any corporation controlling the Issuing Bank, or any Lender or any corporation controlling any such Third Amended and Restated Senior Secured Credit Agreement 33 Lender, and the Issuing Bank or the Lender reasonably determines that the amount of such capital is increased by or based upon the existence of such Letter of Credit (or participation therein) then, upon demand by the Issuing Bank or the Lender, the Borrower shall pay to the Issuing Bank or the Lender, as the case may be, from time to time such additional amounts as may be specified by the Issuing Bank or the Lender as sufficient to compensate it in light of such circumstances, to the extent that the Issuing Bank or the Lender, as the case may be, reasonably determines such increase in capital to be allocable to the issuance or maintenance of any Letter of Credit. A certificate as to such amounts submitted to the Borrower by the Issuing Bank or the Lender shall, in the absence of manifest error, be conclusive and binding for all purposes. (viii) Letter of Credit Fees. The Borrower shall pay in advance on --------------------- the date of issuance of any Letter of Credit and annually in advance thereafter for so long as such Letter of Credit is outstanding, a fee (a "Letter of Credit Fee") of two and one-half percent (2.50%) per annum, computed by applying the annual rate, on the basis of the actual number of days elapsed in a 360-day year, to the maximum amount available under such Letter of Credit as of the date the fee is payable, for the number of days in the succeeding year or (if fewer days) until the expiry date of the Letter of Credit. Such Letter of Credit Fee shall be paid (A) to the Agent, for the account of the Lenders, in the case of any Revolving Credit Facility A Letter of Credit, in accordance with their respective Pro Rata Shares, and (B) to the Agent, for the account of the Revolving Credit Facility B Lender, in the case of any Revolving Credit Facility B Letter of Credit. A Letter of Credit Fee shall also be payable, on the same basis, for any extension, increase or renewal of a Letter of Credit. A certificate as to such amounts submitted to the Borrower by the Agent shall, in the absence of manifest error, be conclusive and binding for all purposes. SECTION 2.02 INTEREST. Each Term Loan and Revolving Loan shall bear, -------- and the Borrower agrees to pay, interest on the outstanding principal amount thereof at the applicable rates and at the times set forth below: (a) Prime Rate Loans. Each Term Loan and Revolving Loan, or a portion ---------------- of any thereof, shall, for so long as it shall be a Prime Rate Loan, bear, and the Borrower agrees to pay, interest on the outstanding principal amount thereof until due (whether at maturity, by reason of prepayment or acceleration or otherwise), or converted into a Loan of another type, at a rate per annum equal to the Prime Rate as in effect from time to time plus the Applicable Margin. ---- (b) Euro-Dollar Rate Loans. Each Term Loan and Revolving Loan, or a ---------------------- portion of any thereof, shall, for so long as it shall be a Euro-Dollar Rate Loan, bear, and the Borrower agrees to pay, interest on the outstanding principal amount thereof until due (whether at maturity, by reason of prepayment or acceleration or otherwise), or converted into a Loan of another type, at a rate per annum equal to the Euro-Dollar Rate for each Interest Period applicable thereto plus the Applicable Margin. ---- (c) Post-Default Rate. Notwithstanding Section 2.02(a) and (c) ----------------- hereof, (i) if at any time an Event of Default shall occur, and for as long thereafter as such Event of Default shall be continuing, without further notice or demand, the outstanding principal amount of the Term Loans and Revolving Loans (and overdue interest thereon, if any, to the extent permitted by Applicable Law) and (ii) any amount due and payable hereunder or under any other Loan Document not paid when due, shall bear interest at a rate per annum equal to the applicable Post-Default Rate. (d) Payment. Interest shall be payable in arrears on each Interest ------- Payment Date. Interest also shall be payable, in respect of any Loan, when such Loan becomes due (whether at maturity, by reason of prepayment or acceleration or otherwise) or is converted, but only to the extent then accrued on the amount then so due or converted. Interest accrued at the Post-Default Rate shall be payable on demand. (e) Conversion or Continuation. -------------------------- Third Amended and Restated Senior Secured Credit Agreement 34 (i) Subject to the provisions of this Section 2.02(e) and Section 2.07 hereof, the Borrower shall have the option (A) to convert all or any part of its outstanding Prime Rate Loans to Euro-Dollar Rate Loans at any time, (B) to convert all or any part of its outstanding Euro-Dollar Rate Loans to a Prime Rate Loan upon the expiration of the Interest Period applicable thereto, or (C) to continue all or any part of any Euro-Dollar Rate Loan as a Loan of the same type upon the expiration of the Interest Period applicable thereto, provided -------- that, in the case of clause (A) or (C), there does not exist a Default or an Event of Default at such time. (ii) Each Euro-Dollar Rate Loan constituting all or a portion of either of the Term Loans shall be in an amount equal to at least $1,000,000 and integral multiples of $1,000,000 in excess thereof, and each Euro-Dollar Rate Loan constituting all or a portion of the Revolving Loans shall be in an amount equal to $500,000 or an integral multiple thereof. The Senior Term Loan shall not at any time be divided into more than one (1) Prime Rate Loan and three (3) Euro-Dollar Rate Loans; the Mortgage Term Loan shall not at any time be divided into more than one (1) Prime Rate Loan and one (1) Euro-Dollar Rate Loan; the Revolving Credit Facility A Loans shall not at any time be divided into more than one (1) Prime Rate Loan and four (4) Euro-Dollar Rate Loans; and the Revolving Credit Facility B Loans shall not at any time be divided into more than one (1) Prime Rate Loan and one (1) Euro-Dollar Rate Loan. (iii) If the Borrower elects or is required to convert or continue a Loan under this Section 2.02(e), it shall deliver a Notice of Conversion/Continuation to the Agent not later than 10:00 a.m. (Los Angeles time) (A) at least three (3) Euro-Dollar Business Days in advance of the proposed conversion or continuation date, if the Borrower proposes or is required to convert into, or to continue, a Euro-Dollar Rate Loan, and (B) otherwise not later than 10:00 a.m. (Los Angeles time) on the Business Day next preceding the proposed conversion or continuation. A Notice of Conversion/Continuation shall specify, if applicable, (I) the proposed conversion or continuation date (which shall be a Business Day and, if the Borrower proposes to convert into, or continue, a Euro-Dollar Rate Loan, a Euro- Dollar Business Day), (II) the amount and type of the Loan to be converted or continued, (III) the nature of the proposed conversion or continuation, and (IV) in the case of a conversion to, or continuation of, a Euro-Dollar Rate Loan, the Interest Period to be applicable to such Euro-Dollar Rate Loan. If a Notice of Continuation of any Euro-Dollar Rate Loan is not made in accordance with this Section 2.02(e) with respect to any Euro-Dollar Rate Loan, then, subject to Section 2.02(e)(iv), such Euro-Dollar Rate Loan shall, without any action on the part of the Borrower, be converted into a Prime Rate Loan with a one (1) month Interest Period. (iv) Notwithstanding anything in this Agreement to the contrary, if a Default or an Event of Default shall have occurred and is then continuing, upon the expiration of the Interest Period applicable to Euro-Dollar Rate Loan, such Euro-Dollar Rate Loan shall then be converted into a Prime Rate Loan, provided -------- that each Euro-Dollar Rate Loan shall be converted into a Prime Rate Loan immediately upon the Term Loan (or either of them) and/or the Revolving Loans becoming due and payable pursuant to Section 7.02(a) hereof or being declared to be due and payable pursuant to Section 7.02(b) hereof. (v) Any Notice of Conversion/Continuation for conversion into, or continuation of, a Euro-Dollar Rate Loan shall be irrevocable and the Borrower shall be bound to convert or continue in accordance therewith. (vi) The Borrower may not select, with respect to any Loans constituting all or a portion of the Senior Term Loan, any Interest Period that ends after any Installment Payment Date for the Senior Term Loans unless, after giving effect to such selection, the aggregate principal amount of Prime Rate Loans and of Euro-Dollar Rate Loans constituting all or a portion of the Senior Term Loans having Interest Periods which end prior to such Installment Payment Date shall be greater than or equal to the amount of principal that is due and payable on such Installment Payment Date. The Borrower may not select, with respect to any Revolving Loans, any Interest Period that ends after the Revolving Credit Facility A Termination Date, in the case of Revolving Credit Facility A Loans, or the Revolving Credit Facility B Third Amended and Restated Senior Secured Credit Agreement 35 Maturity Date, in the case of Revolving Credit Facility B Loans. The Borrower may not select an Interest Period for any Loan that terminates later than the Maturity Date. (f) Computations. Interest on each Loan shall accrue from day to day ------------ from and including the date of the making of such Loan to and excluding the due date or the date of any repayment thereof. Interest on each Loan shall be computed on the basis of a 360-day year and paid for the actual number of days elapsed. Any change in the interest rate on any Loan resulting from a change in the rate applicable thereto in accordance with the terms hereof shall become effective as of the opening of business on the day on which such change in the applicable rate shall become effective. Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error. (g) Maximum Lawful Rate of Interest. The rate of interest payable on ------------------------------- any Loan shall in no event exceed the maximum rate permissible under Applicable Law. If the rate of interest payable on any Loan is ever reduced as a result of this subsection and at any time thereafter the maximum rate permitted by Applicable Law shall exceed the rate of interest provided for in this Agreement, then the rate provided for in this Agreement shall be increased to the maximum rate provided by Applicable Law for such period as is required so that the total amount of interest received by each Lender is that which would have been received by such Lender but for the operation of the first sentence of this subsection. SECTION 2.03 NOTES. ----- (a) Senior Term Loan Notes. The portion of the Senior Term Loan owing ---------------------- to each Lender that constitutes a Domestic Loan or Domestic Loans shall be evidenced by a single Domestic Senior Term Note of the Borrower made payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of such Lender's Senior Term Loan or (ii) the aggregate unpaid principal amount of such Lender's Senior Term Loan that from time to time constitutes a Domestic Loan, with interest thereon as prescribed by Section 2.02 hereof. The portion of the Senior Term Loan owing to each Lender that constitutes a Euro-Dollar Loan or Euro-Dollar Loans shall be evidenced by a single Euro-Dollar Senior Term Note of the Borrower made payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of such Lender's Senior Term Loan or (ii) the aggregate unpaid principal amount of all such Euro-Dollar Loans outstanding, with interest thereon as prescribed by Section 2.02 hereof. Each Senior Term Loan Note shall be dated the date of this Agreement and stated to mature in accordance with the Senior Term Loan Installment Payment Schedule. (b) Mortgage Term Loan Notes. The portion of the Mortgage Term Loan ------------------------ owing to each Lender that constitutes a Domestic Loan or Domestic Loans shall be evidenced by a single Domestic Mortgage Term Note of the Borrower made payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of such Lender's Mortgage Term Loan or (ii) the aggregate unpaid principal amount of such Lender's Mortgage Term Loan that from time to time constitutes a Domestic Loan, with interest thereon as prescribed by Section 2.02. The portion of the Mortgage Term Loan owing to each Lender that constitutes a Euro-Dollar Loan or Euro-Dollar Loans shall be evidenced by a single Euro-Dollar Mortgage Term Note of the Borrower made payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of such Lender's Mortgage Term or (ii) the aggregate unpaid principal amount of all such Euro-Dollar Loans outstanding, with interest thereon as prescribed by Section 2.02 hereof. Each Mortgage Term Loan Note shall be dated the date of this Agreement and stated to mature on the Maturity Date. (c) Revolving Credit Facility A Loan Notes. The portion of the -------------------------------------- Revolving Credit Facility A Loans owing to each Lender that constitutes a Domestic Loan or Domestic Loans shall be evidenced by a single Domestic Revolving Credit Facility A Note of the Borrower payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of the such Lender's Pro Third Amended and Restated Senior Secured Credit Agreement 36 Rata Share of the Revolving Credit Facility A Commitment or (ii) the aggregate unpaid principal amount of such Lender's Revolving Credit Facility A Loans, with interest thereon as prescribed by Section 2.02 hereof. The portion of the Revolving Credit Facility A Loans that constitutes a Euro-Dollar Loan or Euro- Dollar Loan owing to each Lender shall be evidenced by a single Euro-Dollar Revolving Credit Facility A Note of the Borrower payable to the order of such Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of the Revolving Credit Facility A Commitment or (ii) the aggregate unpaid principal amount of all such Euro-Dollar Revolving Credit Facility A Loans outstanding, with interest thereon as prescribed by Section 2.02 hereof. Each Revolving Credit Facility A Note shall be dated the date of this Agreement and stated to mature on the Maturity Date. (d) Revolving Credit Facility B Loan Notes. The portion of the -------------------------------------- Revolving Credit Facility B Loans that constitutes a Domestic Loan shall be evidenced by a single Domestic Revolving Credit Facility B Note of the Borrower made payable to the order of the Revolving Credit Facility B Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of the Revolving Credit Facility B Commitment or (ii) the aggregate unpaid principal amount of all such Revolving Credit Facility B Loans, with interest thereon as prescribed by Section 2.02 hereof. The portion of the Revolving Credit Facility B Loans that constitutes a Euro-Dollar Loan or Euro-Dollar Loans shall be evidenced by a single Euro-Dollar Revolving Credit Facility B Note of the Borrower made payable to the order of the Revolving Credit Facility B Lender and representing the obligation of the Borrower to pay the lesser of (i) the amount of the Revolving Credit Facility B Commitment or (ii) the aggregate unpaid principal amount of all such Euro-Dollar Revolving Credit Facility B Loans outstanding, with interest thereon as prescribed by Section 2.02 hereof. Each Revolving Credit Facility B Note shall be dated the date of this Agreement and stated to mature on the Revolving Credit Facility B Maturity Date. (f) Substitution of Notes; Notation of Amounts and Maturities. Each --------------------------------------------------------- Lender is hereby irrevocably authorized to record on each Note the date, type and amount of each Loan outstanding hereunder, the Interest Period and interest rate applicable thereto in the case of Loans bearing interest at a Fixed Rate, and the date and amount of each borrowing, in the case only of the Domestic Revolving Note and the Euro-Dollar Revolving Note, and each payment or prepayment of principal thereof on the schedules forming a part thereof and to attach to and make a part of any Note a continuation of any such schedule as and when required. The failure to record, or any error in recording, any such Loan or repayment on such schedule (or continuation thereof) or similar records shall not, however, affect the obligations of the Borrower hereunder or under any Note to repay the principal amount of the Loans together with all interest accrued thereon. All such notations shall constitute conclusive evidence of the accuracy of the information so recorded, in the absence of manifest error. SECTION 2.04 FEES. ---- (a) Revolving Credit Facility A Commitment Fees. The Borrower shall ------------------------------------------- pay to the Agent, for the account of the Lenders in accordance with their respective Pro Rata Shares of the Revolving Credit Facility A Commitment, a commitment fee (a "Revolving Credit Facility A Commitment Fee") accruing at the rate of one-half of one percent (0.50%) per annum from and after the date of this Agreement until the Revolving Credit Facility A Termination Date, upon the excess from time to time, if any, of the Lender's Revolving Credit Facility A Commitment over the sum of (i) the aggregate principal amount of Revolving Credit Facility A Loans outstanding and (ii) the existing Revolving Credit Facility A Letter of Credit Liability. The Revolving Credit Facility A Commitment Fee shall be payable quarterly in arrears on the first Business Day of the immediately succeeding calendar quarter. All Revolving Credit Facility A Commitment Fees shall be calculated on the basis of the actual number of days elapsed in a 360-day year. The Borrower shall pay to the Agent, for the account of the Lenders in accordance with their respective Pro Rata Shares of the Revolving Credit Facility A Commitment, the amount of any accrued but unpaid Revolving Credit Facility A Commitment fee under the Second Amended and Restated Senior Secured Credit Agreement in full on the Effective Date. Third Amended and Restated Senior Secured Credit Agreement 37 (b) Revolving Credit Facility B Commitment Fees. The Borrower shall ------------------------------------------- pay to the Agent, for the account of the Revolving Credit Facility B Lender, a commitment fee (a "Revolving Credit Facility B Commitment Fee") accruing at the rate of one-half of one percent (0.50%) per annum from and after the date of this Agreement until the Revolving Credit Facility B Termination Date, upon the excess from time to time, if any, of the Lender's Revolving Credit Facility B Commitment over the sum of (i) the aggregate principal amount of Revolving Credit Facility B Loans outstanding and (ii) the existing Revolving Credit Facility B Letter of Credit Liability. The Revolving Credit Facility B Commitment Fee that accrues in any calendar quarter from and after the date of this Agreement shall be payable quarterly in arrears on the first Business Day of the immediately succeeding calendar quarter. All Revolving Credit Facility B Commitment Fees shall be calculated on the basis of the actual number of days elapsed in a 360-day year. The Borrower shall pay to the Agent, for the account of the Revolving Credit Facility B Lender, the amount of any accrued but unpaid Revolving Credit Facility B Commitment fee under the Second Amended and Restated Senior Secured Credit Agreement in full on the Effective Date. (c) Agent Fee. On or before the Effective Date, the Borrower shall --------- pay to the Agent, for its own account, the agent's fee set forth in that certain letter agreement dated November __, 1996 between Borrower and the Agent (the "Fee Letter"). In addition, the Borrower shall pay to the Agent an annual Agent's fee in accordance with, and in an amount set out in, the Fee Letter. (d) Accrued Fees. On or before the Effective Date, the Borrower shall ------------ pay to the Agent, for the account of the Lenders, all accrued and unpaid Revolving Credit Facility A Commitment Fees under the Second Amended and Restated Senior Secured Credit Agreement and all accrued and unpaid Letter of Credit Fees relating to any Revolving Credit Facility A Letter of Credit under the Second Amended and Restated Senior Secured Credit Agreement. On or before the Effective Date, the Borrower shall pay to the Agent, for the Account of the Revolving Credit Facility B Lender, all accrued and unpaid Revolving Credit Facility B Commitment Fees under the Second Amended and Restated Senior Secured Credit Agreement and all accrued and unpaid Letter of Credit Fees relating to any Revolving Credit Facility B Letter of Credit under the Second Amended and Restated Senior Secured Credit Agreement. (e) Extension Fees. On or before the Effective Date, the Borrower --------------- shall pay an extension fee in the amount of $100,000 (the "Revolving Credit Facility A Extension Fee") to the Agent, for the account of the Lenders, ratably in accordance with each such Lender's Pro Rata Share of the Revolving Credit Facility A Commitment. On or before the Effective Date, the Borrower shall pay an extension fee in the amount of $100,000 (the "Revolving Credit Facility B Extension Fee") to the Agent for the account of the Revolving Credit Facility B Lender. On or before the Effective Date, the Borrower shall pay an extension fee in the total amount of $315,000 (the "Term Loan Extension Fee") to the Agent, for the account of the Lenders, ratably in accordance with each such Lender's Pro Rata Share of the Term Loans. (f) Deferred Amendment Fee. On or before the Effective Date, the ---------------------- Borrower shall pay to the Agent, for the account of the Lenders, the Deferred Amendment Fee. (g) Deferred Letter of Credit Fee. On the Maturity Date, the Borrower ----------------------------- shall pay to the Agent, for the account of the Lenders, ratably in accordance with their respective Pro Rata Shares of the Revolving Credit Facility A Commitment, the Deferred Letter of Credit Fee. SECTION 2.05 PAYMENTS AND PREPAYMENTS. ------------------------ (a) Repayment; Termination of Revolving Credit Commitments. ------------------------------------------------------ (i) (A) The Borrower shall repay to the Agent, for the account of the Lenders, ratably in accordance with their respective Pro Rata Shares of the outstanding Term Loans, the Term Loans in installments each equal to $2,625,000, commencing on March 31, 1997 and continuing on each Installment Third Amended and Restated Senior Secured Credit Agreement 38 Payment Date thereafter to and including September 30, 2001, and the remaining principal amount thereof on the Maturity Date (such schedule of mandatory installment payments of the Term Loans being referred to herein as the "Term Loan Installment Payment Schedule"). Each such payment shall be applied first to the Senior Term Loans until the Senior Term Loans are paid in full, and then to the Mortgage Term Loans. Each Term Loan shall be paid in full on or prior to the Maturity Date. The principal amount of the Term Loans prepaid or repaid by the Borrower may not be re-borrowed. The Borrower shall, at all times during the period that any of the Term Loans remain outstanding, maintain Prime Rate Loans or Euro-Dollar Rate Loans with Interest Periods expiring on or before the next scheduled Installment Payment Date in an aggregate amount at least equal to the next scheduled principal repayment thereof. (B) The Borrower shall prepay to the Agent, for the account of the Revolving Credit Facility B Lender, each Revolving Credit Facility B Loan that constitutes an Acquisition Advance in installments each equal to 5% of the original principal amount of such Acquisition Advance, commencing on the second Installment Payment Date to occur after the Funding Date of such Acquisition Advance and continuing on each Installment Payment Date thereafter to and including September 30, 1999, and the remaining principal amount thereof on the Revolving Credit Facility B Termination Date. Any amount prepaid pursuant to this Section 2.05(a)(i)(B) can, subject to the conditions and upon the terms hereof, be re-borrowed at any time up to and including the Business Day next preceding the Revolving Credit Facility B Termination Date. (ii) The Revolving Credit Facility A Commitment shall expire without further action on the part of the Lenders on the earlier of (A) December 31, 2001 and (B) the date of termination of the Revolving Credit Facility A Commitment pursuant to Section 2.05(b)(v) or 2.05(c)(iii) or Section 7.02(a) or 7.02(b) hereof (such earlier date being referred to herein as the "Revolving Credit Facility A Termination Date"). All outstanding Revolving Credit Facility A Loans shall be paid in full on the Revolving Credit Facility A Termination Date. (iii) The Revolving Credit Facility B Commitment shall expire without further action on the part of the Revolving Credit Facility B Lender on the earlier of (A) December 31, 1999 (the "Revolving Credit Facility B Maturity Date"), and (B) the date of termination of the Revolving Credit Facility B Commitment pursuant to Section 2.05(b)(v) or 2.05(c)(iv) or Section 7.02(a) or 7.02(b) hereof, or (C) such later date to which the Revolving Credit Facility B Lender may, in its sole and absolute discretion, extend such termination date (the earlier of the Revolving Credit Facility B Maturity Date or any such earlier or later date of termination being referred to herein as the "Revolving Credit Facility B Termination Date"); provided, however, that any extension of -------- ------- the Revolving Credit Facility B Termination Date to a date after December 31, 1999 shall not affect the maturity date of any other Loan or any installment payment of principal due thereon. All outstanding Revolving Credit Facility B Loans shall be paid on the Revolving Credit Facility B Termination Date. (b) Mandatory Prepayments. --------------------- (i)(A) Upon receipt (x) subject to the limitation set forth in Section 2.05(b)(ii)(B), by or for the account of the Borrower or any of its Subsidiaries of any Net Cash Proceeds derived from any Asset Disposition or (y) by or for the account of Holdings, the Borrower or any of its Subsidiaries of any Excess Proceeds of Issuance of Stock, the Borrower shall make a prepayment, without premium or penalty, of the Term Loans and Revolving Loans (and deliver cash collateral to the Agent in respect of, and to the extent of, any existing Letter of Credit Liability) in an amount equal to one hundred percent (100%) of such Net Cash Proceeds or twenty- five percent (25%) of such Excess Proceeds of Issuance of Stock so received. (B) The Borrower shall give the Agent not less than three (3) Business Days' prior written notice of the date on which each Mandatory Prepayment will be made Third Amended and Restated Senior Secured Credit Agreement 39 (which date shall be no later than the date on which such Mandatory Prepayment becomes due and payable pursuant to this Section 2.05(b)(i)). (ii) Mandatory Prepayments shall be applied as follows: (A) Each Mandatory Prepayment based upon Net Cash Proceeds derived from an Asset Disposition relating to assets other than Real Property subject to a California Mortgage shall be applied first, to prepay installments of principal of the Senior Term Loan in the inverse order of maturity thereof until the Senior Term Loan is paid in full, second, to prepay the principal of the Revolving Loans then outstanding and to provide cash collateral in respect of Letter of Credit Liability then existing, provided that such prepayment and provision of cash collateral shall be -------- made pro rata as between Revolving Credit Facility A Loans and Letters of --- ---- Credit, on one hand, and Revolving Credit Facility B Loans and Letters of Credit, on the other hand, on the basis of the respective aggregate amounts of principal of such Loans then outstanding and Letter of Credit Liability then existing with respect to such Letters of Credit, and then to prepay the installments of principal of the Mortgage Term Loan in the inverse order of maturity thereof until the Mortgage Term Loan is paid in full; (B) Each Mandatory Prepayment based upon Net Cash Proceeds derived from an Asset Disposition relating to Real Property subject to a California Mortgage shall be applied first, to prepay the installments of principal of the Mortgage Term Loan in the inverse order of maturity thereof until the Mortgage Term Loan is paid in full, second, to prepay the installments of principal of the Senior Term Loan in the inverse order of maturity thereof until the Senior Term Loan is paid in full, and then, to prepay the principal of Revolving Loans then outstanding and to provide cash collateral in respect of Letter of Credit Liability then existing, provided that such prepayment and provision of cash collateral shall be -------- made pro rata as between Revolving Credit Facility A Loans and Letters of --- ---- Credit, on one hand, and Revolving Credit Facility B Loans and Letters of Credit, on the other hand, on the basis of the respective aggregate amounts of principal of such Loans then outstanding and Letter of Credit Liability then existing with respect to such Letters of Credit (provided, however, -------- that notwithstanding any other provision of this Agreement or any California Mortgage, the application of any such Net Cash Proceeds to any Indebtedness other than the Mortgage Term Loan secured by such California Mortgage shall not be a condition to the release of such California Mortgage); and (C) Each Mandatory Prepayment based upon Excess Proceeds of Issuance of Stock shall be applied first, to prepay the installments of principal of the Senior Term Loan in the inverse order of maturity thereof until the Senior Term Loan is paid in full, second, to prepay the principal of Revolving Loans then outstanding and to provide cash collateral in respect of Letter of Credit Liability then existing, provided that such -------- prepayment and provision of cash collateral shall be made pro rata as --- ---- between Revolving Credit Facility A Loans and Letters of Credit, on one hand, and Revolving Credit Facility B Loans and Letters of Credit, on the other hand, on the basis of the respective aggregate amounts of principal of such Loans then outstanding and Letter of Credit Liability then existing with respect to such Letters of Credit, and then to prepay the installments of principal of the Mortgage Term Loan in the inverse order of maturity thereof until the Mortgage Term Loan is paid in full. (iii) If at any time the aggregate principal amount of Revolving Credit Facility A Loans then outstanding plus the Revolving Credit Facility A ---- Letter of Credit Liability then existing exceeds the Revolving Credit Facility A Commitment, the Borrower shall make a prepayment to the extent of such excess, without premium or penalty, of the Revolving Credit Facility A Loans, and then, to the extent of any remaining excess, provide cash collateral in respect of Revolving Credit Facility A Letter of Credit Liability. If at any time the aggregate principal amount of the Revolving Credit Facility B Loans then outstanding plus ---- Third Amended and Restated Senior Secured Credit Agreement 40 the Revolving Credit Facility B Letter of Credit Liability then existing exceeds the Revolving Credit Facility B Commitment, the Borrower shall make a prepayment to the extent of such excess, without premium or penalty, of the Revolving Credit Facility B Loans, and then, to the extent of any remaining excess, provide cash collateral in respect of Revolving Credit Facility B Letter of Credit Liability. (iv) Each prepayment of the Term Loans and the Revolving Loans shall be made together with payment of accrued interest on the amount prepaid to the date of prepayment and any amounts payable in respect of such prepayment pursuant to Section 2.11 hereof. (v) Each Mandatory Prepayment applied to prepay the outstanding Revolving Loans pursuant to Section 2.05(b)(ii)(A) or Section 2.05(b)(ii)(B) shall permanently reduce, on the date on which such prepayment is made and by the amount so applied, the Revolving Credit Facility A Commitment and the Revolving Credit Facility B Commitment. Any Mandatory Prepayment applied to prepay the outstanding Revolving Loans pursuant to Section 2.05(b)(ii)(C), and any prepayment pursuant to Section 2.05(b)(iii) applied to prepay the outstanding Revolving Loan, shall not result in a reduction of the Revolving Credit Facility A Commitment or the Revolving Credit Facility B Commitment, as the case may be. (vi) Each Mandatory Prepayment shall be deemed applied first to reduce the Prime Rate Loan constituting a portion of the respective Term Loans or the Revolving Loans, as the case may be, and then to the Euro-Dollar Rate Loans constituting a portion of any thereof, in each case in inverse order of termination of Interest Periods applicable thereto. (c) Optional Prepayments. -------------------- (i) The Borrower may, at its option, at any time or from time to time, prepay the Term Loans in whole or in part, without premium or penalty, upon not less than ten (10) Business Days' notice, except that (A) any prepayment shall be in an aggregate principal amount of at least $500,000, and in integral multiples of $100,000 in excess thereof (or, alternatively, the whole amount of either of the Term Loans then outstanding), and (B) any prepayment of a Euro- Dollar Rate Loan shall (unless the Borrower pays concurrently therewith any amounts coming due pursuant to Section 2.11 hereof in respect of such prepayment) be made only on the last day of the Interest Period applicable thereto. Any notice of optional prepayment shall be irrevocable, and the payment amount specified in such notice shall be due and payable on the date specified in such notice, together with interest accrued thereon to such date. Each such optional prepayment of the Term Loans shall be applied first to the installments of principal of the Senior Term Loan in the inverse order of maturity thereof until the Senior Term Loan is paid in full, and then to the installments of principal of the Mortgage Term Loan in the inverse order of maturity thereof until the Mortgage Term Loan is paid in full. (ii) The Borrower may, at its option, prepay any outstanding Revolving Loans in whole or in part at any time, without premium or penalty, except that (A) any prepayment shall be in an aggregate principal amount of at least $100,000 and in integral multiples thereof (or, alternatively, the whole amount of all of the Revolving Loans then outstanding), and (B) any prepayment of a Euro-Dollar Rate Loan shall be made only on the last day of the Interest Period applicable thereto. Any amount prepaid pursuant to this Section 2.05(c)(ii) can, subject to the conditions and upon the terms hereof, be re-borrowed at any time up to and including the Business Day next preceding the Revolving Credit Facility A Termination Date, in the case of re-borrowings of Revolving Credit Facility A Loans, or the Business Day next preceding the Revolving Credit Facility B Termination Date, in the case of re-borrowings of Revolving Credit Facility B Loans. (iii) The Borrower shall have the right, at any time or from time to time after the date hereof, to terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Credit Facility A Commitment in an amount up to the difference between the then Revolving Credit Facility A Commitment and the aggregate principal amount of Revolving Credit Facility A Loans outstanding. Third Amended and Restated Senior Secured Credit Agreement 41 The Borrower shall give the Agent not less than three (3) Business Days' prior written notice of such termination or reduction and the amount of any partial reduction. Such termination or partial reduction of the Revolving Credit Facility A Credit Commitment shall be effective on the date specified in the Borrower's notice. Any such partial reduction of the Revolving Credit Facility A Commitment shall be in a minimum amount of $1,000,000 and an integral multiple thereof. (iv) The Borrower may, with the prior written consent of the Agent and the Revolving Credit Facility B Lender, at any time or from time to time after the date hereof, terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Credit Facility B Commitment in an amount up to the difference between the then Revolving Credit Facility B Commitment and the aggregate principal amount of Revolving Credit Facility B Loans outstanding. Any such partial reduction of the Revolving Credit Facility B Commitment shall be in a minimum amount of $1,000,000 and an integral multiple thereof. (d) Mandatory Zero Balance Period. The Borrower shall prepay in full ----------------------------- the principal amount of all Revolving Credit Facility A Loans and maintain a zero balance for a minimum of 30 consecutive days during each twelve month period, beginning with the twelve month period commencing on the Effective Date. SECTION 2.06 MANNER OF PAYMENT. All payments due to the Lenders ----------------- hereunder shall be made to the Agent not later than 12:00 noon local time on the due date thereof, in Dollars in immediately available funds, without any deduction whatsoever, including but not limited to any deduction for any set- off, recoupment, counterclaim or Taxes. SECTION 2.07 MANDATORY SUSPENSION AND CONVERSION OF EURO-DOLLAR RATE ------------------------------------------------------- LOANS. Each Lender's obligation to make or continue, or convert Prime Rate - ----- Loans into, Euro-Dollar Rate Loans shall be suspended, all outstanding Euro- Dollar Loans shall be converted on the last day of the respective Interest Periods applicable thereto (or, if earlier, in the case of clause (ii) below, on the last day that the Lender can lawfully continue to maintain Loans of that type) into Prime Rate Loans and all pending requests for the making of, conversion into, or continuation of, Euro-Dollar Loans shall be disregarded, if: (i) on or prior to the determination of an interest rate for a Euro- Dollar Rate Loan for any Interest Period, the Agent determines that for any reason appropriate quotations are not available to it in the London interbank market for purposes of determining the Euro-Dollar Rate or that such rate would not accurately reflect the cost to the Lenders of continuing, or converting a Prime Rate Loan into, a Euro-Dollar Rate Loan for such Interest Period; or (ii) at any time a Lender determines that any Regulatory Change makes it unlawful or impossible for such Lender or its Lending Office to make or maintain any Euro-Dollar Rate Loan, or to comply with its obligations hereunder in respect thereof. SECTION 2.08 REGULATORY CHANGES. ------------------ (a) Increased Costs. If any Regulatory Change: --------------- (i) shall subject any Lender (or its Lending Office) to any Tax or change the basis of taxation of payments to such Lender of principal, interest, Fees or any other amount payable hereunder (except for changes in the rate of Tax on the overall net income of the Lender); or (ii) shall impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance or similar requirement (other than any such requirement with respect to any Fixed Rate Loan to the extent included in the applicable Reserve Requirement or Assessment Rate), against, or any Third Amended and Restated Senior Secured Credit Agreement 42 fees or charges in respect of, assets held by, deposits with or other liabilities for the account of, commitments of, advances or loans by or other credit extended by, any Lender (or its Lending Office) or shall impose on such Lender (or such Lending Office) or on the relevant interbank market any other condition affecting the Euro-Dollar Rate Loans, the Euro-Dollar Notes or such Lender's obligation to make Euro-Dollar Rate Loans, and the effect of the foregoing is to increase the cost to such Leader (or its Lending Office) of making, renewing or maintaining any Euro-Dollar Rate Loan or the Commitments, to reduce the amount of any sum received or receivable by such Lender (or such Lending Office) under this Agreement or under the Euro-Dollar Notes, or to require such Lender to make any payment on or calculated by reference to the gross amount of any amount received by it hereunder or under any Euro-Dollar Notes; then the Borrower shall from time to time pay to the Agent, for the account of such Lender, upon demand by such Lender, such additional amounts as may be specified by such Lender as sufficient to compensate such Lender for such increased cost, reduction or requirement. A certificate as to the amount of such increased cost, reduction or requirement, submitted to the Borrower by such Lender, shall be final and conclusive and binding upon the Borrower for all purposes, absent manifest error. (b) Capital Costs. The Borrower shall from time to time pay to each ------------- Lender, upon demand by such Lender, such additional amounts as may be specified by such Lender as sufficient to compensate such Lender for any costs which such Lender determines are attributable to the maintenance by it (or its Lending Office), pursuant to any Regulatory Change that affects or would affect the amount of capital required or expected to be maintained by such Lender (or its Lending Office) or any corporation controlling such Lender, of capital in respect of its Loans and Commitments hereunder (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on the capital of such Lender (or its Lending Office) to a level below that which such Lender (or its Lending Office) could have achieved but for such Regulatory Change). A certificate as to such amounts, submitted to the Borrower by such Lender, shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.09 TAXES. The Borrower agrees (a) to pay all amounts ----- payable by it under this Agreement or any Note free and clear of and without liability for, and, subject to the provisions of this Section 2.09, without deduction or withholding for, any and all Taxes; and (b) to pay when due, and reimburse each Lender upon demand for any payment made by such Lender of, and indemnify and hold such Lender harmless against any liability for, (i) any and all Taxes in any way related to this Agreement, the Term Loans or the Revolving Loans or any Loan or the Revolving Credit Commitment, other than income and franchise taxes imposed upon such Lender by the jurisdictions (or any political subdivision thereof) in which such Lender's principal executive office or a Lending Office is located, and (ii) all interest and penalties resulting from or related to any delay in paying any such Taxes; provided that such Lender shall -------- deliver to the Borrower upon request by the Borrower a duly executed certificate to the effect that, as of the date of such certificate, such Lender is entitled to receive all payments made hereunder without deduction or withholding of United States federal income tax (A) pursuant to the terms of an applicable tax treaty in effect with the United States of America (in which case such certificate shall be accompanied by two executed copies of Internal Revenue Service Form 1001), (B) under Code Section 1441(c) (in which case such certificates shall be accompanied by two executed copies of Form 4224 of the Internal Revenue Service), or (C) pursuant to an exemption certificate received from the Internal Revenue Service (in which case such certificates shall be accompanied by a copy of said exemption certificate). Promptly after the date on which payment of any Taxes are due pursuant to applicable law, the Borrower will furnish to the Agent evidence, in form and substance satisfactory to the Agent, that the Borrower has satisfied its obligations under this Section 2.09. If the Borrower is required by Applicable Law to make any deduction or withholding in respect of any Taxes from any amount payable under this Agreement or any Note, the Borrower agrees to pay to each Lender, on the date such amount is payable, such additional amounts as each Lender determines may be necessary so that the net amounts received by the Lenders, in the aggregate, after all applicable deductions or withholdings, shall equal the amount that the Lenders would have been entitled to receive if no deductions or withholdings were made. Third Amended and Restated Senior Secured Credit Agreement 43 SECTION 2.10 LENDING OFFICE. Each Lender may make, carry or transfer -------------- Euro-Dollar Rate Loans at, to, or for the account of an Affiliate of the Lender, provided, however, the Lender shall not be entitled to receive any greater - -------- ------- amount under Section 2.08 or 2.09 hereof as a result of the transfer of any such Loan than the Lender would be entitled to immediately prior thereto unless (a) such transfer occurred at a time when circumstances giving rise to the claim for such greater amount did not exist and (b) such claim would have arisen even if such transfer had not occurred. SECTION 2.11 COMPENSATION FOR FUNDING LOSSES. In addition to the ------------------------------- amounts required to be paid by the Borrower pursuant to Sections 2.07, 2.08 and 2.09 hereof, the Borrower shall pay to the Agent, for the account of each Lender, upon demand by such Lender, such amount or amounts as such Lender determines is or are necessary to compensate it for any loss, cost, expense or liabilities incurred (including, without limitation, any loss, cost or expense incurred by reason of the liquidation or redeployment of deposits) by it as a result of (a) any payment, prepayment or conversion of a Euro-Dollar Rate Loan for any reason (including, without limitation, upon a Mandatory Prepayment pursuant to Section 2.05(b), by reason of an acceleration pursuant to Section 7.02 hereof or pursuant to Section 2.07 hereof) on a date other than the last day of an Interest Period applicable to such Euro-Dollar Rate Loan, or (b) a Euro-Dollar Rate Loan for any reason not being made, converted or continued, or any payment of principal of or interest thereon not being made, on the date therefor determined in accordance with the applicable provisions of this Agreement. SECTION 2.12 DETERMINATIONS. Any determination contemplated by -------------- Section 2.07, 2.08, 2.09, 2.10 or 2.11 that is made by the Agent, the Required Lenders, or the Lenders, as the case may be, shall be final, conclusive and binding upon the Borrower, in the absence of manifest error in computation, and shall be communicated in sufficient detail to permit the Borrower to understand such determination. Third Amended and Restated Senior Secured Credit Agreement 44 ARTICLE III CONDITIONS TO LOANS ------------------- SECTION 3.01 CONDITIONS PRECEDENT TO EFFECTIVE DATE. The occurrence -------------------------------------- of the Effective Date shall be subject to satisfaction of all of the following conditions precedent: (a) Effective Date. The Effective Date shall have occurred on or -------------- before March 31, 1997. (b) Public Offering. Holdings shall have completed a public offering --------------- of shares of its Capital Stock (the "Initial Public Offering"), and the IPO Net Proceeds shall be at least $65,000,000. (c) Distribution of IPO Net Proceeds. -------------------------------- (i) The total amount of IPO Net Proceeds up to $69,350,000 shall have been paid to the Agent, for the account of the Lenders in accordance with their Pro Rata Shares, and applied first, to Deferred Interest, and second, to prepay principal of the Senior Term Loan. (ii) The amount of IPO Net Proceeds, if any, in excess of $69,350,000 shall have been paid as follows: (x) 50% of the amount of IPO Net Proceeds, if any, in excess of $69,350,000 shall have been paid to the Agent, for the account of the Lenders in accordance with their respective Pro Rata Shares, and applied first, to prepay principal of the Senior Term Loan until the Senior Term Loan is paid in full, and second, to prepay principal of the Mortgage Term Loan, and (y) 50% of such amount of IPO Net Proceeds in excess of $69,350,000 shall be retained by Borrower to use for general corporate purposes that are not prohibited by the terms of this Agreement; provided, that the Borrower may use the amount retained by it -------- pursuant to clause (y) above to pay in cash unpaid interest accrued under the Senior Subordinated Credit Agreement from June 30, 1994 to the Effective Date, at the interest rate from time to time in effect during that period. (d) Certain Loan Documents. The Agent shall have received all of the ---------------------- following, all of which shall be in form and substance satisfactory to the Lenders: (i) This Agreement, executed by the Borrower, together with all required Schedules hereto, which are in each case complete and correct in all material respects as of the Effective Date; (ii) Each Note, executed by the Borrower and payable to the order of each Lender; (iii) Guaranties executed by each of Holdings and the Subsidiary Guarantors; and (iv) the Amended and Restated Senior Subordinated Credit Agreement, executed by the Borrower, Holdings and the other guarantors identified therein and Sumitomo Finance (Dublin) Limited. (e) Certain Corporate Documentation. The Agent shall have received ------------------------------- all of the following, all of which shall be in form and substance satisfactory to the Lenders: Third Amended and Restated Senior Secured Credit Agreement 45 (i) a copy of the Borrower's Certificate of Incorporation, as amended, modified or supplemented as of a date not more than five days prior to the Effective Date, certified to be true, correct and complete by the Secretary of State of Delaware as of a recent date prior to such date, together with a long-form good standing certificate from the Secretary of State of Delaware and a good standing certificate from the Secretary of State of each State in which Holdings is qualified to do business, each to be dated a recent date prior to such date; and (ii) a copy of Holdings' Certificate of Incorporation, as amended, modified or supplemented as of a date not more than five days prior to the Effective Date, certified to be true, correct and complete by the Secretary of State of Delaware as of a recent date prior to such date, together with a long-form good standing certificate from the Secretary of State of Delaware and a good standing certificate from the Secretary of State of each State in which Holdings is qualified to do business, each to be dated a recent date prior to such date. (f) Legal Opinion. The Lender shall have received a favorable legal ------------- opinion dated the Effective Date addressed to the Lender from Pillsbury Madison & Sutro LLP, counsel to the Borrower, Holdings and the Subsidiaries, in substantially the form of Exhibit K hereto. (g) Certain Collateral Documents. The Agent shall have received all ---------------------------- other notices, consents, waivers, estoppel certificates and other documents relating to the Collateral or the Collateral Documents that the Agent may request. (h) Certain Other Documents. The Agent shall have received copies of ----------------------- the financial information described in Section 4.04 hereof, certified as specified therein. (i) Certain Corporate Officers' Certificates. The Agent shall have ---------------------------------------- received: (i) A certificate, in substantially the form of Exhibit L-1 hereto, signed by the Chairman of the Board or President and by the Chief Financial Officer or Treasurer of the Borrower, dated the Effective Date, certifying, after due inquiry, (A) that the representations and warranties herein contained as to the Borrower and its Subsidiaries are true and correct in all material respects, as if made on and as of the Effective Date, (B) that no Default or Event of Default has occurred and is continuing and (C) that all of the conditions precedent set forth in this Section 3.01 and in Section 3.02 hereof have been satisfied; (ii) A certificate or certificates of the Secretary of the Borrower dated the Effective Date certifying (A) the names and true signatures of the officers of the Borrower authorized to sign the Loan Documents executed by the Borrower, (B) the By-laws of the Borrower as in effect on the date of such certification, (C) the resolutions of the Borrower's Board of Directors approving and authorizing the transactions contemplated by the Loan Documents, (D) that such resolutions have not been modified or rescinded and remain in full force and effect, and (E) that there have been no changes in the Certificate of Incorporation of the Borrower since the date of the certification thereof by the Secretary of State of Delaware; (iii) A certificate signed by the Chairman of the Board or President of Borrower in substantially the form of Exhibit L-2 hereto, dated the Effective Date, certifying the Amended Certificate of Incorporation of Borrower to be filed with the Secretary of State of Delaware on the Effective Date; and (iv) A certificate signed by the Chairman of the Board or President of Holdings in substantially the form of Exhibit L-3 hereto, dated the Effective Date, certifying the Amended Third Amended and Restated Senior Secured Credit Agreement 46 Certificate of Incorporation of Holdings to be filed with the Secretary of State of Delaware on the Effective Date. (j) Corporate Proceedings. All corporate proceedings taken or to be --------------------- taken by Holdings, the Borrower and the Borrower's Subsidiaries in connection herewith shall be satisfactory to the Agent in its sole discretion, and it shall have received original or certified copies of such documents as it may request. (k) Interest, Fees and Expenses Paid. The Borrower shall have paid to -------------------------------- the Agent, for the account of the Lenders, all of the accrued Deferred Interest and all Fees (including, without limitation, all Deferred Letter of Credit Fees and the Deferred Amendment Fee) and other fees and expenses that are due and payable on or before the Effective Date. The Borrower shall have paid to the Agent, for the account of the Lenders, all accrued and unpaid interest due on the Loans under the Second Amended and Restated Senior Secured Credit Agreement as of the Effective Date. (l) Approvals and Consents. All Government Approvals and material ---------------------- third party consents required to effect the transactions contemplated hereby, or by any other Loan Document, shall have been obtained and be in full force and effect, without imposition of onerous conditions upon any such transaction. (m) No Material Adverse Change. No material adverse change shall have -------------------------- occurred since June 1, 1996 in the business, assets, prospects, results of operations or financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole. (n) Filing of Amended Certificates of Incorporation for Borrower and ---------------------------------------------------------------- Holdings. Within five (5) Business Days after the Effective Date, Holdings - -------- shall have filed an Amended Certificate of Incorporation of Holdings with the Secretary of State of Delaware in the form certified to the Agent and the Lenders on the Effective Date pursuant to Section 3.01(i)(iv) hereof. Within five (5) Business Days after the Effective Date, Borrower shall have filed an Amended Certificate of Incorporation of Borrower with the Secretary of State of Delaware in the form certified to the Agent and the Lenders on the Effective Date pursuant to Section 3.01(i)(iii) hereof. (o) General. All other documents and legal matters in connection with ------- the transactions contemplated by this Agreement shall have been delivered or executed or recorded in form and substance satisfactory to the Lender in its sole discretion, and Lender shall have received all such counterpart originals or certified copies thereof as Lender may request. SECTION 3.02 CONDITIONS PRECEDENT TO ALL REVOLVING LOANS AND LETTERS ------------------------------------------------------- OF CREDIT. The obligation of the Lenders to make Revolving Loans and to issue - --------- Letters of Credit on any Funding Date, including, without limitation, the Effective Date, shall be subject to satisfaction of all of the following conditions precedent: (a) Notice of Borrowing; Letter of Credit Application. The Borrower ------------------------------------------------- shall have delivered to the Agent a Notice of Borrowing in accordance with Section 2.01(e) hereof, in the case of a Revolving Loan, or to the Issuing Bank a Letter of Credit Application in accordance with Section 2.01(h) hereof, in the case of a Letter of Credit. Each submission by the Borrower to the Agent of a Notice of Borrowing with respect to a Revolving Loan or to an Issuing Bank of a Letter of Credit Application with respect to a Letter of Credit and the acceptance by the Borrower of the proceeds of each such Revolving Loan made hereunder or the issuance of a Letter of Credit for the account of the Borrower, shall constitute a representation and warranty by the Borrower as of the Funding Date in respect of such Revolving Loan, or the date of issuance of such Letter of Credit, as the case may be, that all of the conditions contained in this Section 3.02 have been satisfied. Third Amended and Restated Senior Secured Credit Agreement 47 (b) Representations and Warranties. All of the representations and ------------------------------ warranties of the Borrower contained in Article IV hereof and in any other Loan Documents shall be true and correct in all material respects on and as of the Funding Date as though made on and as of that date (except to the extent that such representations and warranties expressly were made only as of a specific date). (c) No Default. No Default or Event of Default shall have occurred ---------- and be continuing or would result from the making of the Revolving Loan or the issuance of the Letter of Credit. (d) No Prohibition or Adverse Litigation. No Applicable Law shall ------------------------------------ prohibit, and no litigation shall be pending or threatened which in the judgment of the Lender could, if adversely determined, prevent or make unlawful, or impose any material adverse condition upon, the Revolving Loans or any other Loan Document, or Holdings' or the Borrower's or any of its Subsidiaries' ability to perform their respective obligations hereunder or thereunder (except, in the case of any Subsidiary, if such condition upon such Subsidiary's ability to perform would not have a material adverse effect upon the business, assets, prospects, results of operation or financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole). Third Amended and Restated Senior Secured Credit Agreement 48 ARTICLE IV REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower represents and warrants as follows: Section 4.01 ORGANIZATION, POWERS AND GOOD STANDING. -------------------------------------- (a) Organization and Powers. The Borrower and each of its ----------------------- Subsidiaries is a corporation or other business entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite power and authority and the legal right to own and operate its properties and to carry on its business as heretofore conducted. The Borrower has all requisite corporate power and authority to enter into this Agreement, the other Loan Documents to which it is a party, to issue the Notes and to carry out the transactions contemplated hereby and thereby. Each Subsidiary has all requisite power and authority to enter into each Loan Document to which it is a party and to carry out the transactions contemplated thereby. The Borrower and each of its Subsidiaries possesses all Governmental Approvals, in full force and effect, free from burdensome restrictions, that are necessary for the ownership, maintenance and operation of its properties and conduct of its business as now conducted and is not in violation thereof, except where the failure to so possess such Governmental Approvals or a violation of any such Governmental Approval would not have a material adverse effect upon the business, assets, prospects, results of operation or financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole. (b) Good Standing. The Borrower and each of its Subsidiaries is duly ------------- qualified and in good standing as a foreign corporation or other business entity and authorized to do business in each state where the nature of its business activities conducted or properties owned or leased requires it to be so qualified and where the failure to be so qualified could have a material adverse effect upon the business, assets, prospects, results of operation or financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole. (c) Subsidiaries. On the date hereof, the Borrower has no ------------ Subsidiaries other than those identified in Schedule 4.01 hereto. Except as set forth on Schedule 4.01 hereto, on the date hereof neither the Borrower nor any of its Subsidiaries owns or holds, directly or indirectly, any Capital Stock or equity security of, or any equity interest in, any corporation or business other than the Borrower's Subsidiaries. (d) Capital Stock of Subsidiaries. The authorized Capital Stock of ----------------------------- each of the Borrower's Subsidiaries on the date hereof, and the number of shares of Capital Stock of each such Subsidiary outstanding on the date hereof, is set out in Schedule 4.01. Except as disclosed in Schedule 4.01, on the date hereof the Borrower is the sole legal and beneficial owner of all shares of outstanding Capital Stock of each of its Subsidiaries, free and clear of any Lien, except (when effective in accordance with its terms) as provided by the CBCREG Pledge Agreement. All of the outstanding shares of Capital Stock of each of the Borrower's Subsidiaries have been duly authorized and validly issued and are fully paid and nonassessable. There are not outstanding any securities convertible into or exchangeable for shares or other units of Capital Stock of any of the Borrower's Subsidiaries, or any options, warrants or rights to purchase any such Capital Stock or any commitments of any kind for the issuance of additional shares or other units of such Capital Stock or any such convertible or exchangeable securities or options, warrants or rights to purchase such Capital Stock. SECTION 4.02 AUTHORIZATION, BINDING EFFECT, NO CONFLICT, ETC. ------------------------------------------------ (a) Authorization by the Borrower and its Subsidiaries. The -------------------------------------------------- execution, delivery and performance by the Borrower and each of its Subsidiaries of each Loan Document to which it is or will be a Third Amended and Restated Senior Secured Credit Agreement 49 party has been duly authorized by all necessary corporate or partnership action on the part of the Borrower and its Subsidiaries. (b) Execution and Delivery by the Borrower and its Subsidiaries. Each ----------------------------------------------------------- Loan Document to which it is party has been duly executed and delivered by the Borrower and each of its Subsidiaries. (c) Binding Obligations of the Borrower and its Subsidiaries. Each -------------------------------------------------------- Loan Document to which it is party is the legal, valid and binding obligation of the Borrower and each of its Subsidiaries, enforceable against each of them in accordance with their respective terms, except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally. (d) No Conflict. The execution, delivery and performance by the ----------- Borrower and each of its Subsidiaries of each Loan Document, and the consummation of the transactions contemplated hereby and thereby, do not and will not (i) violate any provision of the charter or bylaws of the Borrower or any of its Subsidiaries or any provision of Applicable Law binding on the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of, or constitute (or, with the giving of notice or lapse of time or both, would constitute) a default under, or require the approval or consent of any Person pursuant to (which consents have been obtained and are in full force and effect, except as disclosed in Schedule 4.02 hereto), any Contractual Obligation of the Borrower or any of its Subsidiaries except as would not have a material adverse effect upon the business, assets, prospects, results of operation or financial condition of the Borrower and its Subsidiaries taken as a whole, or (iii) result in the creation or imposition of any Lien upon any asset of the Borrower or any Subsidiary, except for Liens in favor of the Lender. (e) Government Approvals. Except for filings and recordings in -------------------- connection with the perfection of Liens created by the Collateral Documents or which are described on Schedule 4.02, which in each case have been made and are in full force and effect, no Governmental Approval is or will be required in connection with the execution, delivery and performance by the Borrower or any of its Subsidiaries of each Loan Document to which it is party or the transactions contemplated hereby or thereby or to ensure the legality, validity or enforceability hereof or thereof. (f) Authorization by Holdings. The execution, delivery and ------------------------- performance by Holdings of the Holdings Guaranty and the Holdings Pledge Agreement has been duly authorized by all necessary corporate action on the part of Holdings. (g) Execution and Delivery by Holdings. Each of the Holdings Guaranty ---------------------------------- and the Holdings Pledge Agreement have been duly executed and delivered by Holdings. (h) Binding Obligation of Holdings. The Holdings Guaranty and the ------------------------------ Holdings Pledge Agreement are the legal, valid and binding obligations of Holdings, enforceable against it in accordance with their respective terms, except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally. (i) No Conflict -- Holdings. The execution, delivery and performance ----------------------- by Holdings of the Holdings Guaranty and the Holdings Pledge Agreement do not and will not (i) violate any provision of the certificate of incorporation or bylaws of Holdings or any provision of Applicable Law binding on Holdings, (ii) conflict with, result in a breach of or constitute (or, with the giving of notice or lapse of time or both, would constitute) a default under, or require the approval or consent of any Person pursuant to, any Contractual Obligation of Holdings, or (ii) result in the creation or imposition of any Lien upon any asset of Holdings, except for a first priority Lien in the CBCREG Capital Stock securing the Senior Secured Obligations and a second priority Lien in the CBCREG Capital Stock securing the Subordinated Debt. Third Amended and Restated Senior Secured Credit Agreement 50 (j) Governmental Approvals -- Holdings. No Governmental Approval is ---------------------------------- or will be required in connection with the execution, delivery and performance by Holdings of the Holdings Guaranty, the Holdings Pledge Agreement or the transactions contemplated hereby or thereby, or to ensure the legality, validity or enforceability hereof or thereof. SECTION 4.03 COLLATERAL DOCUMENTS. -------------------- (a) The provisions of the Security Agreements are effective to create in favor of the Agent, on behalf of the Lenders, a legal, valid and enforceable security interest in all right, title and interest of the Borrower and its Subsidiaries in the Collateral (as defined therein); and the security interest of the Agent, on behalf of the Lenders, in such Collateral constitutes a valid, perfected first priority security interest, to the extent the filing of financing statements under the applicable Uniform Commercial Code in the appropriate jurisdictions, or the delivery of instruments, is a permissible method of perfection of such security interests in the Collateral described therein, subject to no prior Liens, except for Permitted Liens. (b) The provisions of each Mortgage to which the Borrower or any of its Subsidiaries is a party are effective to grant to the Agent, on behalf of the Lenders, a legal, valid and enforceable mortgage Lien on all of its right, title and interest in the mortgaged Real Property thereunder. When each Mortgage is duly recorded in the office(s) listed on Schedule 4.03 hereto and the mortgage recording fees and taxes in respect thereof are paid and compliance is otherwise had with the formal requirements of state law applicable to the recording of real estate mortgages generally, each Mortgage shall constitute a fully perfected lien on and security interest in such mortgaged property, subject only to Permitted Liens. (c) The provisions of the Pledge Agreements are effective to create in favor of the Agent, on behalf of the Lenders, a legal, valid and enforceable security interest in the Collateral (as defined therein). The security interest of the Agent, on behalf of the Lenders, in such Pledged Stock constitutes a valid, perfected security interest, subject to no prior Liens. SECTION 4.04 FINANCIAL INFORMATION. --------------------- (a) The consolidated balance sheets of the Borrower and its Subsidiaries as at December 31, 1995 and the consolidated statements of income, retained earnings and cash flow of the Borrower and its Subsidiaries for the fiscal year then ended, certified by the Borrower's independent certified public accountants, copies of which have been delivered to the Agent, were prepared in accordance with GAAP consistently applied and fairly present the consolidated financial position of the Borrower and its Subsidiaries as at the respective dates thereof and the results of operations and cash flows of the Borrower and its Subsidiaries for the periods then ended. Neither the Borrower nor any of its Subsidiaries had on such dates any material Contingent Obligations, liabilities for Taxes or long-term leases, unusual forward or long-term commitments or unrealized or unanticipated losses from any unfavorable commitments which are not reflected or reserved against in the foregoing statements or in the notes thereto. (b) The Borrower's unaudited consolidated balance sheet as at June 30, 1996 and related statements of income, retained earnings and cash flow for the period then ended certified by the Chief Financial Officer of the Borrower, a copy of which has been delivered to the Lender, were prepared in accordance with GAAP consistently applied (except to the extent noted therein) and fairly present the financial position of the Borrower and its Subsidiaries as of such date and the results of operations and cash flows for the period covered thereby, subject to normal year-end audit adjustments. Neither the Borrower nor any of its Subsidiaries had on such date any material Contingent Obligations, liabilities for Taxes or long-term leases, unusual forward or long-term commitments or unrealized or unanticipated losses from any unfavorable commitments which are not reflected or reserved against in the foregoing statements or in the notes thereto. Third Amended and Restated Senior Secured Credit Agreement 51 SECTION 4.05 NO MATERIAL ADVERSE CHANGES. There has been no material --------------------------- adverse change in the business, assets, prospects, results of operation or financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole, since either (a) June 30, 1995 or (b) the date of any financial statements delivered after the date hereof by the Borrower to the Agent pursuant to Section 5.01 hereof. SECTION 4.06 LITIGATION. Except as disclosed in Schedule 4.06 ---------- hereto, on the date hereof there are no material actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any of its or their respective properties before any Governmental Authority and, in the opinion of the Borrower as of the date hereof, there are no actions, suits or proceedings pending, (a) in which there is a reasonable possibility of an adverse determination that could have a material adverse effect on the business or financial condition of the Borrower and its Subsidiaries taken as a whole, or (b) which in any manner draws into question the validity or the enforceability of this Agreement or any other Loan Document or could materially impair the ability of the Borrower to fulfill its obligations under this Agreement or any other Loan Document. For purposes of this representation, "material actions, suits or proceedings" shall mean any litigation which the Borrower has determined could result in a judgment in excess of $1,000,000. SECTION 4.07 AGREEMENTS; APPLICABLE LAW. Neither the Borrower nor -------------------------- any Subsidiary is in violation of any Applicable Law, or in default under any Contractual Obligations to which it is a party or by which its property is bound, where such default could have a material adverse effect on the business, assets, prospects, results of operation or financial condition of the Borrower and its Subsidiaries taken as a whole. SECTION 4.08 TAXES. Holdings has filed all United States federal ----- income tax returns and all other tax returns required to be filed in respect of the consolidated group of which the Borrower and its Subsidiaries are a part, and each of Holdings and each other member of such group has paid all Taxes shown to be due on the returns so filed as well as all other assessments, governmental charges and other Taxes which are due. The Borrower does not know of any proposed, asserted or assessed tax deficiency against the Borrower or any of its Subsidiaries that would be material to the financial condition of the Borrower or the Borrower and its Subsidiaries, taken as a whole. Neither the Borrower nor any of its Subsidiaries is a party to or obligated under any tax sharing or similar agreement. SECTION 4.09 GOVERNMENTAL REGULATION. ----------------------- (a) Neither the Borrower nor any Subsidiary is (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, or a company controlled by such a company or (ii) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or to any Federal or state statute or regulation limiting its ability to incur Debt for money borrowed. (b) Neither the making of the Loans hereunder nor the use of the proceeds thereof as contemplated hereby will violate the Foreign Assets Control Regulations, the Foreign Funds Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Iranian Assets Control Regulations, the Nicaraguan Trade Control Regulations, the Libyan Sanctions Regulations or the South African Transactions Regulations of the United States Treasury Department (as defined in 31 C.F.R., Subtitle B, Chapter V, as amended). SECTION 4.10 MARGIN REGULATIONS. ------------------ (a) Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purposes of purchasing or carrying Margin Stock. Third Amended and Restated Senior Secured Credit Agreement 52 (b) The Borrower does not own any Margin Stock. SECTION 4.11 EMPLOYEE BENEFIT PLANS. ---------------------- (a) The Borrower and each of its ERISA Affiliates is as of the date of this Agreement in compliance in all material respects with any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Plans and Multiemployer Plans. There has been no prohibited transaction within the meaning of Section 406 of ERISA and Section 4975 of the Code, with respect to any Plan or Multiemployer Plan, which could result in any material liability of the Borrower or any of its respective ERISA Affiliates. The Borrower and its ERISA Affiliates have made any and all payments required to be made under any agreement relating to a Multiemployer Plan or any law pertaining thereto. (b) Except as set forth on Schedule 4.11 hereto, neither the Borrower nor any ERISA Affiliate of the Borrower has during the last six (6) years sponsored, maintained, or contributed to: (i) Any multiemployer plan as defined in Sections 3(37) and 4001(a)(3)(A) of ERISA; (ii) Any employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA or the minimum funding standards of Section 412 of the Code; (iii) Any "employee welfare benefit plan" as defined in Section 3(1) of ERISA which covers retirees (except to the extent that such coverage is limited to coverage required by Title 1, Part 6 of ERISA); or (iv) Any employee benefit plan (as defined in Section 3(3) of ERISA) or other fringe benefit plan maintained in connection with any trust described in Section 501(c)(9) of the Code. (c) Neither the Borrower nor any of its ERISA Affiliates has incurred or (based on the information set forth on Schedule 4.11) reasonably expects to incur any withdrawal liability under ERISA to any Multiemployer Plan. Neither the Borrower nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (d) To the extent that any Plan (which is a "welfare plan" under Section 3(1) of ERISA) is insured, and except as otherwise disclosed on Schedule 4.11, the Borrower, its Subsidiaries and their respective ERISA Affiliates have paid all premiums required to be paid for all periods through and including the most recent full month prior to the Closing Date. To the extent that any Plan (which is a "welfare plan" as defined above) is funded (other than with insurance), the Borrower, its Subsidiaries and their respective ERISA Affiliates have made all contributions required to be paid for all periods through and including the most recent full month period to the Closing Date and such Plans, to the extent that their funding is based on actuarial principles, are actuarially sound at the Closing Date. SECTION 4.12 TITLE TO PROPERTY; LIENS. Except as disclosed in ------------------------ Schedule 4.12 hereto, the Borrower and its Subsidiaries have good and marketable title to, or valid and subsisting leasehold interests in, all of their respective Real Property, and good title to or valid and subsisting leasehold interests in all of their respective other property reflected in their books and records as being owned by them, and none of such property is subject to any Lien, except for Permitted Liens and Liens securing the Obligations and other Liens permitted under Section 6.01 hereof. SECTION 4.13 NO MATERIALLY ADVERSE AGREEMENTS; NO DEFAULTS. --------------------------------------------- Third Amended and Restated Senior Secured Credit Agreement 53 (a) Neither the Borrower nor any of its Subsidiaries is a party to or bound by any unduly burdensome Contractual Obligation which materially and adversely affects the business, assets, prospects, results of operations or financial condition of the Borrower and its Subsidiaries taken as a whole. (b) Neither the Borrower nor any of its Subsidiaries is in default in the performance or observance of any of the covenants or conditions contained in any of its Contractual Obligations, except where such default or defaults, if any, would not have a material adverse effect on the business, assets, prospects, results of operation or financial condition of the Borrower and its Subsidiaries taken as a whole. SECTION 4.14 CAPITALIZATION AND OWNERSHIP. ---------------------------- (a) The authorized Capital Stock of the Borrower on the date hereof consists of one thousand (1,000) shares of common stock, par value $0.01 per share, of which one hundred (100) shares are issued and outstanding. All such outstanding shares of such common stock were duly authorized and validly issued and are fully paid and nonassessable and are owned beneficially and of record by Holdings, free and clear of all Liens and encumbrances whatsoever, except for the first priority Lien securing the Obligations and a second priority Lien securing the Subordinated Debt. (b) There are no outstanding subscriptions, options, warrants, calls, rights (including preemptive rights) or other agreements or commitments of any nature relating to any Capital Stock of the Borrower or any of its Subsidiaries. (c) The Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its Capital Stock. SECTION 4.15 LICENSES, TRADEMARKS, ETC. The Borrower and its ------------------------- Subsidiaries own or hold valid licenses in all necessary Trademarks, copyrights, patents, patent rights and licenses to conduct their respective businesses as heretofore operated and as proposed to be conducted. All of the Borrower's and its Subsidiaries' registered Trademarks, copyrights, patents, patent rights, licenses (excluding unregistered licenses of computer software owned by the Borrower or any Subsidiary) or other similar rights owned or used by the Borrower or any Subsidiary are listed in Schedule 4.15 hereto, showing for each item the owner thereof, and the date (except with respect to trade names) and place of registration thereof. Neither the Borrower nor any of its Subsidiaries has been charged or, to the knowledge of the Borrower, threatened to be charged with any infringement of, nor has any of them infringed on, any unexpired Trademark, patent, patent registration, copyright, copyright registration or other proprietary right of any Person. SECTION 4.16 ENVIRONMENTAL CONDITION. Except as set forth on ----------------------- Schedule 4.16 hereto: (a) To the Borrower's knowledge, all Real Property that the Borrower or any of its Subsidiaries owns or possesses is free from contamination from any Hazardous Materials. Neither the Borrower nor any of its Subsidiaries has caused or suffered, nor to the knowledge of the Borrower, has any other party previously involved in operations at any Real Property owned or possessed by the Borrower or any of its Subsidiaries caused or suffered any Environmental Damages that would have a material adverse effect on the business or financial condition of the Borrower and its Subsidiaries taken as a whole. (b) Neither the Borrower nor any Subsidiary or, to the Borrower's knowledge, any prior owner or occupant, of the Real Property owned by the Borrower or any of its Subsidiaries has received notice of any alleged violation of Environmental Requirements of the type set forth in clause (i) in the definition thereof or, to Borrower's knowledge, of the type set forth in clause (ii) in the definition thereof, or notice of any alleged liability for Environmental Damages in connection with the Real Property, and there exists no writ, injunction, decree, order or judgment outstanding, nor any claim, suit, proceeding, citation, directive, Third Amended and Restated Senior Secured Credit Agreement 54 summons or investigation, pending or threatened, relating to the ownership, use, maintenance or operation of the Real Property by any Person, or from alleged violation of Environmental Requirements, or from the suspected presence of Hazardous Materials thereon, nor, to the knowledge of the Borrower, does there exist any basis for such claim, suit, proceeding, citation, directive, summons or investigation being instituted or filed. (c) To the Borrower's knowledge, there is not constructed, placed, deposited, stored, disposed of nor located on the Real Property any polychlorinated biphenyls (PCBs) nor transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs, or any asbestos. SECTION 4.17 ABSENCE OF CERTAIN RESTRICTIONS. Neither the Borrower ------------------------------- nor any Subsidiary is subject to any Contractual Obligation (other than the Loan Documents and the Subordinated Debt Documents) which restricts or limits the ability of any Subsidiary to (a) pay dividends or make any distributions on its Capital Stock, (b) pay Indebtedness owed the Borrower or any Subsidiary, (c) make any loans or advances to the Borrower or (d) transfer any of its property to the Borrower, except as set forth on Schedule 4.17 hereto. SECTION 4.18 LOCATION OF ASSETS AND CHIEF EXECUTIVE OFFICES. As of ---------------------------------------------- the date hereof, the chief executive office of the Borrower is located in Los Angeles, California, and the Real Property and no tangible personal property of the Borrower having a fair value, in the aggregate, in excess of $50,000 is located at any location or locations other than those identified on Schedule 4.18. SECTION 4.19 NO DEFAULTS. No Default or Event of Default has ----------- occurred and is continuing. Neither the Borrower nor any Subsidiary is in violation of or in default under any Applicable Law binding on the Borrower or any Subsidiary or any Contractual Obligation binding upon or affecting it or any of its properties that could have a material adverse effect on the business, assets, prospects, results of operation or financial condition of the Borrower and its Subsidiaries taken as a whole. SECTION 4.20 DISCLOSURE. No representation or warranty of Holdings, ---------- the Borrower or any Subsidiary contained in this Agreement or any other Loan Document or any information in any other document, certificate or written statement furnished to the Lender by or on behalf of Holdings, the Borrower or any Subsidiary with respect to the business, assets, prospects, results of operation or financial condition of Holdings or the Borrower or any Subsidiary of the Borrower for use in connection with the transactions contemplated by this Agreement, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than matters of a general economic nature) which materially and adversely affects the business, assets, prospects, results of operations or financial condition of the Borrower and its Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement, which has not been disclosed herein or in such other documents, certificates, and statements furnished to the Lender for use in connection with the transactions contemplated hereby. Third Amended and Restated Senior Secured Credit Agreement 55 ARTICLE V AFFIRMATIVE COVENANTS OF THE BORROWER ------------------------------------- The Borrower covenants and agrees that, so long as any portion of the Commitments shall be in effect and until all Obligations of the Borrower are paid in full, the Borrower shall perform each and all of the following: SECTION 5.01 FINANCIAL STATEMENTS AND OTHER REPORTS. The Borrower -------------------------------------- will deliver to the Agent: (a) as soon as practicable and in any event within ninety (90) days after the end of each Fiscal Year of Holdings, consolidated and consolidating balance sheets of Holdings and its Subsidiaries as of the end of such year and the related consolidated (and, except as to statements of stockholders' equity, consolidating) statements of income, stockholders' equity and cash flow of the Borrower and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and (i) in the case of such consolidated financial statements, accompanied by an unqualified report thereon of Arthur Andersen LLP or other independent certified public accountants of recognized national standing selected by the Borrower and satisfactory to the Lender, which report shall state that such consolidated financial statements fairly present the financial position of Holdings and its Subsidiaries as at the date indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP (except as otherwise stated therein) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, and (ii) in the case of such consolidating financial statements, certified by the Chief Financial Officer or Chief Accounting Officer of Holdings as being fairly stated in all material respects when considered in relation to the audited consolidated financial statements of the Holdings, provided that the -------- Borrower shall be required to deliver such consolidating balance sheets and statements of income and cash flow as to Holdings and its Reporting Subsidiaries; (b) as soon as practicable and in any event within thirty (30) days after the end of each Fiscal Quarter, a consolidated balance sheet of Holdings and its Reporting Subsidiaries as at the end of such quarter and the related consolidated statement of income of Holdings and its Subsidiaries for such quarter and the portion of Holdings' fiscal year ended at the end of such quarter, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the prior fiscal year, all in reasonable detail and certified by Holdings' Chief Financial Officer or Chief Accounting Officer as fairly presenting the financial condition of Holdings and its Subsidiaries as at the dates indicated and the results of their operations and cash flows for the periods indicated, subject to normal year-end adjustment; (c) together with each delivery of financial statements of Holdings and its Subsidiaries pursuant to subsections (a) and (b) above, a certificate of the Chief Financial Officer and the Secretary of Holdings (i) stating that such officers have reviewed the terms of the Loan Documents and have made, or have caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence of any Default or Event of Default during or at the end of such accounting period and that such officers do not have knowledge of the existence, as at the date of such certificate, of any Default or Event of Default, or, if they do have knowledge that a Default or an Event of Default existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking, or proposes to take with respect thereto, and (ii) setting forth the calculations required to establish whether the Borrower was in compliance with Section 6.06, on the date of such financial statements; Third Amended and Restated Senior Secured Credit Agreement 56 (d) together with each delivery of consolidated financial statements of Holdings and its Subsidiaries pursuant to subsection (a) above, and so long as and to the extent not contrary to the then current recommendations of the American Institute of Certified Public Accountants, a written statement by the independent certified public accountants giving the report thereon (i) stating that their audit examination has included a review of the terms of this Agreement and the Notes as they relate to accounting matters, (ii) stating whether in connection with their audit examination, any Default or Event of Default has come to their attention and, if so, specifying the nature and period of existence thereof, and (iii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to subsection (c) above; (e) immediately upon any Responsible Officer becoming aware thereof, notice of any Default or Event of Default, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available by Holdings or the Borrower to its security holders, all registration statements (other than the exhibits thereto) and annual, quarterly or monthly reports, if any, filed by Holdings with the SEC; (g) promptly upon becoming aware of the occurrence of (i) any Reportable Event, (ii) any "prohibited transaction," as such term is defined in Section 4975 of the Code (which prohibited transaction could subject any member of the Controlled Group (including ERISA Affiliates) to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code in connection with any Plan (or any trust created thereunder)), (iii) any assertion of withdrawal liability of any Multiemployer Plan, (iv) any partial or complete withdrawal (by the Borrower or an ERISA Affiliate) under Title IV of ERISA (or assertion thereof), (v) any cessation of operations (by the Borrower or an ERISA Affiliate) at a facility in the circumstances described in Section 4068(f) of ERISA, (vi) the withdrawal by the Borrower or an ERISA Affiliate from a Multi-Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA, (vii) the failure by the Borrower or any ERISA Affiliate to make a payment to a Plan required under Section 302(f)(1) of ERISA, which section imposes a lien for failure to make required payments, or (viii) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; (h) promptly, copies of (i) all notices received by any member of the Controlled Group of the PBGC's intent to terminate any Plan administered or maintained by the Borrower or its ERISA Affiliates or to have a trustee appointed to administer any such Plan and (ii) at the request of the Agent each annual report (IRS Form 5500 Series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or its ERISA Affiliates, and schedules showing the amounts contributed to each such Plan by or on behalf of the Borrower or its Subsidiaries in which any of their personnel participate or from which such personnel may derive a benefit, and each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by any member of the Controlled Group with the IRS with respect to each such Plan; (i) promptly after the Borrower obtains knowledge thereof, notice of all litigation or proceedings commenced or threatened affecting the Borrower in which there is a reasonable possibility of an adverse decision and (i) which involves alleged liability in excess of $1,000,000, (ii) in which injunctive or similar relief is sought which if obtained could have a material adverse effect on the business, assets, prospects, results of operation or financial condition of the Borrower and its Subsidiaries taken as a whole or (iii) which questions the validity or enforceability of any Loan Document or Acquisition Document; (j) promptly upon receipt thereof, copies of all final reports or letters submitted to the Borrower by its independent certified public accountants in connection with each annual, interim or special audit of the financial statements of the Borrower or its Subsidiaries made by such accountants, including, Third Amended and Restated Senior Secured Credit Agreement 57 without limitation, any management report, and the Borrower agrees to obtain such a report in connection with each of its annual audits; (k) upon request by the Agent, an appraisal of all Real Property of the Borrower and its Subsidiaries (including both fee and leasehold interests), performed by an appraiser of recognized national standing selected by the Borrower and satisfactory to the Required Lenders, which appraisal shall set forth the fair market value and orderly liquidation value of the Real Property and equipment and shall otherwise be in form and substance satisfactory to the Required Lenders; (l) promptly upon receipt or availability thereof, a copy of any notices or reports received or sent to any Person in connection with Subordinated Debt and a copy of any amendment or supplement to, or material extension, renewal or waiver with respect to, any of the documents or instruments governing Subordinated Debt; (m) promptly after the availability thereof, copies of all amendments to the certificate of incorporation or bylaws of the Borrower and any of its Subsidiaries; (n) promptly after the receipt thereof, a copy of any notice, summons, citation, letter or other communication concerning any actual, alleged, suspected or threatened violation of Environmental Requirements, or liability of the Borrower or any of its Subsidiaries for Environmental Damages in connection with its Real Property or past or present activities of any Person thereon; (o) as soon as practicable and in any event within forty-five (45) days after the end of each Fiscal Quarter, or more frequently if requested by the Lender, a report of all Investments made in such Fiscal Quarter pursuant to Section 6.04, the amount of such Investments and a summary, in reasonable detail, of the Borrower's good faith estimate of the fair value of all Investments made to the end of such Fiscal Quarter; and (p) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Lender may request. SECTION 5.02 RECORDS AND INSPECTION. The Borrower shall, and shall ---------------------- cause each Subsidiary to, maintain adequate books, records and accounts as may be required or necessary to permit the preparation of consolidated financial statements in accordance with sound business practices and GAAP. The Borrower shall, and shall cause each Subsidiary to, permit such persons as the Agent or any Lender may designate, at reasonable times and as often as may be requested, to (a) visit and inspect any properties of the Borrower and its Subsidiaries, (b) inspect and copy their books and records, and (c) discuss with their officers and employees and their independent accountants, their respective businesses, assets, liabilities, prospects, results of operation and financial condition. The Agent and each Lender will use reasonable efforts, consistent with its normal business practices, to maintain the confidentiality of any information so received. SECTION 5.03 CORPORATE EXISTENCE, ETC. The Borrower will, and will ------------------------ cause each Subsidiary to, at all times preserve and keep in full force and effect its corporate existence and any rights and franchises material to its business, provided, however, that the corporate existence of any Subsidiary may -------- ------- be terminated if such termination is not disadvantageous in any material respect to the Lenders. SECTION 5.04 PAYMENT OF TAXES. The Borrower shall, and shall cause ---------------- each Subsidiary to, pay and discharge all Taxes imposed upon it or any of its properties or in respect of any of its franchises, business, income or property before any material penalty shall be incurred with respect to such Taxes, provided, however, that, unless and until foreclosure, distraint, levy, sale or - -------- ------- similar proceedings shall have commenced, the Borrower and its Subsidiaries need not pay or discharge any such Tax so long as the validity Third Amended and Restated Senior Secured Credit Agreement 58 or amount thereof is contested in good faith and by appropriate proceedings and so long as any reserves or other appropriate provisions as may be required by GAAP shall have been made therefor. SECTION 5.05 MAINTENANCE OF PROPERTIES. The Borrower shall maintain ------------------------- or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted), all of those properties useful or necessary to its business, and from time to time the Borrower will make or cause to be made all appropriate repairs, renewals and replacements thereto. SECTION 5.06 MAINTENANCE OF INSURANCE. ------------------------ (a) The Borrower shall, and shall cause each Subsidiary to, maintain, with financially sound and reputable insurance companies satisfactory to the Lender, insurance in at least such amounts, of such character and against at least such risks as is maintained by the Borrower and its Subsidiaries on the date of this Agreement and described on Schedule 5.06 hereto, or, if such insurance is not available on a commercially reasonable basis, with the Agent's prior written consent, such insurance, in at least such amounts, of such character and as against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business. The Borrower shall furnish to the Agent, upon written request, full information as to the insurance in effect at any time. (b) As soon as practicable after the Effective Date, the Borrower shall cause (i) all liability insurance policies to name the Agent as an additional insured, (ii) all property loss or damage insurance policies with respect to any assets of the Borrower to contain a loss payable clause in favor of the Agent as provided in the respective Collateral Documents, (iii) all insurance policies to provide that no cancellation, reduction in amount or material adverse change in coverage thereof shall be effective until at least thirty (30) days after receipt by the Agent of written notice thereof, (iv) all insurance policies to insure the interests of the Agent regardless of any breach of or violation by the Borrower or any other Person of any warranties, declarations or conditions contained therein, (v) all insurance policies to provide that the Agent shall have no obligation or liability for premiums, commissions, assessments or calls in connection with such insurance or in connection with any representation or warranty made by the Borrower in connection with obtaining such insurance, (vi) all business interruption insurance to name the Agent as a loss payee, and (vii) all applicable insurance policies to contain such other provisions as are set forth in the relevant Collateral Documents. (c) Any payments received by the Agent or any Lender from any insurer with respect to loss or damage to any buildings, equipment and facilities constituting a portion of the Collateral shall, if an Event of Default shall have occurred and be continuing or under other circumstances as may be provided in the respective Collateral Document, be treated as Net Cash Proceeds of an Asset Disposition and applied as a mandatory repayment of the Term Loans as set forth in Section 2.05(b). (d) As soon as practicable, and in any event no later than the expiration date of each policy maintained hereunder, the Borrower shall either (i) deliver to the Agent copies of the renewals of the insurance policies (in each case, with a certified true and correct copy of such policy by the insurer named therein if available, or in any event, not later than fifteen (15) days after the expiration date of the prior policy) maintained by the Borrower as required by this Section 5.06 or (ii) notify the Agent of the policies which have not been renewed. SECTION 5.07 CONDUCT OF BUSINESS. The Borrower will not, and will ------------------- not permit any of its Subsidiaries to, engage in any business other than the businesses in which the Borrower and its Subsidiaries are engaged as of the date hereof or any businesses or activities substantially similar or related thereto, except for other businesses which constitute an insubstantial part of the business of the Borrower and its Subsidiaries taken as a whole. The Borrower shall, and shall cause each Subsidiary to, conduct its business in compliance in all material respects with Applicable Law and all material Contractual Obligations. Third Amended and Restated Senior Secured Credit Agreement 59 SECTION 5.08 FURTHER ASSURANCES. ------------------ (a) At any time or from time to time upon the request of the Agent, the Borrower shall execute and deliver, and shall cause its Subsidiaries to execute and deliver, such further documents and do such other acts and things as the Agent may reasonably request in order to effect fully the purpose of this Agreement, the Collateral Documents, the other Loan Documents and any other agreement contemplated hereby and to provide for payment with respect to the Term Loans in accordance with the terms of this Agreement and the other Loan Documents. (b) Within ten (10) days after the earlier of (i) payment in full or defeasance (including without limitation by delivery of one or more letters of credit) of the obligations of WREAP to the Westmark Sellers or (ii) at such time as such a guaranty no longer is prohibited by the Westmark Acquisition Agreement, Borrower shall cause Westmark Realty Advisors L.L.C. to execute and deliver to the Agent for the benefit of the Lenders the Subsidiary Guaranty. Within ten (10) days after the earlier of (i) payment in full or defeasance (including without limitation by delivery of one or more letters of credit) of the obligations of WREAP to the Westmark Sellers or (ii) at such time as such a security interest or lien no longer is prohibited by the Westmark Acquisition Documents, Borrower shall, or shall cause a Subsidiary to, grant to the Agent, for the benefit of the Lenders, a security interest in or lien on the Capital Stock of each Westmark Guarantor and Westmark Realty Advisors L.L.C., and shall cause each Westmark Guarantor and Westmark Realty Advisors L.L.C. to grant a lien in substantially all of its assets to the Agent, for the benefit of the Lenders. SECTION 5.09 ADDITIONAL COLLATERAL. --------------------- (a) With respect to any Real Property of the Borrower or any Subsidiary, whether now owned or acquired after the date hereof, the Borrower or such Subsidiary shall, promptly upon request therefor by the Agent, grant or cause to be granted to the Agent, for the benefit of the Lenders, a Mortgage Lien on any or all such Real Property, upon terms substantially the same as those set forth in the Mortgages, and such other terms as may be reasonably requested by the Agent with respect to the particular collateral, and subject only to those types of Liens permitted by Section 6.01; provided, however, that -------- ------- neither Borrower nor any Subsidiary shall be required to grant a Mortgage Lien on any such Real Property if the granting of such Mortgage Lien would conflict with or constitute a default under any document or instrument creating a Lien permitted by Section 6.01(d). The Borrower, at its own expense, shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, and thereafter cause to be registered, filed or recorded, in each appropriate governmental office, any document or instrument deemed by the Lender to be necessary or desirable for the creation and perfection of the foregoing Liens and shall pay all taxes and fees related to such registration, filing or recording. (b) Upon the creation or acquisition of any direct or indirect Subsidiary of the Borrower after the date hereof, the Borrower shall immediately (i) pledge to the Agent for the benefit of the Lenders all of the issued and outstanding Capital Stock of such Subsidiary pursuant to a pledge agreement in form and substance satisfactory to the Agent, and (ii) cause each such Subsidiary to execute and deliver to the Agent for the benefit of the Lenders the Subsidiary Guaranty, the Subsidiary Security Agreement and such other Collateral Documents as the Agent may request; provided, however, that the Agent -------- ------- hereby agrees to subordinate such Subsidiary's obligations under the Subsidiary Guaranty to such Subsidiary's obligations with respect to any Permitted Seller Indebtedness incurred in connection with the acquisition of such Subsidiary on customary terms reasonably satisfactory to the Agent. (c) Subject to Section 5.09(a) and (b), upon consummation of any Investment in excess of $100,000, the Borrower shall pledge such Investment to the Agent for the benefit of the Lenders as additional Collateral, and shall take any and all action necessary to perfect and protect the lien or security interest created thereby. Third Amended and Restated Senior Secured Credit Agreement 60 (d) Notwithstanding the foregoing provisions of this Section 5.09 or any other provision hereof, unless the Agent shall specifically waive this Section 5.09(d) in writing, all additional collateral consisting of Real Property in California shall secure only the Specified Mortgage Loan Obligations and all other additional collateral shall secure the Senior Secured Obligations. SECTION 5.10 FUTURE INFORMATION. All data, certificates, reports, ------------------ statements, documents and other information furnished to the Agent or the Lenders in connection with this Agreement or any amendment or modification of, or waiver under, this Agreement shall, at the time the information is so furnished, (i) be complete and correct in all material respects to the extent necessary to give the Agent and the Lenders sufficient and accurate knowledge of the subject matter thereof, (ii) not contain any untrue statement of a material fact and (iii) not omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such information is furnished. SECTION 5.11 PROCEEDS OF ASSET DISPOSITIONS BY SUBSIDIARIES. ---------------------------------------------- (a) The Borrower will cause each Subsidiary to pay to or transfer to the Borrower, as dividends or distributions on Capital Stock, the Borrower's ratable interest, in accordance with its percentage ownership, direct or indirect, of such Subsidiary, in Net Cash Proceeds of Asset Dispositions and Excess Proceeds of the Sale of Stock received by or for the account of such Subsidiary, except to the extent that, at the time such payment or transfer is required by this Section 5.11 to be made, such payment or transfer as a dividend or distribution on Capital Stock is not permitted under Applicable Law or by the terms of a written agreement binding on such Subsidiary; provided, that no such -------- legal or contractual prohibition shall affect the Borrower's obligations under Section 2.05(b)(i) hereof. (b) Concurrently with the receipt by or for the account of the Borrower or any Subsidiary of Non-Cash Proceeds of any Asset Disposition, the Borrower shall, or shall cause the relevant Subsidiary to, promptly perform all actions necessary or deemed necessary or advisable by the Lender to grant, create, perfect and maintain perfected a security interest therein in favor of the Lender. SECTION 5.12 SUBORDINATION OF INTERCOMPANY LOANS AND ADVANCES TO THE ------------------------------------------------------- BORROWER. The Borrower shall cause any Indebtedness owed by the Borrower to any - -------- Subsidiary to be subordinated to the Obligations on terms of subordination satisfactory to the Agent and no less favorable to the Lenders than the terms of subordination set forth in the Senior Subordinated Credit Agreement as in effect on the date hereof. SECTION 5.13 DEPOSIT ACCOUNTS. The Borrower will maintain and will ---------------- cause its Subsidiaries to maintain all deposit accounts in accordance with the terms of the Security Agreements and the exhibits thereto. Third Amended and Restated Senior Secured Credit Agreement ARTICLE VI NEGATIVE COVENANTS OF THE BORROWER ---------------------------------- The Borrower covenants and agrees that, so long as any portion of the Commitments shall be in effect and until all Obligations of the Borrower are paid in full, the Borrower shall perform each and all of the following: SECTION 6.01 LIENS. The Borrower shall not, and shall not permit any ----- of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of the Borrower or any Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom or rights in respect thereof, except: (a) Liens securing the Obligations; (b) Permitted Liens; (c) Any attachment or judgment Lien (i) execution of which has been stayed, (ii) payment of which is covered in full by insurance, or (iii) in respect of which the Borrower or its Subsidiary shall in good faith be prosecuting an appeal or proceedings for review and shall have set aside on its books such reserves as may be required by GAAP with respect to such judgment or award; (d) Liens existing on property or assets of any Person at the time such Person becomes a Subsidiary of the Borrower, but only, in any such case, (i) if such Lien was not created in contemplation of such Person becoming a Subsidiary of the Borrower, (ii) so long as the obligation secured by such Lien is not in default at the time such Person becomes a Subsidiary of the Borrower, and (iii) so long as such Lien does not encumber any assets other than the property subject to such Lien immediately prior to the time such Person becomes a Subsidiary of the Borrower; and Liens existing on assets acquired by Borrower or a Subsidiary of the Borrower, but only, in any such case, (x) if such Lien was not created in contemplation of such assets being acquired by Borrower or the Subsidiary, (y) so long as the obligation secured by such Lien is not in default at the time such assets are acquired by Borrower or the Subsidiary, and (z) so long as such Lien does not encumber any assets other than the assets subject to such Lien immediately prior to the time such assets are acquired by Borrower or the Subsidiary; (e) Liens on assets securing Indebtedness permitted to be incurred or assumed pursuant to Section 6.02 (f) hereof, including any interest or title of a lessor under any Capitalized Lease, provided that any such Lien does not -------- encumber any property other than assets constructed or acquired with the proceeds of such Indebtedness; (f) leases or subleases granted to others not interfering with the ordinary and usual course of business of, and consistent with past practices of, the Borrower or any of its Subsidiaries; (g) any Lien constituting a renewal, extension or replacement of any Existing Lien or any Lien permitted by clause (d) or (e) of this Section 6.01, but only, in the case of each such renewal, extension or replacement Lien, to the extent that (i) the principal amount of Indebtedness secured thereby does not exceed the principal amount of such Indebtedness secured by such Existing Lien or Lien permitted by clause (d) or (e), and (ii) such Lien is limited to all or a part of the property subject to the Lien extended, renewed or replaced; Third Amended and Restated Senior Secured Credit Agreement (h) Liens on Permitted Investments owned by Melody, to secure Indebtedness under the Melody Loan Arbitrage Facility, if such Permitted Investments were acquired by Melody with the proceeds of incurrence of such Indebtedness; (i) Liens on commercial mortgage loans originated and owned by Melody subject to an irrevocable, unconditional commitment to purchase such commercial mortgage loans, to secure Indebtedness of Melody under the Melody Warehousing Facility; and (j) Liens on the assets of any direct or indirect Subsidiary of the Borrower created or acquired in connection with a Permitted Acquisition and Liens on assets acquired by the Borrower or a Subsidiary in a Permitted Acquisition, which Liens secure Permitted Seller Indebtedness permitted by Section 6.02(e) in connection with such Permitted Acquisition (but not including any refinancing thereof pursuant to Section 6.02(i)); provided that if, notwithstanding this Section 6.01, any Lien which this Section - -------- 6.01 prohibits shall be created or arise without the prior written consent of Lender (including with respect to this proviso), the specified Mortgage Loan Obligations (if such Lien is on Real Property in California) or the Senior Secured Obligations (if such Lien is on other property) shall be secured by such Lien equally and ratably with the other Indebtedness secured thereby, the Borrower will take or cause to be taken all such action as may be requested by the Agent to confirm and protect such Lien in favor of the Lender and the holder of such other Indebtedness, by accepting such Lien, shall be deemed to have agreed thereto and to share ratably with the Lender on that basis, the proceeds of such Lien, whether or not the Lender's security interest shall be perfected; provided further, however, that notwithstanding such equal and ratable securing and sharing, the existence of such Lien shall constitute a default by the Borrower in the performance or observance of this Section 6.01. SECTION 6.02 INDEBTEDNESS. The Borrower shall not, and shall not ------------ permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or otherwise become or remain liable with respect to any Indebtedness, except: (a) the Obligations; (b) any Indebtedness of Subsidiaries under the Loan Documents; (c) Subordinated Debt under the Senior Subordinated Credit Agreement and guaranties thereof by Subsidiaries which are subordinated, on terms satisfactory to the Agent, to the Subsidiary Guaranty; (d) Existing Indebtedness, but not any extension, refunding or refinancing thereof (except with respect to Existing Mortgage Debt (as defined in Schedule 6.02), which the Borrower may refinance so long as any such refinancing Indebtedness is non-recourse to the Borrower and its Subsidiaries and bears interest at a rate not in excess of prevailing rates with respect to similar mortgage loans at the time such Indebtedness is refinanced); (e) Indebtedness incurred in connection with Permitted Acquisitions (including, without limitation, (x) existing Indebtedness of any Person that becomes a Subsidiary and (y) Indebtedness assumed by the Borrower or any Subsidiary or that is secured by any asset acquired by the Borrower or any Subsidiary, in each case upon consummation of such Permitted Acquisition), in an aggregate amount not to exceed $50,000,000 at any time outstanding, provided -------- that (i) at the time of incurrence of any such Indebtedness, the Pro Forma Fixed Charges Coverage Ratio shall be not less than 1.0:1.0; (ii) no Default or Event of Default shall have occurred and be continuing or shall result from the Permitted Acquisition (including by reason of any Indebtedness incurred in connection with such Permitted Acquisition), and (iii) Third Amended and Restated Senior Secured Credit Agreement not more than $15,000,000 of such Indebtedness at any time outstanding shall be Indebtedness that is not Permitted Seller Indebtedness. (f) purchase money Indebtedness, including Capitalized Lease Obligations; provided that (i) such Indebtedness is incurred in connection with -------- a Capital Expenditure permitted by Section 6.05 hereof, (ii) is secured only by Liens permitted by Section 6.01(e), (iii) does not exceed the cost to the Borrower or its Subsidiary of the assets constructed or acquired with the proceeds of such Indebtedness and (iv) is incurred within twelve (12) months following the date of the completion or acquisition of the asset so constructed or acquired; (g) Intercompany Indebtedness of a Subsidiary to the Borrower or a Wholly Owned Subsidiary, to the extent permitted by Sections 6.04(c) and (d) hereof; (h) other unsecured Indebtedness not in excess of $5,000,000 at any time outstanding; (i) Indebtedness incurred to refinance Indebtedness described in clauses (e) and (f), provided, that (i) the unpaid balance is not increased, -------- (ii) such refinancing Indebtedness is Subordinated Debt if (x) the Indebtedness being refinanced is Subordinated Debt or (y) the Indebtedness being refinanced is Permitted Seller Indebtedness, and (iii) if the Indebtedness being refinanced is Subordinated Debt, (a) no mandatory payments of principal thereof are required prior to the date that is one year after the Maturity Date, (b) the final maturity thereof is not before the later of (I) one year after the Maturity Date or (II) the final maturity date of the Subordinated Debt being refinanced, (c) the terms thereof are not in any respect more restrictive than the terms of the Subordinated Debt being refinanced and the subordination provisions applicable thereto are at least as favorable to the Lenders as such provisions applicable to the Subordinated Debt being refinanced and (d) cash interest payments payable with respect thereto are payable at an interest rate not materially higher than the interest rate applicable to the Indebtedness being refinanced; (j) Indebtedness of the Borrower or a Mortgage Banking Subsidiary comprised of its obligation to repurchase mortgage loans pursuant to mortgage loan purchase and sale agreements entered into in connection with Mortgage Banking Activities; (k) Melody Permitted Indebtedness; and (l) Indebtedness of the Borrower comprised of a guaranty by Borrower of (i) the Melody Seller Senior Notes and the Melody Seller Contingent Notes and (ii) the obligations of WREAP under the Amended and Restated Westmark Subordinated Credit Agreement, provided that in respect of clause (ii) such guaranty is subordinated to prior payment in full of the Obligations on terms satisfactory to the Agent and the Lenders, and such guaranty shall constitute "Subordinated Debt" for all purposes hereof. SECTION 6.03 RESTRICTED PAYMENTS. The Borrower shall not, and shall ------------------- not permit any of its Subsidiaries to, declare, pay or make, or agree to declare, pay or make, any Restricted Payment, except (a) dividends, distributions or payments by any Subsidiary to the Borrower or a Wholly Owned Subsidiary of the Borrower, (b) so long as no Default or Event of Default has occurred and is continuing, dividends or distributions by any Subsidiary to the Borrower and any other Person that is a stockholder or owner of another equity interest in such Subsidiary, so long as, in the case of each such dividend and distribution, the amounts thereof paid to the Borrower and such other Person are in the same proportion as the respective contributions to the capital of such Subsidiary made by the Borrower and such other Person, and (c) if no Default or Event of Default shall exist, or as a result of the proposed declaration, payment or other event would exist: (i) the Borrower may declare and pay dividends on the CBCREG Capital Stock to the extent necessary to enable Holdings to pay expenses of its operations in the ordinary course of business, in an amount not to exceed $50,000 in any year; Third Amended and Restated Senior Secured Credit Agreement (ii) the Borrower may declare and pay dividends on the CBCREG Capital Stock as follows: (A) prior to December 31, 1999, the Borrower may declare and pay dividends on the CBCREG Capital Stock to the extent necessary to permit Holdings to pay dividends accrued on its Series A-1, Series A-2 and Series A-3 Preferred Stock in the period from October 1, 1996 through the Fiscal Quarter last ended prior to the date of such payment by the Borrower (and not dividends accrued on such Preferred Stock in any period prior to October 1, 1996), or interest with respect to accrued but unpaid dividends, all in accordance with the certificates of designation with respect thereto in effect on the Effective Date; and (B) after December 31, 1999, the Borrower may declare and pay dividends on the CBCREG Capital Stock to the extent necessary to permit Holdings to pay any dividends accrued on its outstanding Series A-1, Series A-2 and Series A-3 Preferred Stock in the period of four Fiscal Quarters ended immediately prior to the date of such payment by the Borrower (and not dividends accrued on such Preferred Stock in any prior period) that may be declared by the Board of Directors of Holdings, or interest with respect to accrued but unpaid dividends, all in accordance with the certificates of designation with respect thereto in effect on the Effective Date; provided, however, that the total amount of dividend and interest payments made - -------- ------- by Borrower pursuant to clauses (ii)(A) and (ii)(B) does not exceed 50% of Consolidated Net Income for the period commencing on the first day of the Fiscal Quarter within which the Effective Date occurs and ending on the last day of the last Fiscal Quarter ending prior to the date of declaration, taken as a single accounting period; and (iii) the Borrower may make Permitted Tax Payments to Holdings. SECTION 6.04 INVESTMENTS. The Borrower shall not, and shall not ----------- permit any of its Subsidiaries to, make or own any Investment in any Person, except: (a) Permitted Investments; (b) Investments existing on the Effective Date and listed on Schedule 6.04; (c) Investments by any Subsidiary in the Borrower, or by the Borrower or any Subsidiary in any Wholly Owned Subsidiary that (i) has executed and delivered to the Agent the Subsidiary Guaranty and the Subsidiary Security Agreement, and (ii) is not subject to any Contractual Obligation that restricts or limits the ability of such Subsidiary to pay dividends or make distributions on its Capital Stock or otherwise transfer property to the Borrower or another Subsidiary or to make loans or advances to the Borrower or repay Indebtedness owing to the Borrower; (d) the Borrower may make loans or advances for working capital purposes to any of its Subsidiaries so long as (i) the aggregate amount of the Indebtedness of such Subsidiary to the Borrower is less than the net worth of such Subsidiary, (ii) such Indebtedness is incurred in the ordinary course of business of the Borrower and such Subsidiary, (iii) such Indebtedness is evidenced by a note or other instrument that is subject to a valid, perfected first priority Lien in favor of the Lender, and (iv) the aggregate amount of such Debt owing to the Borrower by all Subsidiaries of the Borrower is less than $5,000,000; (e) trade credit extended on usual and customary terms in the ordinary course of business; Third Amended and Restated Senior Secured Credit Agreement (f) so long as no Default or Event of Default shall have occurred and be continuing at the time such Investment is made, Investments constituting Permitted Acquisitions, up to an aggregate amount of such Investments not in excess of $100,000,000; (g) loans and advances to employees of the Borrower or its Subsidiaries for travel, entertainment and relocation expenses, and advances of commissions payable to employees, in each case in the ordinary course of business in an aggregate amount for the Borrower and its Subsidiaries not to exceed $50,000 at any one time outstanding; (h) Investments by Mortgage Banking Subsidiaries comprised of (i) commitments to make mortgage loans in connection with Mortgage Banking Activities, (ii) mortgage loans made in connection with Mortgage Banking Activities, and (iii) advances of payments of principal and interest on mortgage loans originated in connection with Mortgage Banking Activities, made on terms customary in the mortgage banking industry by the Borrower or a Mortgage Banking Subsidiary in its capacity as servicer of such mortgage loans; (i) Investments in Capital Stock of a Person, where such Investments are conditioned upon the payment by such Person to the Borrower of a fee in connection with the CBC Partners Program and the amount of such Investment does not exceed the amount of such fee; and (j) other Investments in an aggregate amount not to exceed $2,500,000. SECTION 6.05 CAPITAL EXPENDITURES. The Borrower shall not, and shall -------------------- not permit any of its Subsidiaries to, make or incur any Capital Expenditures in any Fiscal Year, if, after giving effect thereto, the aggregate amount of all Capital Expenditures made by Borrower and its Subsidiaries in such Fiscal Year would exceed $10,000,000. SECTION 6.06 FINANCIAL COVENANTS. ------------------- (a) Leverage Ratio. The Borrower shall not permit, at any time, the -------------- Leverage Ratio to be greater than 4.0 : 1.0. (b) Interest Coverage Ratio. The Borrower shall not permit, on the ----------------------- last day of any Fiscal Quarter, the Interest Coverage Ratio to be less than the amount shown below opposite such Fiscal Quarter, or opposite the period in which such Fiscal Quarter occurs:
Period Interest Coverage Ratio ------ ----------------------- October 1, 1996 to December 31, 1998 2.5:1.0 January 1, 1999 to December 31, 2001 3.0:1.0
(c) Fixed Charges Coverage Ratio. The Borrower shall not permit, on ---------------------------- the last day of any Fiscal Quarter, the Fixed Charges Coverage Ratio to be less than 1.0:1.0. (d) Senior Loan Debt Service Coverage Ratio. The Borrower shall not --------------------------------------- permit, at any time, the Senior Loan Debt Service Coverage Ratio to be less than 2.25:1. SECTION 6.07 RESTRICTION ON FUNDAMENTAL CHANGES. The Borrower will ---------------------------------- not, and will not permit any of its Subsidiaries to, enter into any merger, consolidation, reorganization or recapitalization, reclassify its Capital Stock, liquidate, wind up or dissolve or sell, lease, transfer or otherwise dispose of, in one Third Amended and Restated Senior Secured Credit Agreement transaction or a series of transactions, all or substantially all of its or their business or assets, whether now owned or hereafter acquired, except that, as long as no Default or Event of Default shall exist after giving effect to such transaction, any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower or any other Wholly Owned Subsidiary or be liquidated, wound up or dissolved, or all or substantially all of its business or assets may be sold, leased, transferred, or otherwise disposed of, in one transaction or a series of transactions in accordance with Section 6.08, if (a) Consolidated Net Worth after giving effect to such transaction shall not be less than Consolidated Net Worth after giving effect to such transaction, (b) in the case of a merger or consolidation, such transaction occurs in connection with a Permitted Acquisition, and (c) in the case of a merger or consolidation, the surviving corporation shall be the Borrower or a Wholly Owned Subsidiary of the Borrower. SECTION 6.08 ASSET DISPOSITIONS. ------------------ (a) The Borrower will not, and will not permit any of its Subsidiaries to, make or agree to make any Asset Disposition, including, without limitation, any Sale-Leaseback Transaction, unless (i) the Borrower applies any Net Cash Proceeds thereof to repay obligations under this Agreement as and to the extent provided in Section 2.05(b) and pledges any Non-Cash Proceeds thereof to secure obligations under this Agreement as provided in Section 5.11(b) and (ii) in the case of an Asset Disposition involving any Collateral, such transaction satisfies the conditions for release of such Collateral under the respective Collateral Documents (which may, among other possible conditions, require the prior written consent of the Agent) or the terms of such transaction shall have been approved in advance by the Required Lenders; provided that the Borrower -------- will not sell or otherwise dispose of Real Property subject to a California Mortgage unless, in addition to satisfaction of the requirement of clauses (i) through (ii) above, the Lenders shall have been furnished with an appraisal, in form and substance satisfactory to the Required Lenders and from an independent appraiser satisfactory to the Required Lenders, of the fair value of Collateral for the Mortgage Term Loan remaining after giving effect to such sale or other disposition indicating that such fair value is at least equal to one hundred twenty-five percent (125%) of the principal amount of the Mortgage Term Loan remaining unpaid after giving effect to application of the proceeds of such sale or other disposition pursuant to Section 2.05(b)(iii) hereof. (b) The Borrower in any event will not, and will not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, discount (except in the ordinary course of business consistent with past practice to compromise disputes with customers), or otherwise sell for less than the face value thereof or for consideration other than cash, any of their respective accounts receivable. (c) As promptly as practicable in connection with any Asset Disposition, the Borrower shall deliver to the Agent a certificate, duly executed by the Responsible Officer of the Borrower, setting forth in detail a description of such Asset Disposition or other sale or disposition, copies of any related agreements, the date or scheduled date of such Asset Disposition or other sale or disposition, the determination of the Net Cash Proceeds of such Asset Disposition or other sale or disposition, the description of any Non-Cash Proceeds thereof and the Collateral arrangements with respect thereto and such other documents and information as is necessary to demonstrate compliance with this Section 6.08. SECTION 6.09 TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into any transaction (including the purchase, sale, lease, or exchange of any property or the rendering of any service) with any Affiliate of the Borrower, unless (a) such transaction is not otherwise prohibited by this Agreement, (b) such transaction is in the ordinary course of business and (c) such transaction is on fair and reasonable terms no less favorable to the Borrower or its Subsidiary, as the case may be, than those terms which might be obtained at the time in a comparable arm's length transaction with a Person who is not an Affiliate or, if such transaction is not one which by its nature could be obtained from such other Person, is on fair and reasonable terms and was negotiated in good faith on an arm's length basis; provided that this Section 6.09 shall not restrict (x) dividends, distributions and other Third Amended and Restated Senior Secured Credit Agreement payments and transfers on account of any shares of Capital Stock of the Borrower or any Subsidiary of the Borrower, (y) payments pursuant to the terms of any Contractual Obligations in effect on the date hereof listed on Schedule 6.09 hereto, and (z) the grant of capital stock of Holdings or options or rights to purchase such stock, the sale of such stock and the payment of reasonable compensation to employees, directors and independent contractors pursuant to an overall compensation program. SECTION 6.10 PAYMENTS WITH RESPECT TO SUBORDINATED DEBT. The Borrower will not, and will not permit any Subsidiary to, voluntarily purchase, acquire, redeem or retire, make any payment or distribution on account of principal of or, if an Event of Default has occurred and is continuing, interest on any Subordinated Debt; provided, however, that the Borrower shall not pay interest in cash at a rate in excess of the Applicable LIBOR Based Rate (as defined in the Amended and Restated Senior Subordinated Credit Agreement); provided, further, that if no Event of Default has occurred or is continuing, this Section 6.10 shall not prohibit repayments in connection with refinancings of Subordinated Debt permitted under Section 6.02(i). SECTION 6.11 ERISA. The Borrower will not, and will not permit any ----- member of the Controlled Group to: (a) engage in any transaction which it knows or has reason to know could subject any member of the Controlled Group to either a civil penalty in excess of $100,000 assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code; (b) permit the present value of all benefits on a termination basis (whether or not vested) under all Plans subject to Title IV of ERISA to exceed the current value of the assets of such Plans allocable to such benefits by an amount in excess of $100,000; (c) fail to make any payments aggregating in excess of $100,000 to any Multiemployer Plan that the Borrower or any of its ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; (d) voluntarily terminate any one or more of their Plans, if such termination would result in the imposition of Liens on the Borrower or any member of the Controlled Group under Section 4068 of ERISA securing a liability exceeding $100,000; (e) fail to make required contributions to any Plan subject to Section 412(n) of the code that with the passage of time reasonably could result in imposition of a Lien upon the assets of the Borrower or any member of its Controlled Group securing a liability in excess of $100,000; (f) create or suffer to exist any liability with respect to Plans that are welfare plans within the meaning of Section 3(1) of ERISA if, after immediately giving effect to such liability, the aggregate annualized cost with respect to such Plans for post retirement benefits for any fiscal year would exceed $100,000; (g) adopt an amendment to any Plan with respect to which security in an amount in excess of $100,000 is required under Section 307 of ERISA; or (h) enter into any arrangement or agreement pursuant to which the Borrower or any ERISA Affiliate is treated as a member of an affiliated service group (as defined in Code Section 414(m)) of which any shareholder of Holdings is a member. For purposes of this Section 6.11, the term "Controlled Group" shall include any ERISA Affiliates of the Borrower. Third Amended and Restated Senior Secured Credit Agreement SECTION 6.12 AMENDMENTS OF OR WAIVERS UNDER SUBORDINATED DEBT ------------------------------------------------ DOCUMENTS. The Borrower will not, and will not permit any Subsidiary to, amend - --------- or supplement the Senior Subordinated Credit Agreement, or waive or otherwise relinquish any of its rights or causes of action under or arising out of the Senior Subordinated Credit Agreement, with respect to terms and provisions regarding interest rates, principal or interest payment amounts, principal or interest payment dates, subordination, representations by or covenants of the Borrower, or events of default, or other material provisions, without in each case obtaining the prior written consent of the Required Lenders. SECTION 6.13 ISSUANCE OF CAPITAL STOCK. No Subsidiary shall issue ------------------------- any of its Capital Stock to any Person other than the Borrower or a Wholly Owned Subsidiary. SECTION 6.14 EVENT OF ILLEGALITY UNDER THE SENIOR SUBORDINATED CREDIT -------------------------------------------------------- AGREEMENT. The Borrower shall give the Lender immediate notice of the - --------- occurrence of an Event of Illegality (as such term is defined in the Senior Subordinated Credit Agreement) and shall not make any payments on Subordinated Debt upon the occurrence of an Event of Illegality without the prior written consent of the Lender. Third Amended and Restated Senior Secured Credit Agreement ARTICLE VII EVENTS OF DEFAULT ----------------- SECTION 7.01 EVENTS OF DEFAULT. The occurrence of any one or more of ----------------- the following events, acts or occurrences shall constitute an event of default (an "Event of Default") hereunder: (a) Failure to Make Payments. The Borrower shall fail to pay when due ------------------------ any principal (whether at stated maturity, upon acceleration, by notice of or other requirement of prepayment, by operation of Section 2.05 or otherwise) of or interest on either of the Term Loans or any Revolving Loan, or shall fail to pay within three (3) Business Days after the Lender notifies the Borrower that such amount has become due any fees, costs, expenses or other amounts payable hereunder or under the Notes or any other Loan Documents; (b) Default in Other Agreements. The Borrower or any of its --------------------------- Subsidiaries (i) shall default in the payment (whether at scheduled maturity, required prepayment, upon demand or otherwise), beyond any period of grace provided therefor, of any principal of or interest on (A) the Obligations (as therein defined) under the Senior Subordinated Credit Agreement or (B) any other Indebtedness in a principal amount in excess of $500,000, or (ii) shall commit any breach of or default under any other term of any agreement or indenture or instrument governing or evidencing Subordinated Debt or any agreement or indenture or instrument relating to any such other Indebtedness, if the effect of such breach or default is to cause, or to permit the holder or holders of the Subordinated Debt or other Indebtedness or a trustee on behalf of such holder or holders) to cause, the Subordinated Debt or any such other Indebtedness to become or be declared due and payable prior to its stated maturity; (c) Breach of Certain Covenants. The Borrower shall fail duly and --------------------------- punctually to perform, comply with or observe any agreement, covenant, obligation to be performed, observed or complied with by it pursuant to Section 2.01(g), Section 5.01(e), Section 5.03 (insofar as such Section requires the preservation of the corporate existence of the Borrower), Section 5.11, or 5.13, or any Section of Article VI hereof; (d) Breach of Warranty. Any representation or warranty or ------------------ certification made or furnished (before, on or after the Effective Date) by the Borrower under this Agreement (before or after giving effect to the amendment and restatement effected hereby), the Collateral Documents, the other Loan Documents, the Acquisition Documents or any agreement, instrument or document contemplated hereby and thereby shall, at any time, prove to have been false or incorrect in any material respect when made; (e) Other Defaults Under Agreement and Other Loan Documents. The ------------------------------------------------------- Borrower or any Subsidiary shall fail duly and punctually to perform, comply with or observe any covenant or obligation to be performed, observed or complied with by it under this Agreement (other than those provisions referred to in subsections (a) and (c) above) or under the Collateral Documents or the other Loan Documents and such failure shall not have been remedied or waived within thirty (30) days after receipt of notice thereof from the Lender; (f) Involuntary Bankruptcy; Appointment of Receiver, Etc. There shall ----------------------------------------------------- be commenced against the Borrower or any of its Subsidiaries an involuntary case seeking the liquidation or reorganization of the Borrower or any of its Subsidiaries under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code or any similar proceeding under any other Applicable Law or an involuntary case or proceeding seeking the appointment of a receiver, liquidator, sequestrator, custodian, trustee or other officer having similar powers of the Borrower or any of its Subsidiaries to take possession of all or a substantial portion of the property or to operate all or a substantial portion of the business of the Borrower or any of its Subsidiaries, and Third Amended and Restated Senior Secured Credit Agreement any of the following events occur: (i) the Borrower or any of its Subsidiaries consents to the institution of the involuntary case or proceeding; (ii) the petition commencing the involuntary case or proceeding is not timely controverted; (iii) the petition commencing the involuntary case or proceeding remains undismissed and unstayed for a period of sixty (60) days (provided, -------- however, that, during the pendency of such period, the Lender shall be relieved - ------- of its Commitments); or (iv) an order for relief shall have been issued or entered therein; or (g) Voluntary Bankruptcy; Appointment of Receiver, Etc. The Borrower --------------------------------------------------- or any of its Subsidiaries shall institute a voluntary case seeking liquidation or reorganization under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code; or the Borrower or any of its Subsidiaries shall file a petition, answer, or complaint or shall otherwise institute any similar proceeding under any other Applicable Law, or shall consent thereto; or the Borrower or any of its Subsidiaries shall consent to the conversion of an involuntary case to a voluntary case; or the Borrower or any of its Subsidiaries shall file a petition, answer a complaint or otherwise institute any proceeding seeking, or shall consent or acquiesce to the appointment of, a receiver, liquidator, sequestrator, custodian, trustee or other officer with similar powers to take possession of all or a substantial portion of the property or to operate all or a substantial portion of the business of the Borrower or any of its Subsidiaries; or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of creditors; or the Borrower or any of its Subsidiaries shall generally not pay its debts as they become due; or the Board of Directors of Borrower or any of its Subsidiaries (or any committee thereof) adopts any resolution or otherwise authorizes action to approve any of the foregoing; (h) Judgments and Attachments. The Borrower or any of its ------------------------- Subsidiaries shall suffer any money judgments, writs, or warrants of attachment, or similar processes which individually or in the aggregate involve an amount in excess of $100,000 at any time unpaid and shall not discharge, vacate, bond, or stay the same within a period of thirty (30) days or, in any event, within ten (10) days of the date of any proposed sale thereunder; or a judgment creditor shall obtain possession of any material portion of the assets of the Borrower or any of its Subsidiaries by any means, including, without limitation, levy, distraint, replevin or self-help; (i) Change of Control. A Change of Control shall occur at any time; ----------------- (j) ERISA Liabilities. ----------------- (i) Any Termination Event occurs which, when taken together with all other Termination Events that have occurred, can reasonably be expected to result in a liability of the Borrower or any of its ERISA Affiliates in excess of $100,000; or (ii) The Borrower or any ERISA Affiliate shall have committed a failure described in Section 302(f)(1) of ERISA and the amount determined under Section 302(f)(3) of ERISA is at least $100,000; or (iii) Failure to make full payment (including all required installments) when due of all amounts which, under the provisions of any Plan or Multiemployer Plan or applicable law, the Borrower or any member of its Controlled Group is required to pay as contributions thereto, which failure would result in a liability to the Borrower or its Subsidiaries exceeding $100,000; or (iv) The Borrower or any ERISA Affiliate shall have incurred any accumulated funding deficiency in excess of $100,000, whether or not waived, with respect to any Plan; or (v) The Borrower or any of its ERISA Affiliates as an employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer Third Amended and Restated Senior Secured Credit Agreement 71 has incurred a withdrawal liability in an annual amount exceeding $100,000 or the aggregate amount of such withdrawal liabilities for which the Borrower and its Subsidiaries together shall have received such notices exceeds $100,000; or (vi) The Borrower or any of its ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that such plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Plan for the respective plan years which include the Closing Date by an amount exceeding $100,000; or (vii) Any Lien on the assets of the Borrower or any of its ERISA Affiliates under the Pension Protection Act securing a liability exceeding $100,000; or (viii) Borrower or any ERISA Affiliate becomes, or is reasonably expected to become, subject to any liability with respect to the Sears Plans (as defined below) not covered by the indemnification set forth in Section 11.1(a) of the Stock Purchase Agreement which liability (together with the liability described in (x) below) is in excess of $100,000; or (ix) Borrower or any ERISA Affiliate becomes subject to any liability with respect to the Sears Plans (as defined below) covered by the indemnification set forth in Section 11.1(a) of the Stock Purchase Agreement, which liability (together with the liability described in (ix) above) is in excess of $100,000 and Borrower has been unable to collect on the indemnification within one hundred twenty (120) days after it first becomes subject to such liability; or (x) Any one of the events described in (i) through (ix) above occurs (without application of any required level of liability), which taken together with all other such events that have occurred can reasonably be expected to result in a liability of Borrower or any of its ERISA Affiliates in excess of $500,000. For purposes of clauses (ix) and (x) above, the term "Sears Plan" shall mean any employee benefit plan (as defined in Section 3(3) of ERISA) sponsored or maintained by, or to which contributions have ever been made by, any organization other than the Borrower which was, prior to the Closing Date (as defined in the Stock Purchase Agreement), a member of a group described in Code Sections 414(b), (c), (m) or (o), of which the Borrower was a member prior to the Closing Date (as defined in the Stock Purchase Agreement); (k) Failure of Subordination. Any agreement to subordinate other ------------------------ Indebtedness in right of payment to the Obligations, at any time and for any reason other than satisfaction in full of all of the Obligations or satisfaction in full of the subordinated Indebtedness upon the stated maturity thereof, whether incorporated in the Intercreditor Agreement or in the indenture or agreement governing, or instrument evidencing, such subordinated Indebtedness, ceases to be in full force and effect or is declared to be null and void; or any holder of subordinated Indebtedness repudiates or disavows such subordination or denies that it has any further liability or obligation under such subordination agreement or gives notice to such effect; (1) Termination of Collateral Documents or Loan Documents, Etc. Any ---------------------------------------------------------- of the Collateral Documents or the Guaranties or any other Loan Document, or any material provision in any of them, shall cease to be in full force and effect for any reason other than (a) a release or termination thereof upon the full payment and satisfaction of the Indebtedness due hereunder and under the Notes to the Lenders or (b) upon the written consent of the Required Lenders, or any of Holdings, the Borrower or any of its Subsidiaries shall contest or purport to repudiate or disavow any of the Collateral Documents or Guaranties to which it is a party; Third Amended and Restated Senior Secured Credit Agreement 72 (m) Material Adverse Change. There shall occur after the Effective ----------------------- Date a material adverse change in the business, assets, prospects, results of operation or financial condition of the Borrower or the Borrower and its Subsidiaries taken as a whole. SECTION 7.02 REMEDIES. Upon the occurrence of an Event of Default: -------- (a) If an Event of Default occurs under Section 7.01(f) or (g), then the Revolving Credit Facility A Commitment and the Revolving Credit Facility B Commitment shall automatically and immediately terminate, and the obligation of the Lenders to make any Revolving Loan or issue any Letter of Credit hereunder thereupon shall cease, and the unpaid principal amount of, and accrued interest on, both of the Term Loans and all of the Revolving Loans shall automatically become immediately due and payable, without presentment, demand, protest, notice or other requirements of any kind, all of which are hereby expressly waived by the Borrower, and the Borrower shall be unconditionally obligated to deposit with the Agent cash collateral in an amount equal to any and all existing Letter of Credit Liability. (b) If an Event of Default occurs under Section 7.01 hereof, other than under Section 7.01(f) or (g), the Agent may or upon written request of the Required Lenders shall, by written notice to the Borrower, declare that the Revolving Credit Facility A Commitment and the Revolving Credit Facility B Commitment are terminated, whereupon the obligation of any Lender to make any Revolving Loan or issue any Letter of Credit hereunder shall cease, and/or declare the unpaid principal amount of the Term Loans and all of the Revolving Loans, or any of them individually, to be, and the same shall thereupon become, due and payable together with any and all accrued interest thereon, without presentment, demand, protest, any additional notice whatsoever or other requirements of any kind, all of which are hereby expressly waived by the Borrower, except as otherwise provided in this Agreement or by Applicable Law, and the Borrower shall be unconditionally obligated to deposit with the Agent cash collateral in an amount equal to any and all existing Letter of Credit Liability. Third Amended and Restated Senior Secured Credit Agreement 73 ARTICLE VIII THE AGENT AND THE LENDERS ------------------------- SECTION 8.01 AUTHORIZATION AND ACTION. ------------------------ (a) Each Lender and each Issuing Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents to execute and deliver or accept, on its behalf, the other Loan Documents and any other documents, instruments and agreements related thereto or hereto to take such action on its behalf under the provisions hereof and thereof and to exercise such rights, remedies, powers and privileges hereunder and thereunder as are delegated to the Agent by the terms hereof and thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. (b) Except for any matters expressly subject to the consent or approval of the Agent under the Loan Documents, the Agent shall not, without the prior approval of the Required Lenders (or, as provided in Section 9.03, all of the Lenders), consent to any departure by the Borrower from the terms of, waive any default or otherwise amend this Agreement or any other Loan Documents. The Agent will, to the extent practicable under the circumstances, consult with the other Lenders prior to taking action on their behalf under the Loan Documents and in acting as their Agent thereunder. The Agent will not take any action contrary to the written direction of Required Lenders, will take any lawful action not contrary to the provisions of the Loan Documents prescribed in written instructions of the Required Lenders (or, as provided in Section 9.03, all the Lenders) and, as to any matters not expressly provided for by the Loan Documents (including enforcement or collection), may decline to take any action, except upon the written instructions of the Required Lenders (or, as provided in Section 9.03, all the Lenders). If such instructions are requested reasonably promptly, the Agent shall be absolutely entitled to refrain from taking any action and shall not have any liability to the Borrower, any Affiliate of the Borrower, any Subsidiary of the Borrower, or any Lender for refraining from taking any action until it shall have received such instructions; provided, -------- however, that the Agent shall in no event be required to take or refrain from - ------- taking any action that would, in the Agent's opinion, be inconsistent with the Agent's practice in similar situations when acting solely for its own account or be contrary to the provisions of any Loan Document or Applicable Law. (c) The Agent shall not have any duties or responsibilities except those expressly set forth in the Loan Documents. No duty to act, or refrain from acting, and no other obligation whatsoever, shall be implied on the basis of any right, power or authority granted to the Agent or shall become effective in the event of any temporary or partial exercise of such rights, power or authority. The Agent shall not be required to exercise any right, power, remedy or privilege granted to it in any Loan Document, to ascertain or inquire whether any Default or Event of Default has occurred and is continuing, or to inspect the property (including the books and records) of the Borrower or any Affiliate of the Borrower, or any Subsidiary of the Borrower, or to take any other affirmative action, except as provided in Section 7.01, or unless requested or directed to do so in accordance with the provisions of Section 8.01(b). (d) The duties of the Agent shall be mechanical and administrative in nature. The Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any other Lender. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower, any Affiliate or the Borrower, or any Subsidiary of the Borrower that may come into the possession of the Agent or any of its Affiliates. SECTION 8.02 EXCULPATION; AGENT'S RELIANCE; ETC. Neither the Agent ---------------------------------- nor any of its directors, officers, agents, attorneys or employees shall be liable to the Borrower, any Affiliate of the Third Amended and Restated Senior Secured Credit Agreement 74 Borrower, any Subsidiary of the Borrower, or any other Lender Party for any action taken or omitted to be taken by it or them under or in connection with any Loan Document (a) with the consent or at the request of the Required Lenders (or, as provided in Section 9.03, all the Lenders), or (b) in any other circumstances, except for its or their own gross negligence or wilful misconduct as determined by a final judgment of a court of competent jurisdiction. The Agent makes no warranty or representation to any other Lender and shall not be responsible to any other Lender for any recitals, statements, warranties or representations made in, or in connection with, any Loan Document or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of any Loan Document or any financial information, opinions of counsel or other documents executed and delivered pursuant thereto, or for the financial condition of the Borrower, any Affiliate of the Borrower, or any Subsidiary of the Borrower. The Agent shall not be responsible to any Lender for the satisfaction of any condition specified in Article III. The Agent may treat the payee of any Note as the holder thereof until the Agent receives the related assignment and acceptance documentation signed by such holder and the assignee and in form satisfactory to the Agent. The Agent shall be entitled to rely upon any notice, certificate or other writing believed by the Agent to be genuine and correct and to have been signed or sent by the proper Person or Persons. The Agent shall be entitled to consult with legal counsel, independent public accountants and other experts selected by the Agent and to act in reliance upon the advice of such counsel and other experts concerning its actions and duties hereunder. SECTION 8.03 AGENT AND AFFILIATES. The Agent shall in its capacity -------------------- as a Lender have the same rights, powers and obligations under this Agreement and the other Loan Documents as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent, including the right to give or deny consent to any action requiring consent or direction of the Required Lenders or all the Lenders. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any Affiliate of the Borrower, and any Subsidiary of the Borrower, all as if the Agent were not the Agent and without any duty to account therefor to the Lenders. The Agent shall be entitled to receive from the Borrower its fees or portions thereof in connection with this transaction without any liability to account therefor to any other Lender, except as the Agent and such Lender may have expressly agreed. SECTION 8.04 LENDER CREDIT DECISION. Each Lender acknowledges that ---------------------- it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents. Third Amended and Restated Senior Secured Credit Agreement 75 SECTION 8.05 INDEMNIFICATION. ---------------- The Agent shall in no event be required to take any action under the Loan Documents or in relation thereto unless it shall first be indemnified to its satisfaction by the other Lenders against any and all liability and expense that it may incur by reason of taking any such action. Each Lender agrees to indemnify and hold the Agent harmless (to the extent not promptly paid or reimbursed by the Borrower, ratably according to their respective Commitments, from and against any and all (a) costs, expenses and other amounts incurred by the Agent otherwise payable by the Borrower pursuant to Section 9.01 and (b) Indemnified Liabilities that may be imposed on, incurred by, or asserted against the Agent, except to the extent they are finally adjudged by a court of competent jurisdiction to have directly resulted from the gross negligence or willful misconduct of the Agent. SECTION 8.06 SUCCESSOR AGENT. The Agent may resign at any time as --------------- Agent under the Loan Documents by giving written notice thereof to the Lenders and the Borrower and the Agent may be removed at any time with or without cause by written action of all Lenders (other than the Agent) delivered to the Agent. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's notice of resignation or the removal of the Agent, then the retiring or removed Agent may, on behalf of the other Lender Parties, appoint a successor Agent, which shall be a financial institution having a combined capital and surplus of at least $100,000,000, or a branch or agency of such a financial institution, organized or licensed to do business under the laws of the United States of America or any State thereof. Upon the acceptance of any appointment as the Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged of its duties and obligations under the Loan Documents. In making such appointment the Agent shall consult with the Borrower; provided, however, that the Agent shall not be required to obtain any -------- ------- consent by the Borrower with respect to such successor Agent. Upon the acceptance of any appointment as the Agent by a successor Agent, such successor Agent shall give notice to the Borrower of its appointment as Agent. Upon any retiring Agent's resignation or removal, the provisions of this Article VIII (as well as other expense reimbursement, indemnification and exculpatory provisions in the other Loan Documents) shall continue in effect for its benefit as to any actions taken or omitted by it while it was Agent. SECTION 8.07 EXCESS PAYMENTS. If any Lender shall obtain any payment --------------- or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Obligations in excess of its pro rata share of payments and other recoveries on account of such Obligations obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in such Obligations held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of the other Lenders; provided, however, that if all or any portion of the excess -------- ------- payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to such Lender to the extent of such recovery, but without interest. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 8.07 may, to the fullest extent permitted by Applicable Law and by Section 9.11 hereto, exercise all of its rights of payment (including setoff) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 8.08 LENDERS. ------- The provisions of this Article VIII are solely for the benefit of the Agent and the other Lenders and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under the Loan Documents, the Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. Third Amended and Restated Senior Secured Credit Agreement 76 SECTION 8.09 COLLATERAL AND GUARANTY MATTERS. ------------------------------- (a) Except as specifically otherwise provided in any of the Collateral Documents, the Agent is hereby authorized on behalf of all of the Lenders, without assumption of any duty or obligation in respect of and without the necessity of any notice to or further consent from any other Lender, to take any action with respect to any Collateral or Collateral Documents that may be necessary to perfect and maintain perfected the Agent's Liens upon the Collateral. (b) The Lenders hereby irrevocably authorize the Agent, in its discretion, to release any Lien held by the Agent upon any Collateral (i) from and after the day of termination of any Collateral Document pursuant to the terms thereof; (ii) constituting property being sold or disposed of if the Borrower certifies to the Agent that the sale or disposition is permitted under the relevant Collateral Document and this Agreement (and the Agent may rely conclusively on any such certificate, without further inquiry, unless notified to the contrary by the Required Lenders); or (iii) approved, authorized or ratified in writing by all Lender Parties; provided, however, that (x) the Agent -------- ------- shall not be required to execute any such documents on terms that create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (y) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of the Borrower in respect of) all assets retained by the Borrower/Borrowers, including the proceeds of any Asset Disposition, all of which shall continue to constitute part of the Collateral. Upon request by the Agent at any time, the other Lender Parties will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this Section 8.09(b). (c) The Agent shall have no obligation whatsoever to any other Lender or other Person to assure that the Collateral exists or is owned by the Borrower or (except as otherwise expressly required by the Collateral Documents) is cared for, protected or insured, or that the Liens of the Agent thereunder have been properly created, perfected, protected or enforced or are entitled to any particular priority. (d) Except as otherwise provided in the Loan Documents, the Agent may act in any manner it may deem appropriate in respect of the Collateral, in its discretion, given the Agent's own interest in the Collateral as a Lender, and the Agent shall have no duty or liability whatsoever with respect thereto to any other Lender. (e) Each Lender hereby approves the form of the other Loan Documents attached as exhibits to this Agreement and hereby authorizes the Agent on its behalf to accept from Holdings, the Borrower and the Subsidiary Guarantors and execute and deliver as Agent, the other Loan Documents in substantially the form of such exhibits, with such changes, additions or deletions as the Agent, in its discretion, may approve as necessary or appropriate, such approval to be conclusively evidenced by the Agent's acceptance or execution thereof. Each Lender also authorizes the Agent to accept, or execute and deliver, such additional documents (including financing statements, opinions, certificates and other documents in form and substance satisfactory to the Agent, in its discretion) in connection with the closing pursuant to Section 3.01, or any subsequent closing for the pledge of any other Collateral, or any additional Guaranties as the Agent, in its discretion, may approve, such approval to be conclusively evidenced by the Agent's acceptance or execution thereof. SECTION 8.10 PAYMENTS; AVAILABILITY OF FUNDS; CERTAIN NOTICES. If ------------------------------------------------ the Agent shall fail to deliver to any other Lender its share of any payment received from the Borrower as and when required under Article II hereof, the Agent shall pay to such Lender its share of such payment together with interest on such amount at the Federal Funds rate, for each day from the date such amount was required to be paid to such Lender until the date the Agent pays such amount to such Lender. Third Amended and Restated Senior Secured Credit Agreement 77 SECTION 8.11 OBLIGATIONS OF LENDER PARTIES SEVERAL; ENFORCEMENT BY ----------------------------------------------------- THE AGENT. - --------- (a) Each Lender's obligations hereunder are several, and not joint or joint and several. The failure of any Lender to make any Loan or otherwise to perform its obligations hereunder will not increase the obligations of any other Lender. Notwithstanding the foregoing, any Lender may assume, but shall have no obligation to any Person to assume, any non-performing Lender's obligation to make a Loan. Nothing contained in this Agreement and no action taken by the Agent or any other Lender pursuant to this Agreement shall be deemed to constitute the Agent and any other Lender to be a partnership, an association, a joint venture or any other kind of entity. (b) Each Lender agrees that, except with the prior written consent of the Agent or as provided in Section 9.11, no Lender shall have any right individually to realize upon the Collateral or otherwise enforce any Loan Document or any provision thereof, or make demand thereunder, it being agreed that such rights and remedies may only be exercised by the Agent for the ratable benefit of the Lenders upon the terms of this Agreement. Third Amended and Restated Senior Secured Credit Agreement 78 ARTICLE IX MISCELLANEOUS ------------- SECTION 9.01 EXPENSES. The Borrower agrees to pay on demand: -------- (a) the reasonable fees, expenses and disbursements of counsel to the Agent in connection with the negotiation, preparation, execution and delivery and administration of this Agreement and all other Loan Documents and any amendments, modifications and waivers hereof or thereto; (b) all other actual and reasonable out-of-pocket expenses incurred by the Agent in connection with the negotiation, preparation, execution, delivery and administration of this Agreement and all other Loan Documents and any amendments, modifications and waivers hereto or thereto, and the making of the Loans hereunder; and (c) all costs and expenses (including reasonable attorneys' fees and disbursements and costs of settlement) incurred by the Agent in any workout, restructuring or similar arrangements or after an Event of Default in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of its rights hereunder or under the Notes, the Collateral Documents and all other Loan Documents and instruments contemplated hereby and thereby; provided, however, that, without impairing or otherwise affecting provisions in - -------- ------- the California Mortgages, this Section 9.01 shall not in any event extend to or include any costs and expenses incurred by the Agent that are included in the Specified Mortgage Loan Obligations. SECTION 9.02 INDEMNITY. --------- (a) In addition to the payment of expenses pursuant to Section 9.01 hereof, the Borrower agrees to indemnify, defend and hold harmless the Agent and each Lender and any holder of any interest in the Notes and the officers, directors, employees and agents of the Agent and each Lender and such holders (the "Indemnitees") from and against (i) any and all transfer taxes, documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement and the other Loan Documents or the making of the Term Loans or the Revolving Loans, and (ii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to or arising out of or in connection with the making of the Senior Term Loan or the Revolving Loans, this Agreement and all other Loan Documents (other than the California Mortgages) or the use or intended use of the proceeds of the Senior Term Loan and the Revolving Loans (the "Indemnified Liabilities"), provided, -------- however, that the Borrower shall have no obligation hereunder with respect to - ------- any of the Indemnified Liabilities arising from the gross negligence or willful misconduct of any lndemnitee. (b) Each Indemnitee will promptly notify the Borrower of each event of which it has knowledge which may give rise to a claim under the indemnification provisions of this Section 9.02, provided that the failure to so notify the -------- Borrower shall in no way impair the Borrower's obligations under this Section 9.02. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee indemnified or intended to be indemnified pursuant to this Section 9.02, the Borrower, to the extent and in the manner directed by the Indemnitee, will resist and defend such action, suit, or proceeding or cause the same to be resisted and defended by counsel designated by the Borrower (which counsel shall be satisfactory to the Indemnitee), provided that if Borrower shall provide the Indemnitee with -------- Third Amended and Restated Senior Secured Credit Agreement 79 adequate security for its indemnity obligations in form reasonably satisfactory to Indemnitee the Borrower may direct the manner in which such action, suit or proceeding is resisted or defended. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, writ, or proceeding. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding provisions may be unenforceable because it is violative of any law or public policy, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under Applicable Law. (c) The obligations of the Borrower under this Section 9.02 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. (d) Notwithstanding the foregoing (but without impairing or otherwise affecting provisions in the California Mortgages), this Section 9.02 shall not in any event extend to or include any liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever that are included in the Specified Mortgage Loan Obligations. SECTION 9.03 WAIVERS; MODIFICATIONS IN WRITING. --------------------------------- (a) The rights and remedies provided for under this Agreement and in the other Loan Documents are cumulative and are not exclusive of any rights and remedies that may be available to the Lender at law, in equity, or otherwise. No amendment, modification, supplement, termination, consent, or waiver of this Agreement or any other Loan Documents shall in any event be effective unless the same shall be in writing and signed by the Agent and the Required Lenders. Notwithstanding the foregoing, (i) no amendment that has the effect of (A) reducing the rate or amount, or extending the stated maturity or due date, of any amount payable by the Borrower to any Lender under the Loan Documents, (B) increasing the amount, or extending the stated termination or reduction date, of any Lender's Pro Rate Share of the Revolving Credit Facility A Commitment or subjecting any Lender to any additional obligation to extend credit, (C) altering the rights and obligations of the Borrower to prepay the Loans, (D) permitting the creation of any Lien ranking prior to or on a parity with the Lien of any Collateral Document, releasing any part of the Collateral (except as permitted under the Loan Documents) or depriving any Lender of the security afforded by the Lien of any Collateral Document, (E) releasing any party under any of the Guaranties (except as permitted under the Loan Documents), or (F) changing this Section 9.03 or the definition of the term "Required Lenders," shall be effective unless the same shall be signed by or on behalf of all of the Lenders;. (ii) no amendment that has the effect of (A) increasing the duties or obligations of the Agent, (B) increasing the standard of care or performance required on the part of the Agent, or (C) reducing or eliminating the indemnities or immunities to which the Agent is entitled (including any amendment of this Section 9.03), shall be effective unless the same shall be signed by or on behalf of the Agent; and (iii) no amendment that has the effect of (A) increasing the duties or obligations of any Issuing Bank; (B) increasing the standard of care or performance required on the part of any Issuing Bank; or (C) reducing or eliminating the indemnities or immunities to which any Issuing Bank is entitled (including any amendment of this Section 9.03(a)(iii)) shall be effective unless the same shall be signed by or on behalf of each Issuing Bank. (b) Any waiver of any provision of this Agreement or the other Loan Documents shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance Third Amended and Restated Senior Secured Credit Agreement 80 with this Section 9.03 shall be binding upon each holder of any Note, each future holder of any Note, and the Borrower. (c) Notwithstanding anything contained in this Section 9.03, the Revolving Credit Facility B Commitment and the Revolving Credit Facility B Termination Date may each be changed by agreement among the Borrower, the Agent and the Revolving Credit Facility B Lender without notice to or consent of any of the other Lenders. SECTION 9.04 FAILURE OR DELAY. No failure or delay on the part of ---------------- the Agent or any Lender or any holder of any Note in the exercise of any power, right or remedy under this Agreement or the other Loan Documents shall impair such power, right or remedy or shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude other or further exercise of any other power, right or remedy. SECTION 9.05 NOTICES, ETC. All notices, demands, instructions and ------------ other communications required or permitted to be given to or made upon any party hereto shall be in writing and (except for financial statements, other related informational documents and routine communications to be furnished pursuant hereto, which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by courier, by overnight mail, by registered mail or certified mail, postage prepaid, or by prepaid telex, telecopy or telegram (with messenger delivery specified) and shall be deemed to be given for purposes of this Agreement on the day that such writing is received by the intended recipient thereof. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section 9.05, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telex or telecopier numbers) indicated on Schedule 9.05 attached hereto. SECTION 9.06 SUCCESSORS AND ASSIGNS. ---------------------- (a) This Agreement and any amendments hereto shall be binding upon and inure to the benefit of and be enforceable by the Borrower and the Lenders and their respective successors and assigns. The Borrower may not assign or transfer any interest hereunder without the prior written consent of the Lenders. (b) The Lender shall have the right at any time to do either or both of the following: (i) subject to the provisions of Section 9.07, furnish one or more purchasers or potential purchasers of all or any portion of the Term Loans, the Revolving Loans or the Notes or of a participation interest therein, with any and all information concerning Holdings, Borrower or its Subsidiaries which has been supplied by Holdings or the Borrower to the Lender; or (ii) sell, assign, syndicate, transfer or negotiate all or any portion of the Lender's interests in the Term Loans, the Revolving Loans or the Notes, so long as the Lender at all times acts as agent for itself and/or its transferees (unless and until the Lender is removed and a successor agent is appointed) or sell, assign, transfer, or grant participations in all or any portion of the Lender's interests in the Term Loans, the Revolving Loans or the Notes. In this regard, the Borrower specifically acknowledges that The Sumitomo Bank, Limited will be the only Lender party to this Agreement on the date of this Agreement. To the extent that after the date of this Agreement any other financial institution becomes a Lender hereunder, the Borrower and the Lender agree to execute such amendments or new documentation as may be necessary to reflect and join any such financial institutions as parties hereto and to reflect properly their pro rata benefits and obligations hereunder. At such time the Agreement shall be modified to reflect the pro rata share of the Term Loans and or the Revolving Loans of such new Lender and of the existing Lenders and new Notes will be issued to such new Lender and to the assigning Lender in conformity with the requirements of Article II to the extent needed to reflect each Lender's revised pro rata share of the Term Loans and/or the Revolving Loans. Third Amended and Restated Senior Secured Credit Agreement 81 (c) Notwithstanding Section 2.09, in the event that a Foreign Bank becomes a signatory to this Agreement, the Borrower shall withhold tax with respect to payments to such Foreign Bank in accordance with the United States federal income tax laws then in effect and shall have no obligation to make payments to such Foreign Bank that are free and clear of such properly withheld amounts, unless such Foreign Bank shall have delivered to the Agent, in its capacity as agent for the Lenders, and the Agent shall have delivered to the Borrower, a duly executed certificate in form reasonably satisfactory to the Borrower to the effect that as of that date such Foreign Bank is entitled to receive all payments made hereunder without deduction or withholding of United States federal income tax (x) pursuant to the terms of an applicable tax treaty in effect with the United States of America (in which case such certificates shall be accompanied by two executed copies of Form 1001 of the Internal Revenue Service), (y) under Code Section 1441(c) (in which case such certificates shall be accompanied by two executed copies of Form 4224 of the lnternal Revenue Service), or (z) pursuant to an exemption certificate received from the Internal Revenue Service (in which case such certificate shall be accompanied by a copy of such exemption certificate). Each Foreign Bank, upon becoming aware of the occurrence of any event requiring a change in its prior Certificate, shall promptly deliver to the Lender, in its capacity as agent for the Lenders, for delivery to the Borrower duly executed certificates to the effect that (as the case may be): (i) such Foreign Bank is not capable of receiving future payments hereunder without deduction or withholding of United States federal income tax, in which case such Foreign Bank shall be entitled to the benefits of Section 2.09 hereof; or (ii) such Foreign Bank is capable of receiving all payments hereunder without deduction or withholding of United States federal income tax, pursuant to a tax treaty of the United States, pursuant to Code Section 1441(c), or pursuant to an exemption certificate received from the Internal Revenue Service, a copy of which shall be attached to such certificate. (d) "Foreign Bank" shall, for purposes of subsection (c) above, mean and refer to any bank, financial institution or other entity other than a bank, financial institution or other entity organized and existing under the laws of the United States of America or any political subdivision thereof or therein. SECTION 9.07 CONFIDENTIALITY. Each Lender agrees to maintain any --------------- confidential information that it may receive from the Borrower or one of its Subsidiaries pursuant to this Agreement confidential and shall not disclose such information to third parties without the prior consent of the Borrower, except for disclosure: (a) to legal counsel, accountants and other professional advisors to the Lenders; (b) to regulatory officials having jurisdiction over such Lender; (c) as required by law or legal process or in connection with any legal proceeding to which the Lender is a party or is otherwise subject; (d) to another financial institution in connection with a disposition or proposed disposition of all or part of a Lender's interests hereunder, whether by participation, assignment or other transfer, which financial institution shall have agreed in writing to be subject to the confidentiality provisions of this Section 9.07; and (e) to prospective purchasers of Collateral in connection with any disposition thereof after an Event of Default. Each Lender shall undertake to return, upon request by the Borrower made within a reasonable time after all obligations of the Borrower under this Agreement, the Notes and the other Loan Documents have been paid in full and the Agreement has been terminated, any confidential material which Borrower clearly and conspicuously marked "Confidential and Subject to Return" prior to or in connection with furnishing or making available the same to the Lender, provided that the return of such -------- material is not inconsistent with standard banking practice or, in the judgment of the Lender, otherwise disadvantageous to the Lender. SECTION 9.08 GOVERNING LAW AND VENUE; WAIVER OF TRIAL BY JURY. The ------------------------------------------------ validity of this Agreement and each Note, the construction, interpretation and enforcement thereof and the rights of the parties thereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of California. The parties agree that all actions or proceedings arising in connection with this Agreement and the Notes shall be tried and litigated in State and Federal Courts located in the County of Los Third Amended and Restated Senior Secured Credit Agreement 82 Angeles, State of California, unless such actions or proceedings are required to be brought in another court to obtain subject matter jurisdiction over the matter in controversy. THE BORROWER AND EACH LENDER WAIVE THE RIGHT TO A TRIAL BY JURY AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON --------- CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN - ---------- ACCORDANCE WITH THIS SECTION 9.08. SERVICE OF PROCESS, SUFFICIENT FOR PERSONAL JURISDICTION IN ANY ACTION AGAINST THE BORROWER, MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ITS ADDRESS INDICATED IN SCHEDULE 8.05 HERETO. SECTION 9.09 SEVERABILITY OF PROVISIONS. Any provision of this -------------------------- Agreement which is illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenforceability without invalidating or impairing the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 9.10 INDEPENDENCE OF COVENANTS. All covenants under this ------------------------- Agreement shall each be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by another covenant, by an exception thereto, or be otherwise within the limitations thereof, shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. SECTION 9.11 SET OFF. In addition to any rights now or hereafter ------- granted under Applicable Law and not by way of limitation of any such rights, upon the occurrence of any Event of Default, each Lender and each holder or transferee of any Note or any Person with any interest in any Note is hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other indebtedness at any time held or owing by the Lender or that subsequent holder to or for the credit or the account of the Borrower or against and on account of the Debt of the Borrower to the Lender or that subsequent holder under this Agreement and the Notes, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement or the Notes, irrespective of whether or not that Lender or that subsequent holder shall have made any demand under this Agreement. SECTION 9.12 CHANGES IN ACCOUNTING PRINCIPLES. If any changes in -------------------------------- generally accepted accounting principles from those used in the preparation of the financial statements referred to in this Agreement are hereafter occasioned by the promulgation of rules, regulations, pronouncements, or opinions of or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), or there shall occur any change in the Borrower's fiscal or tax years and, as a result of any such changes, there shall result a change in the method of calculating any of the financial covenants, negative covenants, standards, or other terms or conditions found in this Agreement, then the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the Borrower's financial condition shall be the same after such changes as if such changes had not been made. SECTION 9.13 PUBLICITY. Any publicity release, advertisement, --------- filing, public statement or announcement made by or at the request of the Borrower or any Subsidiary regarding this Agreement or the financing provided under this Agreement which makes reference to the Lender, or describes the financing provided by the Lenders, shall be first reviewed by and must be satisfactory to the Lender. SECTION 9.14 SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND WARRANTIES. ------------------------------------------------------ All agreements, representations, and warranties made herein shall survive the execution and delivery of this Third Amended and Restated Senior Secured Credit Agreement 83 Agreement, the making of the Term Loans hereunder and the execution and delivery of the Notes and shall continue until one (1) year after repayment of the Notes and the Obligations, and any investigation at any time made by or on behalf of the Lender shall not diminish the Lender's right to rely thereon. SECTION 9.15 HEADINGS. Article and section headings used in this -------- Agreement are for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or affect the construction of this Agreement. SECTION 9.16 EXECUTION IN COUNTERPARTS. This Agreement may be ------------------------- executed in any number of counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto. SECTION 9.17 COMPLETE AGREEMENT. This Agreement, together with the ------------------ exhibits and schedules to this Agreement, the Notes and the other Loan Documents, is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement. SECTION 9.18 KNOWLEDGE OF BORROWER. Whenever reference is made to a --------------------- fact or the occurrence of an event as being known to or within the knowledge of the Borrower, the Borrower shall be deemed to have such knowledge immediately after the appropriate employee or the agent of the Borrower to whose attention such fact or event would be brought in the ordinary course of the affairs of the Borrower, knows or should have known of such fact or event in the performance of his duties in the ordinary course of the affairs of the Borrower. SECTION 9.19 WAIVER OF ANTI-DEFICIENCY PROTECTION. FURTHER, WITHOUT -------------------------------------------------- LIMITATION TO THE FOREGOING, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY DISCLAIMS AND RENOUNCES ANY RIGHT AND HEREBY IRREVOCABLY WAIVES ANY DEFENSE, PROTECTION OR RIGHT UNDER: (A) CALIFORNIA CODE OF CIVIL PROCEDURE ("CCP") SECTION 580D CONCERNING THE BAR AGAINST RENDITION OF A DEFICIENCY JUDGMENT AFTER FORECLOSURE UNDER A POWER OF SALE; (B) CCP SECTION 580A PURPORTING TO LIMIT THE AMOUNT OF A DEFICIENCY JUDGMENT WHICH MAY BE OBTAINED FOLLOWING EXERCISE OF A POWER OF SALE UNDER A DEED OF TRUST; (C) CCP SECTION 726 CONCERNING EXHAUSTION OF COLLATERAL, THE FORM OF FORECLOSURE PROCEEDINGS WITH RESPECT TO REAL PROPERTY SECURITY LOCATED IN CALIFORNIA AND OTHERWISE LIMITING THE AMOUNT OF A DEFICIENCY JUDGMENT WHICH MAY BE RECOVERED FOLLOWING COMPLETION OF JUDICIAL FORECLOSURE BY REFERENCE TO THE "FAIR VALUE" OF THE FORECLOSURE COLLATERAL; (D) ANY DUTY ON THE PART OF THE LENDER TO CONDUCT A COMMERCIALLY REASONABLE SALE UNDER UCC SECTION 9504(3) TO THE EXTENT ANY PORTION OF THE COLLATERAL FOR THE OBLIGATIONS OF THE BORROWER TO THE LENDER CONSISTS OF PERSONAL PROPERTY OR FIXTURES, INCLUDING, WITHOUT LIMITATION, THE MAKING OF ANY ELECTION UNDER UCC SECTION 9501(4) IN RESPECT OF ANY SUCH PERSONAL PROPERTY OR FIXTURES, IT BEING EXPRESSLY AGREED BY EACH BORROWER THAT THE BORROWER HAS HERETOFORE DEFAULTED AND IS PRESENTLY IN DEFAULT UPON ITS OBLIGATIONS TO THE LENDER; AND (E) ANY RIGHT TO OBJECT TO THE COMMENCEMENT BY THE LENDER OF ANY ADDITIONAL OR FURTHER ACTION TO JUDICIALLY FORECLOSE THE LIEN OF ANY MORTGAGE OR DEED OF TRUST OR ANY OTHER LIEN OR SECURITY INTEREST GRANTED BY THE BORROWER UPON ANY ITEM OF COLLATERAL OR THE FILING BY LENDER OF ANY PLEADINGS IN THE ACTION INTENDED TO CONSOLIDATE THE SUBJECT MATTER OF THE ACTION WITH Third Amended and Restated Senior Secured Credit Agreement 84 ANY CAUSE OF ACTION TO FORECLOSE ANY MORTGAGE OR DEED OF TRUST OR REALIZE UPON ALL OR ANY PART OF THE COLLATERAL. Third Amended and Restated Senior Secured Credit Agreement 85 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first set forth above. CB COMMERCIAL REAL ESTATE GROUP, INC., a Delaware corporation By: ------------------------------------ David A. Davidson, Senior Executive Vice President LENDERS: ------- THE SUMITOMO BANK, LIMITED, a banking corporation organized under the laws of Japan By: ------------------------------------ Title: --------------------------------- The Euro-Dollar Lending Office of THE SUMITOMO BANK, LIMITED is The Sumitomo Bank-- Los Angeles Branch ---------------------------------------- The Domestic Lending Office of THE SUMITOMO BANK, LIMITED is The Sumitomo Bank-- Los Angeles Branch ---------------------------------------- THE SUMITOMO BANK-- 777 South Figueroa Street, Suite 2600 Los Angeles, California 90017 ISSUING BANK: ------------ THE SUMITOMO BANK, LIMITED, a banking corporation organized under the laws of Japan By: ------------------------------------ Title: --------------------------------- AGENT: ----- THE SUMITOMO BANK, LIMITED, a banking corporation organized under the laws of Japan By: ------------------------------------ Title: --------------------------------- Third Amended and Restated Senior Secured Credit Agreement 86 EXECUTION COPY SCHEDULES Schedule 1.01A - Revolving Credit Facility A Lender Pro Rata Shares Schedule 1.01B - Term Loan Lender Pro Rata Share Schedule 1.01C - Excluded Subsidiaries Schedule 1.01D - Westmark Guarantors Schedule 4.01 - Subsidiaries and Joint Ventures Schedule 4.02 - Consents and Approvals Schedule 4.03 - Recordation of Mortgages Schedule 4.06 - Litigation Schedule 4.08 - Taxes Schedule 4.11 - Employee Benefit Plans Schedule 4.12 - Title to Property Schedule 4.15 - Licenses, Trademarks Schedule 4.16 - Environmental Condition Schedule 4.17 - Certain Restrictions Schedule 4.18 - Location of Assets Schedule 5.06 - Required Insurance Schedule 6.01 - Existing Liens Schedule 6.02 - Existing Indebtedness Schedule 6.04(c) - Existing Investments Schedule 6.09 - Certain Contractual Obligations Schedule 9.05 - Notices EXHIBITS Exhibit A - Domestic Mortgage Term Note Exhibit B - Domestic Revolving Credit Facility A Note Exhibit C - Domestic Revolving Credit Facility B Note Exhibit D - Domestic Senior Term Note Exhibit E - Euro-Dollar Mortgage Term Note Exhibit F - Euro-Dollar Revolving Credit Facility A Note Exhibit G - Euro-Dollar Revolving Credit Facility B Note Exhibit H - Euro-Dollar Senior Term Note Exhibit I - Notice of Borrowing Exhibit J - Notice of Conversion/Continuation Exhibit K - Form of Legal Opinion of Pillsbury, Madison & Sutro Exhibit L-1 - Officer's Certificate of Borrower Exhibit L-2 - Officer's Certificate of Borrower re: Amended Certificate of Incorporation Exhibit L-3 - Officer's Certificate of Holdings re: Amended Certificate of Incorporation
Third Amended and Restated Senior Secured Credit Agreement EX-10.6 5 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.6 AMENDED AND RESTATED SENIOR SUBORDINATED CREDIT AGREEMENT AMONG CB COMMERCIAL REAL ESTATE GROUP, INC. and CB COMMERCIAL HOLDINGS, INC., CB COMMERCIAL REAL ESTATE GROUP OF IOWA, INC., CB COMMERCIAL PARTNERS, INC. CB COMMERCIAL REALTY ADVISORS, INC., CB COMMERCIAL BROKERAGE, INC., SUTTER FREMONT PROPERTY SERVICES, INC., CB COMMERCIAL REAL ESTATE GROUP OF HAWAII, INC. CB COMMERCIAL REAL ESTATE FUND MANAGEMENT, INC., CB COMMERCIAL REAL ESTATE MANAGEMENT SERVICES, INC., CB COMMERCIAL SUTTON & TOWNE, INC., SUTTER FREMONT REAL ESTATE MERCHANT CAPITAL CORPORATION, SUTTON & TOWNE N.J., INC., SUTTER FREMONT, INC., CB COMMERCIAL WAREHOUSE PROPERTY CORP., L.J. MELODY INVESTMENTS, INC. L.J. MELODY & COMPANY, and L.J. MELODY & COMPANY OF CALIFORNIA as Guarantors and SUMITOMO FINANCE (DUBLIN) LIMITED Dated as of November 25, 1996 ================================================================================ AMENDED AND RESTATED SENIOR SUBORDINATED CREDIT AGREEMENT This Amended and Restated Senior Subordinated Credit Agreement is dated as of November 25, 1996 (this "Agreement"), and entered into by and among CB Commercial Real Estate Group, Inc. (formerly known as "Coldwell Banker Commercial Group, Inc."), a Delaware corporation ("Company"), CB Commercial Holdings, Inc., a Delaware corporation ("CB Holdings"), and the other parties listed on the signature pages hereto (collectively with CB Holdings, the "Guarantors"), and Sumitomo Finance (Dublin) Limited, a limited liability company organized and existing under the laws of the Republic of Ireland (the "Lender"). RECITALS WHEREAS, the Company and the Lender desire to amend and restate the terms and provisions of the Senior Subordinated Credit Agreement dated as of July 20, 1990, as amended to the date hereof, between the Company and the Lender upon the terms and conditions set forth in this Agreement; and WHEREAS, as of the date hereof, there are outstanding $62,000,000 representing original principal amount and $ 8,916,216.37 representing Deferred Interest (as hereinafter defined); and WHEREAS, the Guarantors have agreed to guarantee the Obligations (as hereinafter defined) pursuant to the Guarantee set forth in Article X hereof; and WHEREAS, CB Holdings pledged the Collateral (as hereinafter defined) to secure its Guarantee. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Company and the Lender agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions ----------- Except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Section 1.1 shall, for all purposes of this Agreement, have the meanings herein specified, the following definitions to be equally applicable to both the singular and plural forms of any of the terms herein defined: 1 "ADJUSTED CONSOLIDATED NET WORTH" means, at any date, Consolidated Net Worth at such date, plus $236,000,000. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly, indirectly or beneficially, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. Notwithstanding the foregoing, in no event shall the Lender or any of its Affiliates be deemed to be an Affiliate of CB Holdings, the Company or any subsidiary of the Company. "AGENT" means any agent appointed by the Lender to administer the Loan pursuant to Section 9.20 of this Agreement. "AGENCY AGREEMENT" has the meaning ascribed to such term in Section 9.20 of this Agreement. "AGREEMENT" means this Amended and Restated Senior Subordinated Credit Agreement dated as of November 25, 1996, as it may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. "APPLICABLE LIBOR BASED RATE" means (i) during the period from the date hereof to and including December 31, 1996, (a) LIBOR plus (b) one-quarter ---- of a percentage point (0.25%) and (ii) during the period from and including January 1, 1997 and thereafter, (x) LIBOR plus (y) one and one-quarter ---- percentage points (1.25%). "APPLICABLE LIBOR MARGIN" means (i) during the period from June 30, 1994 to and including December 31, 1996, one-quarter of a percentage point (0.25%); (ii) during the period from and including January 1, 1997 to and including December 31, 1998, one and one-quarter percentage points (1.25%); (iii) during the period from and including January 1, 1999 to and including December 31, 1999, two percentage points (2.00%); (iv) during the period from and including January 1, 2000 to and including December 31, 2000, three percentage points (3.00%); and (v) during the period from and including January 1, 2001 and thereafter, four percentage points (4.00%). "ASSET SALE" means the sale, transfer or other disposition by the Company or any of its Subsidiaries to any Person other than the Company or any of its Subsidiaries of (i) any of the stock of any of the Company's Subsidiaries, (ii) substantially all of the assets of any geographic or other division or line of business of the Company or any of its Subsidiaries, or (iii) any other assets (including, without limitation, any assets which do not constitute substantially all of the assets of any geographic or other division or line of business but excluding any assets purchased for sale to others (other than Warehoused Real Property) in the ordinary course of business consistent with the past practices of the Company and its Subsidiaries), in the case of each of clauses (i), (ii) and (iii), having a value in excess of 2 $250,000; provided that any asset sale described in clause (i), (ii) or (iii) -------- shall be deemed not to be an "Asset Sale" until the aggregate amount of all such sales by the Company and its Subsidiaries occurring in any fiscal year equals or exceeds $1,000,000; provided, further, that an Asset Sale shall not include (A) -------- ------- inventory sales in the ordinary course of business; (B) sales or other dispositions of obsolete equipment or other operating assets which are either no longer needed for the ordinary course of business of the Company or its Subsidiaries or are being replaced by equipment or other operating assets of at least comparable value and utility; and (C) sales, transfers and other dispositions of assets between the Company and its Subsidiaries and between the Company's Subsidiaries; and provided, further, that the sale, assignment, -------- ------- transfer, lease or other disposition of Warehoused Real Property to an investment partnership or another pooled investment entity sponsored or managed by the Company or a wholly-owned Subsidiary of the Company or to a third party for consideration in excess of the sum of (A) the Company's or such wholly-owned Subsidiary's Investment therein, (B) the outstanding amount of any Non-Recourse Debt secured thereby, to the extent that such amount is repaid in connection with such sale or otherwise is not assumed by the transferee of such Warehoused Real Property, and (C) the Company's or its Subsidiary's Carrying Cost with respect thereto, shall be deemed to be an Asset Sale only to the extent of such excess. "BAILEE" means The Sumitomo Bank, Limited, acting as agent for the Lender, and any successor thereto as provided in the Intercreditor Agreement. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy," as now and hereafter in effect, or any successor statute. "BOARD OF DIRECTORS" means the Board of Directors of CB Holdings, the Company or a Subsidiary of the Company, as applicable, or any duly authorized committee of that Board. "BUSINESS DAY" means any day excluding Saturday, Sunday and any day which is a day on which banking institutions located in Dublin, London, New York or California are authorized or required by law or other government action to close. "CAPITAL EXPENDITURE" means any expenditure (other than capitalized interest) by any Person which would be capitalized in accordance with GAAP, except that the acquisition of Warehoused Real Property by the Company or any Subsidiary shall not constitute a Capital Expenditure until the date that is eight months after the date of the acquisition thereof if such Warehoused Real Property has not been sold, assigned, transferred or otherwise disposed of by such date and in any such event shall, notwithstanding GAAP, be treated as a Capital Expenditure incurred on the date that such eight-month period expires to the extent of the Company's or such Subsidiary's Investment in such Warehoused Real Property. "CAPITAL LEASE," as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person; provided, however, that leases of computer and related equipment of the type treated by the Company as Operating 3 Leases for its fiscal year 1993 and prior periods shall be treated, after September 30, 1994, as Operating Leases and not Capital Leases, notwithstanding the classification thereof under GAAP. "CAPITAL STOCK" of any person means any and all shares, interests, participations, or other equivalents (however designated) of capital stock and any rights (other than debt securities convertible into capital stock), warrants or options to acquire such capital stock or other equity interests. "CARRYING COST" means, as to any Warehoused Real Property, the sum of (without duplication) (i) the amount of any payment of principal of Non-Recourse Debt secured thereby actually made by CB Holdings, the Company or any of their respective Subsidiaries, (ii) interest on such Non-Recourse Debt accrued and actually paid by CB Holdings, the Company or any of their respective Subsidiaries (net of rental and other income actually received by CB Holdings, the Company or any such Subsidiary in respect of such Warehoused Real Property from the date of direct or indirect acquisition thereof by CB Holdings, the Company or such Subsidiary in respect of such Warehoused Real Property from the date of acquisition thereof by CB Holdings, the Company or such Subsidiary to the date of sale or other disposition), and (iii) any and all fees, costs, expenses and transfer taxes incurred by CB Holdings, the Company or any of their respective Subsidiaries in connection with the purchase or other acquisition of such Warehoused Real Property (including, without limitation, any fees, costs and expenses incurred in connection with financing such purchase or other acquisition) and the holding and the subsequent sale or other disposition thereof. "CASH EQUIVALENTS" means (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from Standard & Poor's Corporation, Moody's Investors Service, Inc. or other nationally recognized rating agency; (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having one of the two highest ratings obtainable from Standard & Poor's Corporation, Moody's Investors Service, Inc. or other nationally recognized rating agency; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by the Lender or any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $250,000,000; (v) Eurodollar time deposits having a maturity of less than one year purchased from the Lender or other financial institutions approved by the Lender; and (vi) repurchase agreements and reverse repurchase agreements with the Lender or other financial institutions approved by the Lender relating to marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; provided that the terms of such agreements comply with the guidelines set forth - -------- in the Federal Financial Institutions Examination 4 Council Supervisory Policy--Repurchase Agreements of Depository Institutions With Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985. "CASH PROCEEDS" means, with respect to any Asset Sale, cash payments received from such Asset Sale (including any cash received by way of deferred payment pursuant to a note receivable or otherwise, but only as and when so received, other than the portion of such deferred payment constituting interest, which shall be deemed not to constitute Cash Proceeds). "CB HOLDINGS" means CB Commercial Holdings, Inc., a Delaware corporation. "CB CANADA" means Coldwell Banker Canada, Inc., a corporation organized under the laws of the Province of Ontario, Canada. "CERTIFICATE OF INCORPORATION" means CB Holdings's Restated Certificate of Incorporation as in effect on the Effective Date. "CHANGE IN TAX LAW" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any treaty, law, regulation or ruling relating to any Tax (or in the application or interpretation of any treaty, law, regulation or ruling relating to any Tax) that occurs on or after the Effective Date. "CHANGE OF CONTROL" shall be deemed to have occurred (a) with respect to CB Holdings, (i) at such time as any person (as defined in Section 13(d)(3) of the Exchange Act) (other than the Holdings Capital Accumulation Plan) at any time shall directly or indirectly acquire more than twenty-five percent (25%) of the total voting power of all classes of Capital Stock of CB Holdings (provided, -------- however, that the acquisition of voting stock of CB Holdings by underwriters in - ------- the IPO named in the prospectus relating thereto shall not be deemed to be a Change of Control pursuant to this clause (a)(i)), or (ii) at such time as during any one year period, individuals who at the beginning of such period constitute the Company's Board of Directors cease to be a majority of the Board of Directors and (b) with respect to the Company, at such time as CB Holdings ceases to own 100% of the issued and outstanding Capital Stock of the Company. "CHIEF FINANCIAL OFFICER" means the highest ranking officer of any company then in charge of the financial matters of such company. "COLLATERAL" means the capital stock of the Company. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the common stock of CB Holdings, par value $.01 per share. "COMPANY" means CB Commercial Real Estate Group, Inc., formerly known as Coldwell Banker Commercial Group, Inc. 5 "COMPANY SECURITIES" means, collectively, any senior subordinated or subordinated indebtedness and any Capital Stock of the Company or any Capital Stock of CB Holdings. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form annexed hereto as Exhibit II delivered to the Lender by the Company pursuant to subsection 5.1(c) of this Agreement. "CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Operating Income, (ii) Consolidated Interest Expense (less that portion allocable to Capital Leases), (iii) provisions for taxes based on income, (iv) depreciation expense, (v) amortization expense, (vi) Consolidated Rental Payments and (vii) all other non-cash items (other than working capital) reducing Consolidated Net Operating Income, minus all non-cash items (other than working capital) increasing Consolidated Net Operating Income, all as determined on a consolidated basis for any Person and its Subsidiaries in conformity with GAAP. "CONSOLIDATED FIXED CHARGE RATIO" means the ratio, on a pro forma --- ----- basis, giving effect to any Indebtedness to be incurred as if it had been incurred on the first day of the four-fiscal-quarter period referred to in clause (i), of (i) the aggregate amount of Consolidated Cash Flow Available for Fixed Charges of any Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Ratio (the "Transaction Date") to (ii) the aggregate Consolidated Fixed Charges of such Person during such four fiscal quarters; provided that in making such computation, Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being incurred) computed on a pro forma basis --- ----- and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period. "CONSOLIDATED FIXED CHARGES" of any Person means, for any period, the sum of the amounts for such period of (i) Consolidated Interest Expense (less that portion allocable to Capital Leases) and (ii) Consolidated Rental Payments, all as determined on a consolidated basis for such Person and its Subsidiaries in conformity with GAAP. "CONSOLIDATED INTEREST EXPENSE" of any Person means, for any period, the aggregate Interest Expense of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, for any period taken as one accounting period, the net income (or loss) of any Person and its Subsidiaries on a consolidated basis for such period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person - -------- (other than a Subsidiary of such Person) in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) except to the extent includable pursuant to the foregoing clause (i), the income (or loss) of any Person accrued prior to the date 6 it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or that Person's assets are acquired by such Person or any of its Subsidiaries, (iii) the income of any Subsidiary (other than Westmark and its Subsidiaries) to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary and (iv) any gains or losses attributable to Asset Sales. In determining the Consolidated Net Income of the Company, provision for tax payments by the Company shall be assumed to be made at the then effective corporate statutory tax rate. "CONSOLIDATED NET OPERATING INCOME" of any Person means, for any period taken as one accounting period, the aggregate Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, adjusted by excluding (to the extent not otherwise excluded in calculating Consolidated Net Income) any net extraordinary gains and losses during such period except that no adjustment shall be made for extraordinary items consisting of income tax effects associated with net operating loss carry forwards incurred by such Person after the Funding Date. "CONSOLIDATED NET WORTH" means, as at any date of determination, the sum of the Capital Stock (excluding any mandatorily redeemable preferred stock) and additional paid-in capital plus retained earnings (or minus accumulated deficit) of the Company and its Subsidiaries on a consolidated basis calculated in conformity with GAAP. "CONSOLIDATED RENTAL PAYMENTS" means, for any period, the aggregate amount of the interest component of all rents paid under all Capital Leases and the interest component of all rents paid under all Operating Leases of the Company and its Subsidiaries as lessee (net of sublease income) that are not cancelable upon 30 days' or less notice by the lessee thereunder, all as determined on a consolidated basis in conformity with GAAP. "CONTESTED CLAIM" means any Tax, Indebtedness, Contingent Liability or other claim or liability, (i) the validity or amount of which is being contested in good faith by appropriate proceedings, (ii) which has been bonded or for which adequate reserves, as required by GAAP, have been established and (iii) with respect to which any right to execute upon or sell any assets of the Company or its Subsidiaries has not matured or has been and continues to be effectively enjoined, superseded or stayed. "CONTINGENT LIABILITIES" means, as applied to any Person, any guaranties, endorsements, agreements to purchase or provide funds for the payment of obligations of others, or other liabilities which would be classified as contingent in accordance with GAAP. "CONTINGENT OBLIGATION" means, as to any Person, any obligation, direct or indirect, contingent or otherwise, of such Person (i) with respect to any Indebtedness or other obligation or liability of another Person, including without limitation any direct or indirect guarantee of such Indebtedness, obligation or liability, endorsement (other than for collection or deposit in the ordinary course of business) thereof or discount or sale thereof by such Person with recourse to such Person, or any other direct or indirect obligation, by agreement or 7 otherwise, to purchase or repurchase any such Indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge of any such Indebtedness, obligation or liability (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (ii) to provide funds to maintain working capital or equity capital of another Person or otherwise to maintain the net worth, solvency or financial condition of the other Person, (iii) to make payment for any products, property, securities or services regardless of non-delivery thereof, if the purpose of any agreement so to do is to provide assurance that another Person's Indebtedness, obligation or liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of another Person's Indebtedness, obligation or liability will be protected (in whole or in part) against loss in respect thereof, or (iv) otherwise to assure or hold harmless the holders of Indebtedness or other obligation or liability or another Person against loss in respect thereof; provided, that indemnities given by the Company or its -------- Subsidiaries to employees or independent contractors in the ordinary course of business and consistent with past practices shall not be considered Contingent Obligations; provided, further, that the provisions in the By-laws of the -------- ------- Company, its Subsidiaries or CB Holdings holding harmless and indemnifying their respective officers and directors shall not be considered Contingent Obligations so long as such provisions are not materially different from such provisions in the Company's By-laws in effect on the Effective Date; and provided, further, -------- ------- that the term "Contingent Obligation" shall not include any obligation of the Company under any guaranty made by it with respect to obligations of a Mortgage Banking Subsidiary (as defined below) relating to unfunded mortgage loans, or any obligation of the Company or a Mortgage Banking Subsidiary under any indemnity made by the Company or a Mortgage Banking Subsidiary in a purchase and sale agreement with respect to any mortgage loan, which guaranty or indemnity is made, and which obligations are incurred, in connection with Mortgage Banking Activities (as defined below). The amount of any Contingent Obligation shall be an amount equal to the amount of the indebtedness, obligation or liability guaranteed or otherwise supported thereby. For purposes hereof, (x) "MORTGAGE BANKING ACTIVITIES" means the origination by the Company or a Mortgage Banking Subsidiary of mortgage loans in respect of commercial and multi-family residential real property, and the sale or assignment of such mortgage loans and the related mortgages to another Person (other than the Company or another of its Subsidiaries) within 60 days after the origination thereof, provided, -------- however, that in each case prior to origination of any mortgage loan, the - ------- Company or a Mortgage Banking Subsidiary, as the case may be, shall have entered into a legally binding and enforceable purchase and sale agreement, with respect to such mortgage loan with a Person that purchases such loans in the ordinary course of its business; and (y) "MORTGAGE BANKING SUBSIDIARY" means any Wholly- owned Subsidiary of the Company that is engaged in Mortgage Banking Activities. "CONTRACTUAL OBLIGATION" means, as applied to any Person, any provision of any security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement, or other written instrument to which that Person is a party or by which it or any of its owned properties is bound or to which it or any of its owned properties is subject. 8 "DEFERRED INTEREST" means all accrued and deferred interest under this Agreement and the Notes, of which $8,916,216.37 remains outstanding as of the date hereof, and any and all interest which shall hereafter accrue and be deferred under this Agreement and the Notes. "DOLLARS" or the sign "$" means the lawful money of the United States of America. "EARN-OUT PAYMENT OBLIGATIONS" means, with respect to any Permitted Acquisition, the Westmark Acquisition and the Melody Acquisition, any and all deferred payment obligations (other than Permitted Seller Indebtedness) of the Company or any of its Subsidiaries incurred in connection therewith (including non-competition payments). "EFFECTIVE DATE" shall have the meaning set forth in Section 9.21. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA AFFILIATE" means any trade or business (whether or not unincorporated) which is a member of a group of which the Company is a member and which is under common control within the meaning of Section 414 of the Internal Revenue Code and the regulations thereunder. "ESTIMATED NET CASH PROCEEDS" means with respect to any Asset Sale, an amount equal to 90% of the amount estimated in good faith by the Company to be Net Cash Proceeds of Sale of such Asset Sale. "EVENT OF DEFAULT" means each of the events set forth in Section 7.1 of this Agreement. "EVENT OF ILLEGALITY" means that due to the adoption of, or any changes in, any applicable treaty, law, rule or regulation after the Effective Date or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable treaty, law, rule or regulation after the Effective Date, it becomes unlawful for the Lender to receive a payment in respect of this Agreement or any Note or to maintain the Loan. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXCLUDED JOINT VENTURE" means any Joint Venture in which the Company and its Subsidiaries, together, own 1% or less of the equity interests and any Joint Venture designated as an "Excluded Joint Venture" by the Company (which designation shall be made by written notice to the Lender at least 30 days prior to the proposed effective date of such designation) with the written consent of the Lender, which consent may be given or withheld in the sole discretion of the Lender. 9 "EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Subsidiaries listed on Schedule B annexed hereto. "FULLY DILUTED BASIS" means the aggregate number of outstanding shares of Common Stock (assuming, for this purpose, exercise or conversion, or both, of all outstanding securities of CB Holdings that are exercisable or convertible into shares of Common Stock). "FUNDING DATE" means July 23, 1990. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date hereof so as to properly reflect the financial conditions, and the results of operations and cash flows, of the Company and its Subsidiaries, except that any accounting principle or practice required to be changed by the Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee of such boards) in order to continue as a generally accepted accounting principle or practice may so be changed. "GUARANTEE" means the guarantee by the Guarantors of the Obligations pursuant to Article X of this Agreement. "GUARANTORS" means CB Commercial Holdings, Inc., CB Commercial Real Estate Group of Iowa, Inc., CB Commercial Partners, Inc., CB Commercial Realty Advisors, Inc., CB Commercial Brokerage, Inc., Sutter Fremont Property Services, Inc., CB Commercial Real Estate Group of Hawaii, Inc., CB Commercial Real Estate Fund Management, Inc., CB Commercial Real Estate Management Services, Inc., CB Commercial Sutton & Towne, Inc., Sutter Fremont Real Estate Merchant Capital Corporation, Sutton & Towne N.J., Inc., Sutter Fremont, Inc., CB Commercial Warehouse Property Corp., L.J. Melody Investments, Inc., L.J. Melody & Company, and L.J. Melody & Company of California. "GUARANTY" means, with respect to any Person, any contract, agreement or understanding of such Person pursuant to which such Person guarantees, or in effect guarantees, any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation: (a) agreements to purchase such Indebtedness or any property constituting security therefor; (b) agreements to advance or supply funds (i) for the purchase or payment of such Indebtedness, or (ii) to maintain working capital, equity capital or other balance sheet conditions; (c) agreements to purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness of the ability of the primary obligor to make payment of the Indebtedness; 10 (d) letters or agreements commonly known as "comfort" or "keepwell" letters or agreements; or (e) any other agreements to assure the holder of the Indebtedness of the primary obligor against loss in respect thereof; except that "guaranty" shall not include (i) the endorsement by a Person in the ordinary course of business of negotiable instruments or documents for deposit or collection or (ii) indemnities given by the Company or its Subsidiaries in brokerage, management and other agreements in the ordinary course of business substantially consistent with past practices. "HOLDINGS CAPITAL ACCUMULATION PLAN" means the CB Commercial Holdings, Inc. Capital Accumulation Plan, a plan intended to be qualified under Section 401(a) of the Internal Revenue Code, as in effect on the Effective Date. "INDEBTEDNESS" means, with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables, accrued commissions and other similar accrued current liabilities in respect of such obligations, in any case, not overdue, arising in the ordinary course of business; (d) all Capital Lease obligations; (e) all obligations or liabilities of others secured by a lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties and other Contingent Obligations. "INSOLVENCY OR LIQUIDATION PROCEEDING" means (i) any insolvency or bankruptcy case or proceeding (including any case under the Bankruptcy Code), or any receivership, liquidation, reorganization or other similar case or proceeding, relative to CB Holdings, the Company or any Guarantor or to their respective creditors, as such, or to their respective assets, or (ii) any liquidation, dissolution, reorganization or winding up of CB Holdings, the Company or any Guarantor, whether voluntary or involuntary and whether or not involving insolvency or 11 bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of CB Holdings, the Company or any Guarantor. "INTERCOMPANY INDEBTEDNESS" means any Indebtedness of the Company or any Subsidiary of the Company which, in the case of the Company, is owing to any Subsidiary of the Company and which, in the case of any such Subsidiary, is owing to the Company or any other Subsidiary of the Company. "INTERCREDITOR AGREEMENT" means the Amended and Restated Intercreditor Agreement dated as of November 25, 1996 among the Lender, The Sumitomo Bank, Limited, as agent, CB Holdings and the Company as such agreement may hereafter may be amended, restated, supplemented or otherwise modified from time to time. "INTEREST EXPENSE" means, for any period, the consolidated interest charges paid or accrued by the Company or any of its Subsidiaries during such period (including imputed interest on Capital Lease obligations, but excluding amortization or write-off of debt discount and expense) on Indebtedness of the Company or any of its Subsidiaries. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended from time to time hereafter, and any successor code or statute. "INVESTMENT" means, with respect to any Person, any direct, indirect or beneficial investment (other than Cash Equivalents), whether by means of share purchase, loan, advance, extension of credit (other than accounts receivable and trade credits arising in the ordinary course of business), capital contribution or otherwise, in or to such Person, the guaranty of any Indebtedness of such Person or the subordination of any claim against such Person to other Indebtedness of such Person or any direct or indirect purchase or other acquisition by that Person of Warehoused Real Property, through purchase or exchange for cash, securities or other property (including, without limitation, any distribution, upon liquidation or otherwise, of Warehoused Real Property to such Person by any partnership or other investment entity). The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment together with, in the case of a Permitted Acquisition, any related Earn-out Payment Obligations (in an amount equal to the maximum amount thereof, or if there is no prescribed maximum amount, then the greater of (x) the Company's reasonable estimate of its future liability with respect thereto (estimated on the basis of reasonable financial projections at the time of consummation of such Permitted Acquisition) and (y) the aggregate amount of payments actually made with respect thereto), but excluding any amounts capitalized in accordance with GAAP to reflect probable severance, office closing and similar payments and expenses, less in the case of the Warehoused ---- Real Property, the amount of any Non-Recourse Debt incurred by such Person in connection therewith and (to the extent included in the cost thereof) Non- Recourse Debt to which such Warehoused Real Property is subject at the time of the acquisition thereof. Notwithstanding the foregoing, any promissory note issued by the Company or any of its Subsidiaries to fund the general partner's capital contribution in an investment partnership or other pooled investment vehicle of which the Company or any of its Subsidiaries is the general partner and which 12 partnership or other investment vehicle is engaged solely in the business of acquiring, holding and disposing of Real Property shall not be deemed to be an Investment unless and until the aggregate amount of principal and interest payments made under such promissory note by such general partner exceeds the aggregate amount of such general partner's partnership distributions and management fees received as of the date of determination. In such event, the entire principal amount of such promissory note shall be deemed an Investment for purposes of Section 6.11 and shall remain an Investment until the aggregate amount of partnership distributions and management fees received by such general partner exceeds the aggregate amount of principal and interest paid by such general partner on such promissory note for 18 consecutive months; provided, -------- that an Event of Default shall not be deemed to have resulted from a violation of Section 6.11 solely from the operation of the immediately preceding sentence. The term "Investment" shall not include (i) customary loans or advances (including draw payments) to employees of the Company or its Subsidiaries, (ii) notes for deferred sales or leasing commissions received by the Company or its Subsidiaries in the ordinary course of business and substantially consistent with past practices or (iii) any investment by the Company in or with respect to C.B. Commercial Acquisition Associates, Inc. in an aggregate amount not in excess of $187,000. "IPO" means the initial public offering of Common Stock of CB Holdings underwritten by Merrill Lynch & Co. and Montgomery Securities and as further described in the prospectus of CB Holdings dated as of November 25, 1996. "IPO NET PROCEEDS" shall mean the cash proceeds received by or for the account of the CB Holdings or any of its Subsidiaries attributable to the IPO minus amounts expended in connection with the IPO for (a) underwriters' discounts and commissions, (b) prospectus and stock certificate printing and distribution fees, (c) fees and reimbursed expenses of the Company's counsel and independent public accountants, (d) fees and reimbursed expenses of the underwriters' counsel relating to compliance with the blue sky laws of the various states, (e) fees and reimbursed expenses of counsel to the Senior Agent, (f) fees payable to the Commission, and minus the Revolving Credit Facility A ----- Extension Fee, the Revolving Credit Facility B Extension Fee and the Term Loan Extension Fee (such terms as defined in the Senior Credit Agreement). "JOINT VENTURE" means a joint venture partnership or other similar arrangement between or among the Company or any of its Subsidiaries on one hand, and another Person or Persons that is or are not Affiliates with the Company or any of its Subsidiaries, on the other hand, whether in corporate, partnership or other legal form; provided that, as to any such arrangement in corporate form, -------- such corporation shall not, as to any Person of which such corporation is a Subsidiary, be considered to be a Joint Venture to which such Person is a party. "LAWS" means all applicable statutes, laws, ordinances, regulations, orders, judgments, writs, injunctions or decrees of any state, commonwealth, nation, territory, possession, province, county, parish, town, township, village, municipality or Tribunal, and "Law" means each of the foregoing. 13 "LENDER" means Sumitomo Finance (Dublin) Limited, a limited liability company organized and existing under the Laws of the Republic of Ireland or its successors and assigns pursuant to the provisions of this Agreement. "LETTER AGREEMENT" has the meaning ascribed to such term in Section 2.4 of this Agreement. "LIBOR" means, for any LIBOR Interest Period, the rate at which deposits in Dollars are offered by the Reference Bank at approximately 11:00 A.M., London Time, on the day which is two London Banking Days preceding the first day of such LIBOR Interest Period to prime banks in the London interbank market for a period equal to such LIBOR Interest Period and in the same or approximately the same amount as the Loan. For the purposes of this definition, the term "London Banking Day" shall mean any day on which dealings in deposits in Dollars are transacted in the London interbank market. "LIBOR INTEREST PERIOD" means the period commencing as of June 30, 1994 and having a duration of three months, and, thereafter, each subsequent period commencing on the last day of the then current LIBOR Interest Period and having a duration of three months, except that (i) each LIBOR Interest Period ------ which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or, if such next succeeding Business Day would fall in a succeeding calendar month, the next preceding Business Day, (ii) if any LIBOR Interest Period commences on the last day of a calendar month and there is no corresponding day in the month in which such LIBOR Interest Period would otherwise end, such LIBOR Interest Period shall end on the last day of such succeeding calendar month and (iii) if any LIBOR Interest Period would otherwise end after the date on which the principal of the Loan is to be repaid pursuant to Section 2.2 of this Agreement, such LIBOR Interest Period shall end on such principal repayment date. Notwithstanding the foregoing, the duration of LIBOR Interest Periods for purposes of determining the Post-Default Rate for the Loan or interest thereon shall be selected by the Lender at the commencement of each such LIBOR Interest Period. "LIEN" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "LITIGATION" means any proceeding, claim, lawsuit and/or investigation conducted or overtly threatened by or before any Tribunal. "LOAN" shall have the meaning ascribed to such term in Section 2.1 of this Agreement. "LOAN DOCUMENTS" means this Agreement, the Notes, the Letter Agreement, the Stock Pledge Agreement and all schedules and exhibits hereto and thereto. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. 14 "MATERIAL ADVERSE EFFECT" means any circumstance or event which (i) could have any material adverse effect whatsoever upon the validity, performance by the Company, perfection or enforceability of any Loan Document, (ii) is material and adverse to the financial condition or business operations of the Company and its Subsidiaries, taken as a whole, or (iii) could materially impair the ability of the Company to fulfill its obligations under the Loan Documents. "MATERIAL SUBSIDIARY" means each Subsidiary of the Company now existing or hereafter acquired or formed by the Company which (x) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company, or (y) as at the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company. "MELODY" means L.J. Melody & Company, a Texas corporation that is a Wholly-owned Subsidiary of the Company. "MELODY ACQUISITION" means, collectively, (i) the purchase by CB Commercial Mortgage Company, Inc., a California corporation that is a Wholly- owned Subsidiary of the Company ("CB Mortgage"), of (x) all of the issued and outstanding capital stock of Melody pursuant to and in accordance with the terms of the Melody Stock Purchase Agreement and (y) all of the issued and outstanding capital stock of Melody California pursuant to and in accordance with the terms of the Melody California Stock Purchase Agreement, and (ii) consummation of the merger (the "Melody Merger") of CB Mortgage with and into Melody, pursuant to and in accordance with the terms of the Melody Merger Agreement and the subsequent merger of Melody California with and into Melody. "MELODY ACQUISITION DOCUMENTS" means, collectively, the Melody Stock Purchase Agreement, the Melody California Stock Purchase Agreement, the Melody Merger Agreement and each agreement, document and instrument ancillary thereto entered into in connection therewith, in each case together with all schedules and exhibits thereto. "MELODY CALIFORNIA" means L.J. Melody & Company of California, a Texas corporation that is a wholly-owned subsidiary of Melody. "MELODY CALIFORNIA STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement dated as of June 27, 1996, among the Company, CB Mortgage and the Melody Stockholders party thereto, and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in Amendment No. 4 to Senior Subordinated Credit Agreement dated as of June 30, 1996 (the "FOURTH AMENDMENT")). "MELODY LOAN ARBITRAGE FACILITY" means a credit facility provided to Melody by any depository bank in which Melody deposits payments made on mortgage loans for which Melody is servicer prior to distribution of such payments to or for the benefit of the holders of such loans, so long as (i) Melody applies all proceeds of loans made under such credit facility to purchase Permitted Investments, and (ii) all Permitted Investments purchased by Melody with the proceeds of loans thereunder (and proceeds thereof and distribution thereon) are pledged to 15 the depository bank providing such credit facility, and such bank has a first priority perfected security interest therein, to secure loans made under such credit facility. "MELODY MERGER AGREEMENT" means the Agreement and Plan of Merger between CB Mortgage and Melody providing for the merger of CB Mortgage with and into Melody, and the articles or certificate of merger, if any, required to be in the office of the secretary of state, or other public official, in any jurisdiction in order to effect the Melody Merger. "MELODY MORTGAGE WAREHOUSING FACILITY" means the credit facility provided by Residential Funding Corporation ("RFC") or any substantially similar facility, pursuant to which RFC or another lender makes loans to Melody, the proceeds of which loans are applied by Melody to fund commercial mortgage loans originated and owned by Melody subject to an unconditional, irrevocable commitment to purchase such mortgage loans by the Federal Home Loan Mortgage Corporation so long as loans made by RFC or such other Lender to Melody thereunder are secured by a pledge of commercial mortgage loans made by Melody with the proceeds of such loans, and RFC or such other lender has a perfected first priority security interest therein, to secure loans made under such credit facility. "MELODY PERMITTED INDEBTEDNESS" means Indebtedness of Melody under the Melody Loan Arbitrage Facility, the Melody Mortgage Warehousing Facility and the Melody Working Capital Facility, and in respect of the Melody Seller Senior Notes and the Melody Seller Contingent Notes. "MELODY SELLER CONTINGENT NOTES" means the Contingent Promissory Notes due July 1, 2001 issued by CB Mortgage to the Melody Stockholders, in substantially the form attached as Exhibit B to the Melody Stock Purchase Agreement, in an aggregate principal amount not in excess, at any time, of $3,000,000 less the aggregate amount of payments of principal thereof required ---- to be made in respect thereof at or prior to such time in accordance with the terms thereof. "MELODY SELLER SENIOR NOTES" means the Senior Promissory Notes due July 1, 1998 issued by CB Mortgage to the Melody Stockholders, in substantially the form attached as Exhibit A to the Melody Stock Purchase Agreement, in an aggregate principal amount not in excess, at any time, of $3,000,00 less the ---- aggregate amount of payments of principal required to be made in respect thereof at or prior to such time in accordance with the terms thereof. "MELODY STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement dated as of June 27, 1996 among the Company, CB Mortgage and the Melody Stockholders party thereto, and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in the Fourth Amendment). "MELODY STOCKHOLDERS" means, together, Lawrence J. Melody and John M. Bradley. 16 "MELODY WORKING CAPITAL FACILITY" means a credit facility provided by a financial institution to Melody, so long as (i) the proceeds of loans thereunder are applied only to provide working capital to Melody, (ii) loans under such credit facility are unsecured, and (iii) the aggregate principal amount of loans outstanding under such credit facility at no time exceeds $1,000,000. "MULTI-EMPLOYER PLAN" means a Pension Plan which is a "multi-employer plan" as defined in Section 4001(a)(3) of ERISA. "NET CASH PROCEEDS OF SALE" means cash payments (including Cash Equivalents and any cash received by way of deferred payment pursuant to a note receivable or otherwise (other than the portion of such deferred payment constituting interest, which shall be deemed not to constitute Net Cash Proceeds of Sale), but only as and when so received) received from an Asset Sale, net of costs of sale (including payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness other than the Loan required to be repaid under the terms thereof as a result of such Asset Sale), taxes to be paid as a result thereof and any amount required to be paid to any Person (other than the Company or any of its Subsidiaries) owning a beneficial interest in the assets disposed of in such Asset Sale. "NON-RECOURSE DEBT" means Indebtedness which is incurred in connection with the acquisition of Warehoused Real Property as to which, subject to customary exceptions, (i) the creditor's sole recourse is to the land, improvements, fixtures and any personal property attached to or used in connection with such land, improvements and fixtures which secure such Indebtedness and not to any other assets owned by CB Holdings, the Company or its Subsidiaries and (ii) the failure to pay or acceleration thereof would not give rise to the right of cross-default or cross-acceleration on the part of holders of other Indebtedness in an amount in excess of $2,500,000 created on or after April 18, 1989; provided, however, Non-Recourse Debt within this -------- ------- definition shall not cease to be Non-Recourse Debt if the amount of such other Indebtedness is in excess of $2,500,000, so long as such Indebtedness, at least to the extent of such excess, is paid or otherwise discharged or the agreement or instrument evidencing such Indebtedness is amended to eliminate such right of cross-default or cross-acceleration within 30 days after the incurrence of such Indebtedness. "NOTES" means the promissory notes of the Company evidencing the Loan (including any Deferred Interest). "OBLIGATIONS" means all obligations of every nature of the Company from time to time owed to the Lender under the Loan Documents. "OFFERING CLOSING DATE" the date on which the IPO is consummated and the IPO raises at least $65,000,000 of IPO Net Proceeds. "OFFICERS' CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its Chairman of the Board (if an officer) or its President or one of its Vice Presidents and by its Chief Financial Officer or its Treasurer; provided that every Officers' Certificate -------- with respect to the compliance with the conditions 17 precedent or the terms hereunder shall include (i) a statement that the officer or officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "OPERATING LEASE" means, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the Lessee at any time) of any property (whether real, personal or mixed) which is not a Capital Lease other than any such lease under which that Person is the lessor. "PBGC" means the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation's functions under ERISA. "PENSION PLAN" means an employee pension benefit plan as defined in Section 3(2) of ERISA maintained or contributed to by one or more of the Company or its Subsidiaries for employees of one or more of the Company or its Subsidiaries or ERISA Affiliates, and which is subject to the provisions of Title IV of ERISA. "PERMITTED ACQUISITIONS" means the acquisition by the Company or any of its Subsidiaries after the Effective Date of assets constituting an entire business or division of any Person that is not already a Subsidiary of the Company or any of its Subsidiaries, or the acquisition by Company or any of its Subsidiaries of 100% of the Capital Stock (except for directors' qualifying shares) of any such Person, including by any merger or consolidation permitted under Section 6.6 of this Agreement, so long as (i) such acquisition and all transactions related thereto are consummated in accordance with applicable law; (ii) such acquisition, in the case of a Permitted Acquisition of capital stock, results in such domestic corporation becoming a Wholly-Owned Subsidiary; (iii) if required by the Senior Agent, the Company shall have delivered to the Senior Agent (and a copy to the Lender) a certificate demonstrating in reasonable detail compliance with Sections 6.01, 6.02, 6.03, 6.04, 6.05 and 6.06 of the Senior Credit Agreement (and if no loan under the Senior Credit Agreement is outstanding, then the Company shall have delivered a certificate to Lender demonstrating in reasonable detail compliance with Article 6 hereof) that immediately after giving effect to such acquisition and giving pro forma effect thereto as if such acquisition had been consummated, and any Indebtedness incurred in connection therewith had been incurred, on the first day of the period of four consecutive fiscal quarters most recently ended prior to the date on which such acquisition is completed (iv) no Capital Stock or other assets acquired in connection with such acquisition shall be subject to any lien (other than liens permitted by Section 6.5 of this Agreement); and (v) no Default or Event of Default shall have occurred and be continuing on the date such acquisition is completed or shall result therefrom. 18 "PERMITTED ENCUMBRANCES" means the following types of Liens: (i) Liens granted to the lender or lenders, or an agent on their behalf, securing any Senior Credit Agreement Obligations, (ii) Liens granted pursuant to the Stock Pledge Agreement, (iii) Liens in existence on the date hereof described on Schedule C annexed hereto and renewals and extensions thereof so long as the Indebtedness secured thereby and the interest rate payable thereon is not increased or the maturity shortened (except to the extent set forth on such Schedule C), (iv) Liens imposed by mandatory provisions of Law such as carrier's, materialmen's, mechanics', warehousemen's, landlord's and other like Liens arising in the ordinary course of business, securing Indebtedness not yet due or which arise out of or in connection with a Contested Claim or Liens or exceptions which arise under any real property leases, (v) Liens for Taxes, if the same are not yet due and payable or qualify as a Contested Claim, (vi) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, pensions and other types of social security, or to secure the performance of statutory obligations, surety and appeal bonds, bids, the payment of taxes, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of Indebtedness), (vii) title exceptions consisting of zoning restrictions, easements or other restrictions on the use of real property, provided that such items do not materially impair the use of such property for the purposes intended, and none of which are materially violated by existing or proposed structures or land use, (viii) title exceptions which would customarily be shown on an ALTA/ACSM land title "as-built" survey, (ix) Permitted Purchase Money Liens, (x) Liens and exceptions on mortgage title policies, (xi) Liens securing Senior Debt, including Liens granted to qualify Indebtedness as Senior Debt, (xii) non-consensual Liens not otherwise permitted hereby that are removed, bonded or stayed within 60 days after attachment thereof, (xiii) other Liens permitted under Section 6.01 of the Senior Credit Agreement as in effect on the date hereof, and (xiv) in addition to Liens permitted by clauses (i) through (xiii), Liens in an aggregate amount not to exceed $100,000 at any time outstanding. "PERMITTED INVESTMENTS" means (i) marketable direct obligations issued by the United States Government and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and having, at the time of acquisition, the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) commercial paper having, at the time of acquisition, the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iv) certificates of deposit, other time deposits, and bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank operating under the laws of the United States of America or any state thereof or the District of Columbia which has combined capital and surplus of not less than $500,000,000, (v) institutional money market funds organized under the laws of the United States of America or any state thereof that invest solely in any of the Investments permitted under clauses (i), (ii), (iii) and (iv) hereof, or (vi) repurchase agreements with respect to Investments permitted under clause (i) or (ii) with counterparties acceptable to the Lender. 19 "PERMITTED PURCHASE MONEY INDEBTEDNESS" means (i) purchase money Indebtedness (other than Indebtedness pursuant to Permitted Acquisitions) created after the date hereof secured by a Permitted Purchase Money Lien and Capital Leases, not to exceed $3,000,000 in the aggregate for the Company and all its Subsidiaries at any time outstanding, and (ii) purchase money Indebtedness existing on the date hereof described on Schedule B annexed hereto. "PERMITTED PURCHASE MONEY LIEN" means any purchase money Lien on real estate, motor vehicles, equipment and other assets acquired or built by the Company or any of its Subsidiaries (a "Purchase Money Lien"); provided, however, -------- ------- that: (i) the transaction in which any Purchase Money Lien is proposed to be created is not then prohibited by this Agreement; (ii) any Purchase Money Lien shall attach only to the asset acquired or built in such transaction and shall not extend to or cover any other assets of the Company or any of its Subsidiaries; (iii) the Indebtedness secured or covered by any Purchase Money Lien shall not exceed the cost to the Company or any of its Subsidiaries of the asset acquired or built; (iv) the aggregate outstanding principal amount of all Indebtedness created after the date hereof secured by Purchase Money Liens (other than pursuant to Permitted Acquisitions) shall not at any time exceed $3,000,000; and (v) such Indebtedness is either (x) incurred within 12 months following the date of the acquisition or completion of the property or asset so acquired or (y) incurred for the purpose of refinancing or refunding any Indebtedness secured by a Permitted Purchase Money Lien provided the unpaid balance is not increased. "PERMITTED REFINANCING INDEBTEDNESS" means Indebtedness of the Company all the proceeds of which are used to repay or prepay the Senior Credit Agreement Obligations and other Indebtedness (which other Indebtedness shall not exceed $20,000,000 in the aggregate at any time outstanding) then permitted under Section 6.1(xvi). In addition to the foregoing, Permitted Refinancing Indebtedness shall also include Indebtedness in an amount equal to the amount then available under the Revolving Credit Commitment (as such term is defined in the Senior Credit Agreement) whether under the Senior Credit Agreement or any other agreement which replaces such agreement at the time such Indebtedness is incurred and any amount then available under Section 6.1(ii) of this Agreement. "PERMITTED SELLER INDEBTEDNESS" means Indebtedness of the Company or a Subsidiary of the Company incurred to finance, a Permitted Acquisition, owing to the Seller therein and constituting a portion of the aggregate consideration paid with respect to such Permitted Acquisition; provided, that (x) such Indebtedness shall not be guaranteed by any other Subsidiary of the Company, and (y) unless (i) such Permitted Acquisition consists of an acquisition of a business or assets directly by the Company, or (ii) the acquired Subsidiary (or, in the case of a Permitted Acquisition involving the acquisition of assets, the acquiring Subsidiary) has executed and delivered to the Lender the Guarantee, any such Indebtedness shall constitute the obligation only of the Subsidiary of the Company acquired or formed in connection with the related Permitted Acquisition, and shall not be guaranteed by the Company. "PERMITTED TAX PAYMENT" means for any taxable year of the Company in which it joins in filing a consolidated federal income tax return with CB Holdings, a payment by the Company to CB Holdings in an amount not in excess of the lesser of (i) the separate return 20 federal income tax liability (if any) of the affiliated group (within the meaning of Section 1504 of the Code) of which the Company would be the parent (the "Company Group") if it were not a member of another affiliated group for that or any other taxable year, and (ii) the portion of the actual tax liability (if any) of the affiliated group of which the Company is actually a member (the "CB Holdings Group") for such year allocable to the Company Group under the rules set forth in Section 1552(a)(1) of the Code and the Treasury Regulations promulgated thereunder; provided that such payment can be made by the Company no -------- earlier than the date on which the CB Holdings Group is required to make federal income tax payments for such year to the Internal Revenue Service; and provided, -------- further, that for purposes of clause (ii) above, actual tax liability of the CB - ------- Holdings Group shall be computed without regard to any income, gain, loss, deduction or credit generated by a corporation other than CB Holdings, the Company or a Subsidiary of the Company. In the event that CB Holdings and any member of the Company Group join in filing any combined or consolidated (or similar) state or local income or franchise tax returns, then "Permitted Tax Payment" shall include payments with respect to such state or local income or franchise taxes determined in a manner as similar as possible to that provided in the preceding sentence for federal income taxes. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "PLAN" means an employee benefit plan as defined in Section 3(3) of ERISA maintained or contributed to by the Company or any of its Subsidiaries for employees of the Company or any of its Subsidiaries. "POST DEFAULT RATE" means in respect of any amount payable hereunder or under the Notes not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum for each day during the period (the "Default Period") commencing on the due date of such amount until such amount shall be paid in full equal to two percentage points (2%) above the Applicable LIBOR Margin plus LIBOR for such LIBOR Interest Periods during the Default Period of up to three months' duration as the Lender shall select for the Loan (the interest rate to be recalculated as aforesaid and adjusted at the end of each such LIBOR Interest Period for the next succeeding such LIBOR Interest Period selected by the Lender). "POTENTIAL EVENT OF DEFAULT" means a condition or event which, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "PREFERRED STOCK" means the preferred stock of CB Holdings. "REAL PROPERTY" means, with respect to any Person, each of those parcels (or portions thereof) of real property, improvements and fixtures thereon and appurtenances thereto now or hereafter owned or leased by such Person. 21 "REFERENCE BANK" means the principal London branch of The Sumitomo Bank, Limited, or such other leading bank as shall be designated from time to time by the Lender and which shall be reasonably satisfactory to the Company. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System as in effect on the date hereof. "REGULATORY CHANGE" shall have the meaning ascribed to it in Section 2.12 of this Agreement. "REPORTABLE EVENT" has the meaning set forth in Section 4043 of ERISA, but excluding any event for which the 30-day notice requirement has been waived by applicable regulations of the PBGC. "REPORTING SUBSIDIARY" means any Subsidiary of the Company that has, on any date of determination, total assets in excess of $25,000 or total liabilities in excess of $50,000, as determined in accordance with GAAP. "RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other distribution, direct or indirect, on account of any shares of Capital Stock of the Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) loans or advances by the Company to the holders of its Capital Stock, (iii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any Capital Stock of the Company now or hereafter outstanding, and (iv) any prepayment of principal, optional redemption, purchase, retirement prior to stated maturity, defeasance, or similar optional payment with respect to, any Subordinated Indebtedness. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SENIOR AGENT" means The Sumitomo Bank, Limited, as agent or lender under the Senior Credit Agreement, or any successor agent thereunder or under any agreement governing Permitted Refinancing Indebtedness or, in the absence of such agent, the lender holding all or the greatest portion of the Indebtedness thereunder. "SENIOR CREDIT AGREEMENT" means the Third Amended and Restated Senior Secured Credit Agreement dated as of November 25, 1996, and originally entered into as of April 18, 1989, as amended and restated in its entirety as of October 10, 1991, as further amended and restated in its entirety as of June 30, 1994, between the Company and The Sumitomo Bank, Limited, as lender, and the Loan Documents (as defined therein), and as such agreement may hereafter be amended, restated, supplemented or otherwise modified from time to time. "SENIOR CREDIT AGREEMENT NOTES" means the Company's promissory notes issued pursuant to the Senior Credit Agreement. 22 "SENIOR CREDIT AGREEMENT OBLIGATIONS" means the "Obligations" as defined in the Senior Credit Agreement and all Permitted Refinancing Indebtedness. "SENIOR DEBT" or "SENIOR INDEBTEDNESS" means collectively, Senior Debt of the Company and Senior Debt of the Guarantors. All interest accrued on any Senior Indebtedness, in accordance with and at the contract rate specified in the agreement or instrument creating, evidencing or governing such Senior Indebtedness, shall constitute Senior Indebtedness for periods both before and after the commencement of any Insolvency or Liquidation Proceeding, even if the claim for such interest is not allowed pursuant to applicable law. To the extent any payment of Senior Indebtedness (whether by or on behalf of the Company or the Guarantors, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to a trustee, receiver or other similar party under any bankruptcy, insolvency, receivership or similar law, then if such payment is recovered by, or paid over to, such trustee, receiver or other similar party, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. "SENIOR DEBT OF THE COMPANY" means all Indebtedness and other obligations specified below payable directly or indirectly by the Company from time to time outstanding, whether now existing or hereafter arising, fixed or contingent, due or not due, liquidated or not liquidated, determined or undetermined: (1) the principal of and interest on all loans and other extensions of credit under the Senior Credit Agreement and any other agreement or instrument providing for, evidencing or securing any Permitted Refinancing Indebtedness or any other loans or extensions of credit by the lender or lenders thereunder which are permitted to be incurred under Section 6.1 (including in each case any amendment, renewal, supplement, extension, refinancing, restructuring, refunding or other modification thereof) and all premiums, expenses, fees, reimbursements, indemnities and other amounts owing by the Company pursuant to the Senior Credit Agreement and any such other agreement or instrument; (2) any other Indebtedness of the Company permitted to be incurred under Section 6.1 (except to the extent excluded below); provided, however, -------- ------- that the Indebtedness under this clause (2) shall constitute Senior Debt of the Company only to the extent such Indebtedness is fully and adequately secured; provided, further, however, that such Indebtedness shall not cease -------- ------- ------- to be fully and adequately secured merely because of the occurrence of an unanticipated diminution in value of the collateral; and provided, further, -------- ------- that such collateral shall be deemed fully and adequately secured if the Company delivers an Officers' Certificate certifying that such Indebtedness is fully and adequately secured. "Senior Debt of the Company" shall not include (a) any Indebtedness of the Company to a Subsidiary of the Company or to any other Affiliate (which shall not include The Sumitomo Bank, Limited or any other financial institution that may be a lender under the Senior Credit Agreement or under any agreement or instrument governing, evidencing or securing any Permitted Refinancing Indebtedness) of the Company or any of its Subsidiaries (or an Affiliate of any Affiliate of the Company or 23 any of its Subsidiaries); (b) any Trade Payable, even if overdue; (c) any Indebtedness of the Company that by its terms or by the terms of the instrument creating, governing or evidencing such Indebtedness expressly provides that such Indebtedness is pari passu or subordinated in right of ---- ----- payment to the Notes or any Indebtedness which by its terms is subordinated to any other Indebtedness of the Company; (d) any obligation of the Company arising from redeemable Capital Stock of the Company; (e) any amounts or other obligations under or relating to any Operating Lease; (f) any liability for federal, state, local or other taxes, or other governmental charges or claims of whatever nature, owed or owing by the Company; (g) any Indebtedness or other obligations (x) owing, directly or indirectly, to any Person under or in respect of any employee benefit plan, whether pursuant to ERISA, or otherwise, or (y) owing, directly or indirectly, to employees; (h) any amounts owing under any promissory note issued by the Company or any of its Subsidiaries to fund the general partner's capital contribution in an investment partnership or other pooled investment vehicle of which the Company or any such Subsidiary is the general partner and which partnership or other investment vehicle is engaged solely in the business of acquiring, holding and disposing of Real Property; and (i) any Indebtedness with respect to which recourse to the Company or its assets is limited in any manner; provided, however, that in no event shall any -------- ------- Indebtedness or obligations described in clause (1) be excluded from Senior Indebtedness pursuant to this sentence; and (3) to the extent not subject to (2) above, Indebtedness to finance Permitted Acquisitions under Section 6.1(xv); provided that the aggregate principal amount of such Indebtedness to finance Permitted Acquisitions under clause (2) and this clause (3) shall not exceed $50,000,000 at any time outstanding. "SENIOR DEBT OF THE GUARANTORS" means all Indebtedness and other monetary obligations under a guarantee, security agreement, mortgage, deed of trust or other agreement or instrument executed by a Guarantor (or any other Subsidiary or Affiliate of the Company) from time to time outstanding in respect of the payment or performance of Indebtedness or other obligations included in Senior Debt of the Company, whether now existing or hereafter arising, fixed or contingent, due or not due, liquidated or not liquidated, determined or undetermined, including in each case any amendment, renewal, supplement, extension, refinancing, restructuring, refunding or modification thereof. "STOCK PLEDGE AGREEMENT" means the Amended and Restated Stock Pledge Agreement dated as of November 25, 1996 between CB Holdings and the Lender, in the form of Exhibit V hereto, as such agreement may hereafter be amended, supplemented or otherwise modified from time to time in accordance with its terms. "SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company which is subordinated in right of payment to the Loan and the Notes at least to the same extent as the Loan and the Notes are subordinated to Senior Debt. "SUBSIDIARY" means any corporation or other entity (i) of which more than fifty percent (50%) of the total voting power of the shares of capital stock or other securities or other 24 ownership interests entitled to vote in the election of the Board of Directors or other persons performing similar functions are at any time directly or indirectly owned by the Company or (ii) of which more than fifty percent (50%) of the outstanding shares of stock of any class (or of any other class of ownership interests), is owned, beneficially or of record, directly or indirectly, by the Company or any of its Subsidiaries; provided, however, that -------- ------- the term "Subsidiary" shall not include any of the Persons set forth on Schedule 1.01(c) to the Senior Credit Agreement (as in effect on the date hereof). "TAXES" means all taxes, assessments, fees, levies, imposts, duties, penalties, deductions, withholdings or other charges of any nature whatsoever from time to time or at any time imposed by any Law or any Tribunal. "TRADEMARKS" means trademarks, servicemarks and trade names, all registrations and applications to register such trademarks, servicemarks and trade names and all renewals thereof, and the goodwill of the business associated with or relating to such trademarks, servicemarks and trade names, including, without limitation, any and all licenses and rights granted to use any trademark, servicemark or trade name owned by any other person. "TRADE PAYABLES" of any Person means accounts payable and other similar accrued current liabilities in respect of such obligations or any other indebtedness or monetary obligations to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of materials or services. "TRIBUNAL" means any government, any arbitration panel, any court or any governmental department, commission, board, bureau, agency or instrumentality of the United States of America or any other jurisdiction or any state, province, commonwealth, nation, territory, possession, county, parish, town, township, village or municipality, whether now or hereafter constituted and/or existing or political subdivision thereof. "UNITED STATES" means the United States of America and its territories and possessions. "UNITED STATES PERSON" means any citizen or resident of the United States, any corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, and any estate or trust which is subject to United States Federal income taxation regardless of the source of its income. "WAREHOUSED REAL PROPERTY" means Real Property acquired by the Company or any of its Wholly-owned Subsidiaries with the intention of selling or transferring such Real Property to any Person, including, but not limited to, a partnership of which the Company or one of its Wholly-owned Subsidiaries is a general or limited partner or other investment entity in which the Company or any of its Subsidiaries has an interest or which is managed by the Company or any of its Subsidiaries. Warehoused Real Property shall also include the Real Property identified in Schedule A hereto. 25 "WESTMARK" means Westmark Realty Advisors L.L.C., a Delaware limited liability company. "WESTMARK ACQUISITION AGREEMENT" means the Purchase Agreement dated as of May 15, 1995 among Westmark Acquisition Partnership, the Company, and Vincent F. Martin, Jr., Stanton H. Zarrow, Bruce L. Ludwig, Sol L. Rabin, Roger C. Schultz and certain other individuals (together the "WESTMARK SELLERS"), and all schedules and exhibits thereto, as in effect on the Amendment Effective Date (as defined in the Limited Waiver, Consent and Amendment No. 3 hereto dated as of June 30, 1995 (the "THIRD AMENDMENT")). "WESTMARK ACQUISITION DOCUMENTS" means, collectively, the Westmark Acquisition Partnership Agreement, the Westmark Acquisition Agreement, the Realty Advisors Management Agreement, and the Westmark Subordinated Credit Agreement and each agreement ancillary thereto entered into in connection with the Closing (as defined in the Westmark Acquisition Agreement), in each case together with all schedules and exhibits thereto. "WESTMARK ACQUISITION PARTNERSHIP" means Westmark Real Estate Acquisition Partnership, L.P., a Delaware limited partnership formed pursuant to the Agreement of Limited Partnership of Westmark Real Estate Acquisition Partnership, L.P. dated as of May 15, 1995 (the "WESTMARK ACQUISITION PARTNERSHIP AGREEMENT") between the Company, as sole general partner, and the Citicorp Affiliate, as limited partner. "WESTMARK EARN-OUT PAYMENTS" means payments of the Supplemental Purchase Price (as defined in the Westmark Acquisition Agreement) made or required to be made by Westmark Acquisition Partnership pursuant to the Westmark Acquisition Agreement and payments under the Incentive Compensation Plan established pursuant to Section 9.17 of the Westmark Acquisition Agreement and as in effect on the Closing Date (as defined in the Westmark Acquisition Agreement). "WESTMARK SELLER FINANCING" means the aggregate portion of the Initial Purchase Price deferred by the Westmark Sellers pursuant to Sections 2.6(a) and 2.7(a) of the Westmark Acquisition Agreement. "WESTMARK SUBORDINATED DEBT" means Indebtedness of Westmark Acquisition Partnership to the Citicorp Affiliate in an amount not in excess of $10,000,000 in aggregate principal amount, together with accrued and unpaid interest thereon (including any such interest that is capitalized or paid-in- kind by issuance of additional promissory notes), incurred by Westmark Acquisition Partnership pursuant to the Senior Subordinated Credit Agreement dated as of June 30, 1995 (the "WESTMARK SUBORDINATED CREDIT AGREEMENT") between Westmark Acquisition Partnership and the Citicorp Affiliate, as in effect on the Amendment Effective Date (as defined in the Third Amendment). "WHOLLY-OWNED SUBSIDIARY" means any corporation, association or other business entity of which 100% of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof 26 is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. Section 1.2 Accounting Terms ---------------- For the purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Section 1.3 Other Definitional Provisions; Anniversaries -------------------------------------------- Reference to "Sections" and "Subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. For purposes of this Agreement, a monthly anniversary of the Funding Date shall occur on the same day of the applicable month as the day of the month on which the Funding Date occurred; provided that if the applicable month has no -------- such day (i.e., 29, 30 or 31), the monthly anniversary shall be deemed to occur ---- on the last day of the applicable month. ARTICLE II LOAN AND NOTES Section 2.1 Loan and Notes. -------------- The Lender made a loan to the Company on the Funding Date in the original principal amount of $62,000,000, the entire principal amount of which remains outstanding as of the date hereof, and the Company has Deferred Interest on such principal amount owing to the Lender in the aggregate amount of $8,916,216.37, which remains outstanding as of the date hereof (together with any Deferred Interest hereafter arising hereunder, collectively, the "Loan"). The Loan shall be evidenced by a promissory note of the Company such note to be substantially in the form of Exhibit I-A hereto (the "Term Note"), dated as of the Effective Date, payable to the order of the Lender and in the principal amount of $62,000,000 and by a note of the Company such note to be substantially in form of Exhibit I-B hereto (the "Payment-in-Kind Note") dated as of the Effective Date. Such notes shall be payable to the order of the Lender, duly completed, executed and delivered by the Company, as borrower. 27 Section 2.2 Payment of Loan. --------------- The Loan and all other amounts owed hereunder with respect to the Loan shall be paid in full by July 23, 2002, unless earlier paid in accordance with the terms of this Agreement. In addition to the prepayment or repayment of the obligations under the Payment-In-Kind Note required as a condition precedent under Article III hereof, all remaining obligations of the Company represented by the Payment-In- Kind Note (including any interest accrued to date thereon) shall be paid in cash on the earlier of (i) the 91st day after the Senior Loan Repayment Date (as defined below) and (ii) any day on which any principal on the Loan is payable hereunder (whether at stated maturity, by acceleration, prepayment or offer to purchase or otherwise, any such day being a "Principal Paying Day"). Section 2.3 Interest on the Loan -------------------- (a) The Company hereby promises to pay to the Lender interest on the unpaid principal amount of the Loan, as provided in clauses (i), (ii) and (iii) below, until all principal (including compounded interest pursuant to clause (ii) below) shall have been paid in full, at a rate equal to LIBOR for the relevant LIBOR Interest Period plus the Applicable LIBOR Margin for such period. (i) All interest on the Loan (including interest on any Deferred Interest) which becomes due and payable (i.e. on the last day ---- of each LIBOR Interest Period) on or after the earlier of (x) the Offering Closing Date and (y) January 1, 1997, shall be paid in cash at the Applicable LIBOR Based Rate on the last day of each LIBOR Interest Period. (ii) All interest on the Loan (including interest on any Deferred Interest) accrued and payable in excess of the interest computed at the Applicable LIBOR Based Rate shall (x) until the Senior Loan Repayment Date (as defined below), not be paid in cash and shall be compounded quarterly on the last day of each LIBOR Interest Period, and all such accrued and deferred interest (including any Deferred Interest thereon) shall be paid in cash on the 91st day after the Senior Loan Repayment Date and on any Principal Paying Day; and (y) for periods from and after the Senior Loan Repayment Date, be fully paid in cash on the last day of each LIBOR Interest Period and on any Principal Paying Day. As used herein, "Senior Loan Repayment Date" means the date of repayment in full in cash of all amounts of principal and interest under the Loans (as defined in the Senior Credit Agreement) under the Senior Credit Agreement (whether at stated maturity, by acceleration, prepayment or offer to purchase or otherwise). (iii) Notwithstanding the foregoing, to the fullest extent permitted by law, interest shall be payable at the Post-Default Rate on the amounts payable under this Agreement which shall not be paid in full when due (whether at stated maturity, by acceleration, prepayment or offer to purchase or otherwise) for the period commencing on the due date thereof until the same is 28 paid in full, and such interest at the Post-Default Rate shall be paid in cash, on and after the 91st day after the Senior Loan Repayment Date and on any Principal Paying Day, from time to time on demand of the Lender. Interest on the Loan shall be computed on the basis of a 360-day year and the actual days elapsed in the period during which it accrues. In computing interest on the Loan, interest shall accrue from and including the first day of a LIBOR Interest Period to but excluding the last day of such LIBOR Interest Period. The obligation of the Company to pay interest in kind and/or cash interest accrued but not paid currently under clause (ii) above shall be additionally evidenced by an additional promissory note in the form attached hereto as Exhibit I-C (the "Second Payment-In-Kind Note"). The Second Payment- In-Kind Note shall be in addition to the Term Note and the Payment-In-Kind Note. (b) If on or before the commencement of any LIBOR Interest Period, the Lender shall have determined either (i) adequate and reasonable means do not exist for ascertaining LIBOR as herein provided or (ii) U.S. Dollar deposits in an amount comparable to the outstanding principal amount of the Loan are not generally available at such time in the London Interbank Eurodollar market for such LIBOR Interest Period, the Lender shall so notify the Company and both shall attempt to reach a mutually satisfactory alternative rate. If no such mutually satisfactory alternative rate has been agreed upon by the Lender and the Company before the date which is two Business Days prior to the commencement of the next succeeding LIBOR Interest Period, the rate for such LIBOR Interest Period shall be equal to a rate which fairly reflects the cost to the Lender (and, if applicable, any participant holding a funded participation in the Loan) of obtaining funds in an amount equal to the outstanding principal of the Loan plus the Applicable LIBOR Margin. The Lender shall use reasonable efforts to acquire funds from an interbank dollar market other than the London Interbank Eurodollar market with respect to any LIBOR Interest Period affected by the circumstances described in this subsection (b) if the use of such other market will avoid such circumstances without prejudicing the interests of the Lender. Section 2.4 Loan Extension and Amendment Fees. --------------------------------- The Company agrees to pay to the Lender certain fees and costs as separately set forth in a letter agreement dated as of the date hereof between the Company and the Lender (the "Letter Agreement"). Such fees and costs shall be paid within three Business Days of the Offering Closing Date or as otherwise set forth in the Letter Agreement. Such fees and costs shall for all purposes be deemed amounts payable hereunder. Section 2.5 Voluntary Prepayments. --------------------- The Company may, at any time and from time to time, prepay the Loan, without premium, in whole or in part; provided, that (i) so long as any Senior -------- Credit Agreement Obligation is outstanding, such prepayment shall only be accepted by the Lender if accompanied by a certificate of the Senior Agent stating that such prepayment is not a violation of the Senior 29 Credit Agreement or the agreement governing Permitted Refinancing Indebtedness, (ii) the Company shall give the Lender at least five Business Days' prior notice of each prepayment in accordance with the provisions of Section 9.9 hereof specifying the principal amount to be prepaid and the date of prepayment (which shall be a Business Day), (iii) each partial prepayment of the Loan shall be in an aggregate principal amount of at least equal to $100,000 and in a multiple of $100,000, (iv) interest on the principal prepaid, accrued to the prepayment date, shall be paid on the prepayment date and (v) amounts prepaid may not be reborrowed. Notice of prepayment once given shall be irrevocable and, in connection with any prepayments, the Company shall comply with the provisions of Section 2.13 of this Agreement. Voluntary prepayments shall be credited against the outstanding principal amount of the Loan. If the Offering Closing Date shall occur on or after December 28, 1996 but before March 31, 1997 and if the Company is required to pay $10,000,000 out of IPO Net Proceeds to Lender in accordance with Article III hereof, the Company shall repay any then outstanding Deferred Interest, up to $15,664, within three Business Days of the Offering Closing Date Section 2.6 Mandatory Prepayments from Asset Sales. -------------------------------------- In the event of any Asset Sale not permitted by Section 6.7(a) to the extent not (1) required by the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness to prepay Senior Credit Agreement Obligations, (2) voluntarily used by the Company to prepay or repay the Senior Credit Agreement Obligations and in the case of a repayment of a revolving loan, a permanent reduction in the commitment in an amount equal to such payment, (3) prohibited by the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness or (4) used by the Company to make Capital Expenditures, in each case within 60 days after receipt by the Company or any Subsidiary of the Company of Cash Proceeds of any Asset Sales occurring after the Funding Date, the Company shall (i) prepay the Loan in an amount equal to the Estimated Net Cash Proceeds of such Asset Sale, but only to the extent that the Company has actually received Net Cash Proceeds of such Asset Sale (and subject to the provisions of the next sentence) or (ii) if applicable, within 60 days after any Asset Sale, the Company shall deliver to the Lender an Officers' Certificate evidencing the extent to which the Cash Proceeds of such Asset Sale were used or will be used for Capital Expenditures. On the 90th day after receipt of Cash Proceeds of an Asset Sale in respect of which a prepayment based on Estimated Net Cash Proceeds has been made, the Company shall make an additional prepayment of the Loan in an amount equal to the excess ("Proceeds Adjustment"), if any, of (1) Net Cash Proceeds of such Asset Sale over (2) Estimated Net Cash Proceeds of such Asset Sale, provided that if either -------- Estimated Net Cash Proceeds or the Proceeds Adjustments from an Asset Sale is less than $1,000,000, such amount shall not be applied to the prepayment of the Loan until the sum of such amounts and all other Estimated Net Cash Proceeds or Proceeds Adjustments payable by the Company but not previously paid is equal to or greater than $1,000,000. Concurrently with the making of any prepayment pursuant to this Section 2.6, the Company shall deliver to the Lender an Officers' Certificate demonstrating the derivation of Net Cash Proceeds of Sale from the gross sales price of any correlative Asset Sale. 30 All mandatory prepayments shall include payment of accrued interest on the principal amount so prepaid and shall be applied to payment of interest before application to principal and shall be subject to the provisions of Section 2.13 of this Agreement. Section 2.7 Lender's Optional Right of Prepayment. ------------------------------------- Upon the occurrence of a Change of Control, the Lender shall have the right to require the prepayment of the Loan provided that prior to any exercise ------------- by the Lender of such prepayment rights, the Company shall have (i) repaid in full all Indebtedness under the Senior Credit Agreement and any agreement governing Permitted Refinancing Indebtedness or (ii) offered to repay in full all such Indebtedness and repaid the Indebtedness of each lender under the Senior Credit Agreement or such other agreement who has accepted such offer or (iii) obtained the requisite consent under the Senior Credit Agreement or such other agreement to permit the prepayment of the Loan as provided for in this Section 2.7. The conditions set forth in the foregoing (i)-(iii) shall have been satisfied before the Company shall be required to prepay the Loan pursuant to this Section 2.7. Section 2.8 Manner and Time of Payment. -------------------------- All payments of principal and interest and loan fees hereunder and under the Notes by the Company shall be made without defense, set off or counterclaim and in same day funds and delivered to the Lender not later than 2:00 P.M., New York Time on the date due at its current account number 283 883 at The Sumitomo Bank, Limited New York Branch, 277 Park Avenue, New York, New York 10172 (or such other account as the Lender shall give the Company at least 5 Business Days notice given in accordance with the provisions of Section 9.9 hereof). Funds received by the Lender after that time shall be deemed to have been paid by the Company on the next succeeding Business Day. Any payments made to the Lender shall be applied in the following order of priority: (a) first, against costs, expenses and indemnities due hereunder, (b) second, against default interest, if any, (c) third, against interest due on the Loan and (d) thereafter against the principal of the Loan. The Lender shall open and maintain on its books a loan account in the Company's name. Such loan account shall show the Loan, all repayments, the computation, compounding, accrual and payments of interest and other amounts due and sums paid hereunder. Such loan account shall be available for inspection by the Company at reasonable times. The notations in such loan account shall be conclusive and binding upon the Company as to the amount at any time due from the Company, absent manifest error. Whenever any payment to be made hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, the payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or under the Notes; provided, that if any extension would result in such payment being made in a - -------- succeeding calendar month, the payment shall instead be made on the immediately preceding Business Day. 31 Section 2.9 Notation of Payment. ------------------- The Lender agrees that it will make a notation on each Note of all principal and interest payments made thereon and will notify the Company of the name and address of the transferee of each Note; provided that the failure to -------- make (or any error in the making of) a notation of any such payments on any Note or to notify the Company of the name and address of such transferee shall not limit or otherwise affect the obligation of the Company hereunder or under such Note. Section 2.10 Notice to Senior Credit Agreement Senior Agent. ---------------------------------------------- If the Lender receives any payment or prepayment other than its payment of accrued interest, the Lender will send notice in writing to the Senior Agent and if, within five Business Days after notice shall have been given, the Senior Agent notifies the Lender that such payment or prepayment constitutes an event of default under the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness or any payment is due and owing on any Senior Credit Agreement Obligations, the Lender shall immediately remit any such payment or prepayment to the Senior Agent for application to the Senior Credit Agreement Obligations. Section 2.11 Use of Proceeds. --------------- No portion of the proceeds of the Loan shall be used by the Company in any manner which might cause the borrowing or the application of such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of the Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. Section 2.12 Increased Costs. --------------- (a) Except in respect of an event subject to subsection (c) of this Section 2.12, which event shall be governed by the provisions of that section, if, after the Effective Date, the adoption of, or any change in, any law, rule or regulation (including Regulation D), or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (a "Regulatory Change") shall impose, modify or deem applicable any reserve (including, without limitation any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of credit extended by the Lender or shall impose on the Lender or the London interbank market any other conditions affecting the Loan, and the result of any of the foregoing is to increase the cost to the Lender of maintaining the Loan, or to reduce the amount of any sum received or receivable by the Lender under this Agreement, then, within 15 days after written request by the Lender, the Company shall pay to the Lender such additional amount or amounts as may be necessary to compensate it for such increased cost. As soon as practicable, the Lender will notify the Company of any event of which it has knowledge, occurring after the Effective Date, which will entitle it to compensation 32 pursuant to this Section 2.12 and will use reasonable efforts to take such action as will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable opinion of the Lender, be otherwise disadvantageous to it. (b) Without limiting the effect of the foregoing, the Company will pay to the Lender if it requests compensation under this subsection (b) by written notice to the Company, on the last day of each LIBOR Interest Period and on any other day on which interest is payable hereunder, so long as the Lender shall be required to maintain reserves against "Eurocurrency liabilities" under Regulation D (or, so long as it may be required, by reason of any Regulatory Change, to maintain reserves against any other category of liabilities which includes deposits by reference to which the interest rate on the Loan is determined as provided in this Agreement) an additional amount (determined by the Lender and communicated in writing to the Company) equal to the product of the following for each day for which the Lender may be required to maintain any such reserves during such LIBOR Interest Period: (i) the principal amount of the Loan which is outstanding on such day; and (ii) the amount by which (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on the Loan for such LIBOR Interest Period as provided in this Agreement (less the Applicable LIBOR Margin) and the denominator of which is one minus the rate (expressed as a decimal) at which such reserve requirements are imposed on the Lender against such "Eurocurrency liabilities" or such other category of liabilities on such date exceeds (y) such numerator; and (iii) 1/360. A certificate of the Lender claiming compensation under this Section 2.12 and setting forth the additional amount or amounts to be paid to it hereunder and setting forth in reasonable detail the calculations thereof shall be conclusive in the absence of manifest error. (c) If the Lender shall reasonably determine that subsequent to the Effective Date, there shall have occurred the adoption of or any change in any law, rule or regulation concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, other than a change subsequent to the Effective Date implementing the capital adequacy proposals of the Bank for International Settlements - Committee on Banking Regulations and Supervisory Practices published in July 1988 under the title "International Convergency of Capital Measurement and Capital Standards", which has the effect of increasing, by an amount deemed material by the Lender, the amount of capital required to be maintained by the Lender as a result of the existence of the Loan compared to the amount of capital which would otherwise be required to be maintained by the Lender in the absence of the Loan and the Lender desires to obtain compensation therefor from the Company, the Lender will promptly notify the Company thereof. Thereafter, subject to the later provisions of this subsection (c), the Company will pay to the Lender upon written demand such amounts as shall be necessary to compensate for the increased cost incurred or any resulting reduction in return on capital suffered by the Lender as a result of an actual increase in the Lenders' capital due to an event described in the first sentence of this subsection (c) for the period from the date of any previous payment to the Lender in relation thereto to the date of receipt of such demand by the Company. In determining such amount, the Lender will act reasonably and in good faith. Any demand by the Lender for any payment under this subsection (c) shall be accompanied by a statement setting forth in reasonable detail the basis for calculation of such increased costs. As soon as practicable after becoming aware of the same, the Lender shall notify the Company of any event occurring after the Effective Date which 33 will entitle it to compensation pursuant to this subsection (c) and will use reasonable efforts (determined in its absolute discretion exercised in good faith) to take such action which in its reasonable opinion will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable opinion of the Lender be otherwise disadvantageous to it. Section 2.13 Funding Losses. -------------- The Company shall pay to the Lender, upon its written request (which request shall set forth in reasonable detail the basis for requesting such amounts), such amount or amounts as shall compensate the Lender for any loss, cost or expense incurred by it as a result of: (a) any prepayment of the Loan or a portion thereof on a date other than the last day of the LIBOR Interest Period or (b) any failure by the Company to prepay the Loan or any portion thereof on the date specified in a notice of prepayment given pursuant to Section 2.5 of this Agreement or (c) any Event of Default relating to nonpayment of the Loan whether at maturity or upon acceleration. For purposes of this Section 2.13, the costs and losses of the Lender shall include any funding or carrying costs and/or losses in connection with the acquisition or liquidation of deposits acquired by the Lender to make or maintain the Loan and any funding or carrying costs and/or losses in connection with the re-employment of funds during the remainder of the then current LIBOR Interest Period, including any loss arising from the re-employment of funds at rates lower than the cost to the Lender of such funds and any related costs. The Lender shall certify such costs and losses (including a reasonably detailed description thereof) to the Company. The Lender shall act in good faith to minimize its costs and losses otherwise payable by the Company hereunder. Section 2.14 Deduction or Withholding for Taxes. ---------------------------------- (a) All sums payable by the Company or any Guarantor hereunder, whether of principal, interest, fees, expenses or otherwise, shall be paid in full, without set-off or counterclaim for any reason whatsoever, and free of any deductions or withholdings for any and all taxes, levies, imposts, deductions, charges, withholdings and all liabilities with respect thereto excluding taxes on net income, net worth or shareholders' capital imposed by the jurisdiction of the Lender's incorporation or the jurisdiction of its lending office (and in each case any political subdivision or taxing authority thereof or therein). In the event that the Company or any Guarantor is prohibited by law from making payments hereunder free of such deductions or withholdings, then the Company or such Guarantor shall pay such additional amounts to the Lender as may be necessary in order that the actual amount received after such deduction or withholding (and after deduction of an amount equal to any additional taxes or other charges payable as a consequence of the payment of such additional amount) shall equal the 34 amount that would have been received if such deduction or withholding were not required; provided, that, if the Lender fails to comply with the provisions of -------- paragraph (d) of this Section 2.14, then all such payments to the Lender shall be net of any amount the Company or such Guarantor is required to withhold under applicable law. (b) The Company shall pay directly to the appropriate taxing authorities any and all present and future taxes, levies, imposts, stamp and other duties, and other fees or charges and all liabilities with respect thereto imposed on or with regard to any aspect of the transactions contemplated by this Agreement or the execution and delivery of this Agreement or the other Loan Documents. The Company shall hold the Lender harmless from any liability with respect to the delay or failure by the Company to pay any such taxes or charges, and shall reimburse the Lender upon demand for any such taxes paid by the Lender in connection herewith whether or not such taxes shall be correctly or legally asserted or otherwise contested or contestable together with any interest, penalties and expenses in connection therewith, provided, if such taxes result -------- from the failure of the Lender to comply with subsection (d) of this Section 2.14, the Company shall not have any obligation to reimburse the Lender under this subsection (b). (c) If the Company or any Guarantor shall pay any tax or charge as provided herein or shall make any deductions or withholdings from amounts paid hereunder, the Company or such Guarantor shall forthwith forward to the Lender copies of official receipts or other evidence acceptable to the Lender to establish any tax credit to which the Lender may be entitled. (d) The Lender agrees promptly to deliver, to the extent that it may lawfully do so, to the Company on the Funding Date and each year thereafter that the Loan remains outstanding, such forms (including Internal Revenue Service Form 1001), duly completed and executed by the Lender, sufficient to establish that all payments under this Agreement by the Company may be paid without deduction or withholding for or on account of any taxes, levies, imposts, duties, fees, assessments or other charges of any nature imposed by any government or any political subdivision or taxing authority thereof. Upon request of the Lender, the Company shall provide the Lender with the appropriate forms in order to enable it to comply with this provision. (e) The Lender agrees to use reasonable efforts to take such action to avoid the imposition of withholding liability hereunder or reduce the amount thereof which in the reasonable opinion of the Lender would not otherwise be disadvantageous to it. Section 2.15 Event of Illegality. ------------------- Upon the occurrence of an Event of Illegality, then the Lender shall promptly notify the Company and the Senior Agent thereof and, unless such prepayment is a violation of the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness, the Company shall prepay the outstanding Loan together with interest accrued to the date of prepayment within 30 days after such notice and consent shall have been received by the Company. Such notice shall include evidence certified by the Lender as to such Event of 35 Illegality. As soon as practicable, the Lender will notify the Company and the Senior Agent of any event of which it has knowledge, occurring after the Funding Date which will or is likely to become an Event of Illegality. The Lender will take such reasonable action as will avoid such Event of Illegality. ARTICLE III CONDITIONS PRECEDENT Section 3.1 Conditions Precedent to Effective Date. -------------------------------------- The occurrence of the Effective Date shall be subject to satisfaction of all of the following conditions precedent all in form and substance satisfactory to the Lender: A. Effective Date. The Effective Date shall have occurred on or -------------- before March 31, 1997. B. Public Offering. The IPO shall have been completed and such --------------- completion shall have occurred on or before March 31, 1997, and the IPO Net Proceeds shall be at least $65,000,000. C. Distribution of IPO Net Proceeds. -------------------------------- (1) The total amount of IPO Net Proceeds up to $69,350,000 shall have been paid to the Senior Agent, for the account of the lenders under the Senior Credit Agreement. (2) The amount of IPO Net Proceeds, if any, in excess of $69,350,000 shall have been paid as follows: (x) 50% of the amount of IPO Net Proceeds, if any, in excess of $69,350,000 shall have been paid to the Senior Agent and (y) 50% of such amount of IPO Net Proceeds in excess of $69,350,000 shall be paid to Lender, up to the amount of all accrued and deferred interest or $10,000,000, whichever is less, as payment of Deferred Interest. D. On or before the Effective Date, the Lender shall have received the following, each of which, unless otherwise noted, shall be dated the Effective Date: (1) a certified copy of the charter of each of the Guarantors and the Company, certified by the Secretary or one of the Assistant Secretaries of each of the Guarantors and the Company, respectively, together with a good standing certificate from the Secretary of State of the state of incorporation of each of the Guarantors and the Company, each to be dated a recent date on or prior to the Effective Date; 36 (2) a copy of the By-laws of each of the Guarantors and the Company, certified as of the Effective Date, in each case, by the Secretary or one of the Assistant Secretaries of each of the Guarantors and the Company, respectively; (3) (a) Resolutions of the Company's Board of Directors approving and authorizing the execution, delivery and performance of this Agreement and any other documents, instruments and certificates required to be executed by the Company in connection herewith and approving and authorizing the execution, delivery and payment of the Notes, each certified as of the Effective Date by the Company's Secretary or one of its Assistant Secretaries as being in full force and effect without modification or amendment; (b) Resolutions of CB Holdings's Board of Directors approving and authorizing the execution, delivery and performance of this Agreement and certified as of the Effective Date by CB Holdings's Secretary or one of its Assistant Secretaries as being in full force and effect without modification; and (c) Resolutions of the Board of Directors of each Guarantor approving and authorizing the execution, delivery and performance of the Guarantee, certified as of the Effective Date by each of the Guarantors' Secretaries or one of its Assistant Secretaries as being in full force and effect without modification. (4) (i) Signature and incumbency certificates of the Company's and the Guarantors' officers executing this Agreement, and the Company's officers executing the Notes; (5) Fully executed copies of this Agreement, the Third Amended and Restated Senior Credit Agreement, the Letter Agreement, the Notes and the schedules and exhibits hereto and thereto; and (6) Such other documents as the Lender may reasonably request. E. On or before the Effective Date, the Company shall have paid all fees and expenses that are due and payable on or before the Effective Date. F. On or before the Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by the Lender, shall be reasonably satisfactory in form and substance to the Lender, and the Lender shall have received all such counterpart originals or certified copies of such documents as the Lender may reasonably request. G. The Lender shall have received originally executed copies of opinions of Pillsbury, Madison & Sutro LLP, counsel for CB Holdings, the Subsidiaries and the Company and of general counsel of the Company, in substantially the forms of Exhibits III and IV annexed hereto, respectively, dated as of the Effective Date. 37 H. The Company and CB Holdings shall have performed in all material respects all agreements which this Agreement provides shall be performed on or before the Effective Date except as otherwise disclosed to and agreed to in writing by the Lender. I. No event shall have occurred and be continuing or would result from the consummation of the transactions contemplated hereunder or under the Senior Credit Agreement or IPO Documents which would constitute an Event of Default or Potential Event of Default. J. No order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain the Lender from entering into this Agreement or consummating the transactions contemplated hereby. K. There shall not be existing, or to the knowledge of the Company threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting the Company or any of its Subsidiaries or any property of the Company or any of its Subsidiaries, which has not been disclosed by the Company in writing pursuant to Section 4.11 of this Agreement, and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, which, in the opinion of the Lender, could reasonably be expected to materially and adversely affect the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or to impair the ability or obligation of the Company to perform or of the Lender to enforce the Obligations. No injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of this Agreement. L. The use of proceeds of the Loan by the Company shall not violate Regulation U of the Federal Reserve Board. M. No material adverse change shall have occurred since December 31, 1995 in the business, assets, prospects, results of operations or financial condition (i) of the Company or the Company and its Subsidiaries, taken as a whole or (ii) CB Holdings and its consolidated subsidiaries, taken as a whole. N. On or before the Effective Date, all required approvals, consents and waivers under the Senior Credit Agreement to this Agreement and the transactions contemplated hereby shall have been obtained. O. On the Offering Closing Date and the Effective Date the Company shall provide the Lender with an Officer's Certificate (A) that all of the Company's representations set forth in this Agreement are true and correct on such date as if made on and as of such date, and (B) that no Default or Event of Default has occurred and is existing under this Agreement and (C) that the Third Amended and Restated Senior Credit Agreement will concurrently be in full force and effect as of the Effective Date. 38 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 General. ------- In order to induce the Lender to enter into this Agreement and to extend the maturity of the Loan, each of CB Holdings and the Company, as the case may be, represents and warrants to the Lender that, at the time of the Offering Closing Date and the Effective Date and after consummation of the transactions contemplated hereby and by the Senior Credit Agreement, the statements set forth in this Article IV are true, correct and complete. Section 4.2 Organization and Good Standing. ------------------------------ Each of CB Holdings, the Company and its United States Subsidiaries is a corporation or other business entity, duly organized and existing in good standing under the laws of its jurisdiction of incorporation or formation. Each of CB Holdings, the Company and its United States Subsidiaries has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged and is duly qualified as a foreign corporation and in good standing in all states in which it is doing business, except where failure to be so qualified will not have a Material Adverse Effect. Section 4.3 Authorization and Power. ----------------------- Each of CB Holdings, the Company and its Subsidiaries has the corporate power and requisite authority, and has taken all action necessary, to execute, deliver and perform the Loan Documents, the Senior Credit Agreement and the Senior Credit Agreement Notes executed or to be executed by it and to issue the Notes and the Senior Credit Agreement Notes and to grant the security interest in the Collateral pursuant to the Stock Pledge Agreement. Section 4.4 No Conflicts or Consents. ------------------------ Except as disclosed in Schedule F, to the knowledge of CB Holdings and the Company, the execution and delivery of the Loan Documents, the Senior Credit Agreement, the Senior Credit Agreement Notes, the consummation of any of the transactions herein or therein contemplated, and compliance with the terms and provisions hereof or thereof, the issuance, delivery and performance of the Notes, the Senior Credit Agreement Notes and the grant of the security interest in the Collateral pursuant to the Stock Pledge Agreement, will not contravene or materially conflict with any provision of Law to which CB Holdings, the Company or any of its Subsidiaries is subject or any material judgment, license, order or permit applicable to CB Holdings, the Company or any of its Subsidiaries, or any material contract, lease, indenture, loan agreement, mortgage, deed of trust or other agreement or instrument to which CB Holdings, the Company or any of its Subsidiaries is a party or by which CB Holdings, the Company or any of its Subsidiaries may be bound, or to which CB Holdings, the Company or any of its Subsidiaries may be subject, or violate any provision of the charters or bylaws of CB 39 Holdings, the Company or any of its Subsidiaries, which would in any case have a Material Adverse Effect. Except as disclosed in Schedule 4.02 to the Senior Credit Agreement, no consent, approval, authorization or order of any Tribunal or other Person is required in connection with the execution and delivery by CB Holdings, the Company or any of its Subsidiaries of the Loan Documents, the Senior Credit Agreement, the Senior Credit Agreement Notes, the grant of the security interest in the Collateral pursuant to the Stock Pledge Agreement or the consummation of the transactions contemplated hereby or thereby, all of which required consents, approvals and authorizations have been obtained by the Company or waived in writing by the Lender, except with respect to which the failure to obtain would not have a Material Adverse Effect. Section 4.5 Enforceable Obligations. ----------------------- The Loan Documents, the Senior Credit Agreement, the Senior Credit Agreement Notes have been duly executed and delivered by CB Holdings, the Company and each of its Subsidiaries party thereto and are, or will be, the legal and binding obligations of CB Holdings, the Company and each such Subsidiary, enforceable in accordance with their respective terms, except to the extent that their enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 4.6 Title to Properties; Liens. -------------------------- Except for Permitted Encumbrances and except as disclosed in Schedule C, all of the material assets owned or leased by CB Holdings and the Company and its Subsidiaries are free and clear of all Liens and other adverse claims of any nature, each of CB Holdings, the Company and its Subsidiaries has good and indefeasible title to, or valid and subsisting interests in, all Real Property included in such assets and good and marketable title to, or valid and subsisting interests in, all personal property included in such assets, and, to the knowledge of CB Holdings and the Company and its Subsidiaries, except for financing statements with respect to Permitted Encumbrances, there are no presently effective financing statements of record in any jurisdiction covering any material tangible or intangible assets of CB Holdings, the Company or its Subsidiaries. Section 4.7 Financial Condition. ------------------- (a) The consolidated balance sheet of CB Holdings and its consolidated subsidiaries at December 31, 1995, and the consolidated statements of income, retained earnings and cash flows of CB Holdings and its consolidated subsidiaries for the fiscal year then ended, copies of which have been delivered to the Lender, were prepared in accordance with GAAP consistently applied and fairly present the consolidated financial position of CB Holdings and its consolidated subsidiaries, as at the date thereof and the results of operations and cash flows of CB Holdings and its consolidated subsidiaries for the periods then ended. Neither CB Holdings nor the Company or any of its Subsidiaries, as the case may be, had on such dates any material Contingent Liabilities, liabilities for Taxes or long-term leases, unusual forward or long- term 40 commitments or unrealized or unanticipated losses from any unfavorable commitments which are not reflected or reserved against in the foregoing statements or in the notes thereto. Other than changes disclosed to the Lender in writing prior to the Effective Date, no changes having a Material Adverse Effect have occurred since the date of such financial information. (b) CB Holding's unaudited consolidated balance sheets as at September 30, 1996, and related statements of income and retained earnings for the periods then ended certified by the Chief Financial Officer, copies of which have been delivered to the Lender, were prepared in accordance with GAAP consistently applied (except to the extent noted therein) and fairly present the financial position of CB Holdings and its consolidated subsidiaries as of such dates and the results of operations for the periods covered thereby, subject to normal year-end audit adjustments. CB Holdings, the Company or any of its Subsidiaries did not have on such date any material Contingent Liability, liabilities for Taxes or long-term leases, unusual forward or long-term commitment or unrealized or unanticipated losses from any commitment or unrealized or unanticipated losses from any unfavorable commitments which are not reflected or reserved against in the foregoing statements or in the notes thereto. (c) Solvency. Upon giving effect to the consummation of the -------- transactions contemplated hereby and by the Senior Credit Agreement, the following are true and correct to the best knowledge of the Company, after reasonable investigation: (i) The fair salable value of the Company and each of its Subsidiaries exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including Contingent Liabilities) of the Company or its Subsidiaries, as they mature. (ii) The assets of the Company and its Subsidiaries do not constitute unreasonably small capital for each such company to carry out its business as now conducted and as proposed to be conducted, including the capital needs of each such company, taking into account the particular capital requirements of the business conducted by such company, and the projected capital requirements and capital availability thereof. (iii) The Company does not intend to, and will not permit any of its Subsidiaries to, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts or cash to be payable on or in respect of debt of each of the Company and it Subsidiaries). The cash flow of the Company and each of its Subsidiaries, after taking into account all anticipated uses of the cash of each such company, will at all times be sufficient to pay all amounts on or in respect of debt of each such company when such amounts are required to be paid. (iv) The Company does not believe that final judgments against any of the Company or its Subsidiaries in currently pending actions for money damages will be rendered at a time when, or in an amount such that, any such company will be unable to satisfy any such judgments promptly in accordance 41 with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). The cash flow of the Company and each of its Subsidiaries, after taking into account all other anticipated uses of the cash of the Company and each of its Subsidiaries (including the payments on or in respect of debt referred to in paragraph (iii) of this Section 4.7(c)), will at all times be sufficient to pay all such judgments promptly in accordance with their terms. Section 4.8 Accurate Information. -------------------- All information previously furnished or delivered to Lender in connection with this Agreement or the transactions contemplated hereunder or under the Senior Credit Agreement is true and complete in all material respects. Section 4.9 No Default. ---------- No event has occurred and is continuing which constitutes a Potential Event of Default or an Event of Default. Section 4.10 Material Agreements. ------------------- (a) Neither the Company nor any of its Subsidiaries, is in default under any Contractual Obligations to which it is a party or by which its property is bound, where such default could have a Material Adverse Effect. (b) Neither the Company nor any of its Subsidiaries, is a party to or bound by any unusual or unduly burdensome Contractual Obligation (excluding the Senior Credit Agreement) which materially and adversely affects the business, assets, prospects, results of operations or financial condition of the Company and its Subsidiaries taken as a whole. Section 4.11 No Litigation. ------------- Except for the Litigation described in Schedule D hereto, there is no material Litigation existing, or to the knowledge of CB Holdings or the Company threatened, by or against CB Holdings, the Company or any of its Subsidiaries, and in the opinion of the Company as of the date hereof and as of the date on which such representation is deemed to have been made, no existing or threatened Litigation will have a Material Adverse Effect. There are no outstanding injunctions or restraining orders prohibiting consummation of any of the transactions contemplated by the Loan Documents. For purposes of this representation "material Litigation" shall mean any litigation which the Company has determined could result in a judgment in excess of $1,000,000. Section 4.12 Use of Proceeds; Margin Stock. ----------------------------- The proceeds of the Loan will be used solely for the purposes specified herein. None of such proceeds will be used for the purpose of Regulation G, T, U or X, or for the 42 purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry a Margin Stock or for any other purpose which might constitute a "purpose credit" within the meaning of Regulation G, T, U or X. Neither the Company nor any of its Subsidiaries has taken or will take any action which might cause any of the Loan Documents to violate Regulation G, T, U or X, or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 8 of the Exchange Act or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. Section 4.13 No Financing of Regulated Corporate Takeovers. --------------------------------------------- No proceeds of the Loan will be used to acquire any security in any transaction which is subject to Section 13 or 14 of the Exchange Act, including particularly (but without limitation) Sections 13(d) and 14(d) thereof. Section 4.14 Taxes. ----- All tax returns required to be filed by CB Holdings have been filed, and all Taxes upon CB Holdings or upon any of its properties, income, franchises or Plans have been paid prior to the time that such Taxes could give rise to a Lien thereon, except for Contested Claims. There is no material proposed Tax assessment against CB Holdings and, to CB Holdings's knowledge, there is no basis for such assessment. Section 4.15 ERISA. ----- Except as disclosed in Schedule E hereto, (i) neither the Company nor any ERISA Affiliate has sponsored, maintained or contributed to any Multiemployer Plan or any Pension Plan during the past six years; (ii) no material liability has been incurred by the Company or any of its Subsidiaries which remains unsatisfied for any taxes or penalties (A) with respect to any Plan that is not a Multiemployer Plan and (B) to the best of the Company's knowledge and belief, with respect to any Multiemployer Plan; (iii) except as described in Schedule D, no material Litigation is existing or, to the Company's best knowledge, threatened concerning or involving any Plan; (iv) except as shown in Schedule E with respect to the date and using the assumptions described therein, and to the best of the Company's knowledge and belief, no unfunded or unreserved liability exists for benefits under any Pension Plan; (v) except as set forth in Schedule E and to the best of the Company's knowledge and belief, neither the Company nor any of its Subsidiaries contributes to or, within the prior six-year period contributed to any Multiemployer Plan; (vi) with respect to each Multiemployer Plan set forth in Schedule E, neither the Company nor any of its Subsidiaries has suffered or caused to occur a "complete withdrawal" or "partial withdrawal" (as such terms are respectively defined in Sections 4203 and 4205 of ERISA); and in each of the cases described in any of clauses (i) through (vi) preceding, an event described therein involving a Multiemployer Plan shall be disregarded unless the aggregate of all such events and any liabilities otherwise incurred with respect to a Multiemployer Plan have a Material Adverse Effect. 43 Section 4.16 Compliance with Law. ------------------- To the knowledge of CB Holdings and the Company, CB Holdings, the Company and each of its Subsidiaries is in compliance with all Laws, except where failure to comply will not have a Material Adverse Effect. Section 4.17 Government Regulation. --------------------- Neither CB Holdings, the Company, nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940 (as any of the preceding acts have been amended) or other Law which regulates the incurring by the Company or any of its Subsidiaries of Indebtedness, including, but not limited to, Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. Section 4.18 Capital Structure and Subsidiaries. ---------------------------------- (a) As of the Effective Date, CB Holdings owns 100% of all classes of stock of the Company. The authorized Capital Stock of the Company consists of 1,000 shares of common stock, par value $.01 per share, of which 100 shares are issued and outstanding. All such outstanding shares of such common stock were duly authorized and validly issued and, as of such time, are fully paid and nonassessable and are owned beneficially and of record by CB Holdings free and clear of all liens and encumbrances whatsoever, except for a first priority Lien securing CB Holdings's obligations under its guaranty pursuant to the Senior Credit Agreement and the second priority Lien securing CB Holdings's Guarantee. (b) There are no outstanding subscriptions, options, warrants, calls, rights (including preemptive rights) or other agreements or commitments of any nature relating to any Capital Stock of the Company or any of its Subsidiaries. (c) The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its Capital Stock. Section 4.19 Licenses, Trademarks, etc. ------------------------- The Company and its Subsidiaries own or hold valid licenses in all necessary Trademarks, copyrights, patents, patent rights and licenses to conduct their respective businesses as heretofore operated and as proposed to be conducted. All of the Company's and its Subsidiaries' Trademarks, copyrights, patents, patent rights, licenses or other similar rights owned or used by the Company or any of its Subsidiaries are listed in Schedule 4.15 to the Senior Credit Agreement, showing for each item the owner thereof, and the date (except with respect to tradenames) and place of registration thereof. Neither the Company nor any of its Subsidiaries has been charged or, to the knowledge of CB Holdings and the Company, threatened to be charged with any infringement of, nor, to their knowledge, has any of them infringed on, any unexpired Trademark, patent, patent registration, copyright, copyright registration or other proprietary right of any Person. 44 Section 4.20 Permits and Licenses. -------------------- All material permits, licenses and other governmental authorizations ("Permits") needed by the Company or any of its Subsidiaries to carry on its business have been obtained and are in full force and effect and have not been modified or amended. Neither the Company nor any of its Subsidiaries is in material breach of any such Permits except for breaches which, considered singly or in the aggregate, would not have a Material Adverse Effect. Section 4.21 Survival of Representations and Warranties. ------------------------------------------ Subject to Section 9.10, all representations and warranties in the Loan Documents shall survive the delivery of the Notes, the making of the Loan and the Effective Date hereof and shall continue until one year after repayment of the Notes and the Obligations, and any investigation at any time made by or on behalf of the Lender shall not diminish the Lender's right to rely thereon. Section 4.22 Environmental Condition. ----------------------- (a) To CB Holdings's and the Company's knowledge, all Real Property that the Company or any of its Subsidiaries owns is free from contamination from any Hazardous Materials (as such term is defined in the Senior Credit Agreement). Neither the Company nor any of its Subsidiaries has caused or suffered any Environmental Damage (as such term is defined in the Senior Credit Agreement) that would have a Material Adverse Effect. (b) Neither the Company nor any of its Subsidiaries or, to CB Holdings's and the Company's knowledge, any prior owner or occupant of the Real Property owned by the Company or any of its Subsidiaries has received notice of any alleged violation of Environmental Requirements (as defined in the Senior Credit Agreement) of the type set forth in clause (i) of such definition or, to the Company's knowledge, of the type set forth in clause (ii) of such definition, or notice of any alleged liability for Environmental Damages in connection with the Real Property, and there exists no writ, injunction, decree, order or judgment outstanding, nor, to the knowledge of CB Holdings and the Company, any claim, suit, proceeding, citation, directive, summons or investigation, pending or threatened, relating to the ownership, use, maintenance or operation of the Real Property by any Person, or from alleged violation of Environmental Requirements, or from the suspected presence of Hazardous Material thereon, nor, to the knowledge of CB Holdings and the Company, does there exist any basis for such claim, suit, proceeding, citation, directive, summons or investigation being instituted or filed. (c) To CB Holdings's and the Company's knowledge, there is not constructed, placed, deposited, stored, disposed of nor located on the Real Property owned by the Company any polychlorinated biphenyls (PCBs) nor transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs, or any asbestos that would have a Material Adverse Effect. 45 Section 4.23 Subsidiaries ------------ On the date hereof, the Company has no Subsidiaries other than those identified in Schedule 4.01 to the Senior Credit Agreement. Except as set forth on such schedule, on the date hereof neither the Company nor any of its Subsidiaries owns or holds, directly or indirectly, any Capital Stock or equity security of, or any equity interest in, any corporation or business other than the Company's Subsidiaries. ARTICLE V AFFIRMATIVE COVENANTS Section 5.1 Financial Statements and Other Reports. -------------------------------------- The Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of consolidated financial statements in conformity with GAAP. The Company will deliver to the Lender: (a) as soon as practicable and in any event within ninety (90) days after the end of each fiscal year of the Company, the consolidated balance sheet of the CB Holdings and its Subsidiaries as of the end of such year and the related consolidated statements of income, stockholders' equity and cash flow of CB Holdings and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail, accompanied by an unqualified report thereon of Arthur Andersen LLP or other independent certified public accountants of recognized national standing selected by CB Holdings and satisfactory to the Lender, which report shall state that such consolidated financial statements fairly present the financial position of CB Holdings and its Subsidiaries as at the date indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP (except as otherwise stated therein) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards. (b) as soon as practicable and in any event within forty five (45) days after the end of each fiscal quarter a consolidated balance sheet of CB Holdings and its Subsidiaries as at the end of such quarter and the related consolidated statement of income of CB Holdings and its Subsidiaries for such quarter and the portion of CB Holdings' fiscal year ended at the end of such quarter, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the prior fiscal year, all in reasonable detail and certified by the Company's Chief Financial Officer as fairly presenting the financial condition of CB Holdings and its Subsidiaries as at the date indicated and the results of their operations and cash flows for the periods indicated, subject to normal year-end adjustment; 46 (c) together with each delivery of financial statements of CB Holdings and its Subsidiaries pursuant to clauses (a) and (b) above, a Compliance Certificate of the Company (i) stating that the signers have reviewed the terms of the Agreement and the Notes and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of the Compliance Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken, is taking and proposes to take with respect thereto and (ii) demonstrating in reasonable detail compliance (as determined in accordance with GAAP) during and at the end of such accounting periods with the restrictions contained in Section 6.3; (d) together with each delivery of consolidated financial statements pursuant to clause (a) above, and so long as and to the extent not contrary to the then current recommendations of the American Institute of Certified Public Accountants, a written statement by the independent certified public accountants giving the report thereon (i) stating that their audit examination has included a review of the terms of this Agreement and the Notes as they relate to accounting matters, (ii) stating whether in connection with their audit examination, any Event of Default or Potential Event of Default has come to their attention and if so, specifying the nature and period of existence thereof, and (iii) confirming the calculations set forth in the Compliance Certificate delivered simultaneously therewith pursuant to clause (c) above; (e) promptly after the occurrence of any Event of Default or Potential Event of Default, an Officers' Certificate of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (f) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available by CB Holdings to its security holders, all registration statements (other than the exhibits thereto) and annual, quarterly or monthly reports, if any, filed by CB Holdings with the Commission; (g) promptly, to the extent delivered under the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness, upon becoming aware of the occurrence of (i) any Reportable Event involving any Pension Plan, (ii) any "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code (which prohibited transaction could subject any ERISA Affiliate) to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code in connection with any Plan (or any trust created thereunder), (iii) any assertion of withdrawal liability of any Multiemployer Plan, (iv) any partial or complete withdrawal (by the Company or an ERISA Affiliate) from any Multiemployer Plan under Title IV of ERISA (or assertion thereof), (v) any cessation of operations (by the Company or an ERISA Affiliate) at a facility in the circumstances described in Section 4068(f) of ERISA, (vi) the withdrawal by the Company or an ERISA Affiliate from a Pension Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA, (vii) the failure by the Company or any 47 ERISA Affiliate to make a payment to a Plan required under Section 302(f)(1) of ERISA, which Section imposes a lien for failure to make required payments, (viii) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; (h) promptly, to the extent delivered under the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness, copies of (i) all notices received by any ERISA Affiliate of the PBGC's intent to terminate any Pension Plan administered or maintained by the Company or its ERISA Affiliates or to have a trustee appointed to administer any such Pension Plan; (ii) at the request of the Lender each annual report (IRS Form 5500 Series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Company or its ERISA Affiliates, and schedules showing the amounts contributed to each such Plan by or on behalf of the Company or its Subsidiaries in which any of their personnel participate or from which such personnel may derive a benefit, and each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by any ERISA Affiliate with the Revenue Service with respect to each such Plan; (i) promptly after the Company obtains knowledge thereof, notice of all litigation or proceedings commenced or threatened affecting the Company in which there is a reasonable possibility of an adverse decision and (i) which involves alleged liability in excess of $1,000,000 (in the aggregate), (ii) in which injunctive or similar relief is sought which if obtained could have a material adverse effect on the business, assets, prospects, results of operation or financial condition of the Company and its Subsidiaries taken as a whole or (iii) which questions the validity or enforceability of any Loan Document; (j) promptly upon receipt thereof, copies of all final reports or letters submitted to the Company by its independent certified public accountants in connection with each annual, interim or special audit of the financial statements of the Company or its Subsidiaries made by such accountants, including, without limitation, any management report, and the Company agrees to obtain such a report in connection with each of its annual audits to the extent required under the Senior Credit Agreement or any agreement governing Permitted Refinancing Indebtedness; (k) promptly after the availability thereof, copies of all material amendments to the certificate of incorporation or By-laws of the Company and any of its Subsidiaries; (l) promptly after the receipt thereof, a copy of any notice, summons, citation, letter or other communication concerning any actual, alleged, suspected or threatened violation of Environmental Requirements (as defined in the Senior Credit Agreement), or liability of the Company or any of its Subsidiaries for Environmental Damages (as defined in the Senior Credit Agreement) in connection with its real property or past or present activities of any Person thereon; 48 (m) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested by the Lender; (n) prior written notice of the amount, recipient and time of each payment or allocation (or other reservation or segregation of funds) of "Excess Proceeds of Issuance of Stock" (as defined in the Senior Credit Agreement) for the benefit of the lender under the Senior Credit Agreement or the Company; and (o) promptly after the Lender's request, such other information pertaining to the Senior Credit Agreement, collateral therefor or payments or performance thereunder as the Lender may from time to time request. Section 5.2 Corporate Existence, etc. ------------------------ The Company will at all times preserve and keep in full force and effect its corporate existence and rights and franchises to its business and, those of each of its Subsidiaries, except when failure to so preserve or keep will not have a material adverse effect on the financial condition, properties or business operations of the Company and its Subsidiaries, taken as a whole. The Company and any permitted successor thereto shall at all times be a "qualified person" within the meaning of the Finance Act of the Republic of Ireland. Section 5.3 Payment of Taxes; Tax Consolidation. ----------------------------------- A. CB Holdings and the Company will, and will cause each of its Subsidiaries to, pay all Taxes imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property prior to the time when any material penalty or fine shall be incurred with respect thereto; provided that no such Tax need be paid if being contested in -------- good faith by appropriate proceedings and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. B. The Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person other than CB Holdings, the Company or any of the Company's Subsidiaries or such other Person as may be reasonably acceptable to the Lender. Section 5.4 Maintenance of Properties; Insurance. ------------------------------------ The Company will maintain or cause to be maintained in good repair, working order and condition all material properties used or useful in the business of the Company and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily 49 carried under similar circumstances by such other corporations and which is available at a cost which the Company considers to be reasonable and may self- insure to the extent, and only to the extent, reasonably prudent and in cases in which the cost of insurance is considered by the Company to be unreasonable. Section 5.5 Inspection. ---------- The Company shall permit any authorized representatives designated by the Lender to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested. Section 5.6 Equal Security for Loan and Notes; No Further Negative ------------------------------------------------------ Pledges. - ------- A. If the Company or any of its Subsidiaries shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of Section 6.5 (unless prior written consent to the creation or assumption thereof shall have been obtained from the Lender), it shall, at the request of the Lender, make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness thereby secured as long as any such Indebtedness shall be secured; provided that this covenant -------- shall not be construed as consent by the Lender to any violation by the Company of the provisions of Section 6.5; and provided, further, that the Company shall -------- ------- under no circumstances be required to make or cause to be made effective provision whereby the Obligations will be secured, directly or indirectly, by Margin Stock; and provided, further, that any such Lien granted to the Lender -------- ------- pursuant to this Section 5.6A shall be subject to the provisions of the Intercreditor Agreement. B. Except (i) as otherwise permitted by this Agreement, the Senior Credit Agreement or any other agreement governing Senior Debt of the Company, (ii) with respect to specific property encumbered to secure payment of particular Indebtedness and (iii) with respect to Margin Stock, neither the Company nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. Section 5.7 Compliance with Laws, etc. ------------------------- The Company and each of its Subsidiaries shall exercise all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which might have a Material Adverse Effect. Section 5.8 Maintenance of Accurate Records, etc. ------------------------------------ The Company shall keep, and will cause each of its Subsidiaries to keep, true books and records and accounts in which full and correct entries will be made of all its 50 respective business transactions, and will reflect, and cause each of its Subsidiaries to reflect, in its respective financial statements adequate accruals and appropriations to reserves. Section 5.9 Lender Meeting. -------------- The Company will participate in a meeting with the Lender once during each fiscal year to be held at a location and a time selected by the Company. Section 5.10 ERISA Compliance. ---------------- The Company and each of its Subsidiaries and ERISA Affiliates will make prompt payment of all contributions which it is obligated to make under all Pension Plans and which are required to meet the minimum funding standard set forth in ERISA with respect to each of the Pension Plans. Section 5.11 Ownership of the Company; No Merger. ----------------------------------- CB Holdings shall at all times own 100% of the total voting power entitled to vote in the election of directors of the Company. CB Holdings shall not merge with or into the Company. Section 5.12 Subsidiaries of the Company. --------------------------- The Company shall cause any of its Subsidiaries which guarantee Senior Debt at any time in the future to also guarantee the Obligations on substantially similar terms as the Guarantee. Section 5.13 General. ------- The Company covenants and agrees that, until payment in full of the Loan and Notes and all other amounts due under this Agreement have been made indefeasibly paid in full unless the Lender shall otherwise give prior written consent, the Company shall perform all covenants in this Article V. ARTICLE VI NEGATIVE COVENANTS Section 6.1 Indebtedness. ------------ The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly create, incur, assume, extend the maturity of, or otherwise become directly or indirectly liable with respect to, any Indebtedness; provided the Company may become liable for Indebtedness if after -------- giving effect to the incurrence of such Indebtedness and all other 51 Indebtedness incurred subsequent to the four fiscal quarters referred to herein, the Consolidated Fixed Charge Ratio of the Company for the four fiscal quarters (taken as a whole) for which financial statements of the Company are available (provided that the immediately preceding fiscal quarter shall be included in any - --------- such determination pursuant to this Section 6.1 made more than 45 days after the end of such fiscal quarter) immediately preceding the fiscal quarter in which such Indebtedness is to be created, incurred, issued, assumed, guaranteed or for which the Company is otherwise to become liable, determined on a pro forma basis --- ----- as if such Indebtedness has been created, incurred, issued, assumed, guaranteed or for which the Company had otherwise become liable at the beginning of such four fiscal quarter period (and, in the event the proceeds of such Indebtedness are applied to the acquisition or to refinance the acquisition of a business (within the meaning of Rule 11-01(d) of Regulation S-X (17 C.F.R. 210, 11-01(d)) of the Commission as in effect on the date hereof), after giving effect to the earnings from continuing operations of such business during such four fiscal quarters (determined in good faith by the Company in accordance with the rules and regulations of the Commission, including Rule 11-02 of Regulation S-X (17 C.F.R. 210, 11-02) of the Commission as in effect on the date hereof) would be greater than 2 to 1. Notwithstanding the foregoing, the Company may, and may permit any of its Subsidiaries to, become directly or indirectly liable for the following: (i) the Company and its Subsidiaries may become liable with respect to the Obligations and the Guarantee; (ii) the Company may become and remain liable with respect to the Indebtedness pursuant to the Senior Credit Agreement and its Subsidiaries may become and remain liable with respect to their guarantees of such Indebtedness; provided that the aggregate principal -------- amount of borrowings outstanding under the Senior Credit Agreement shall not exceed $210,000,000 less the sum of (a) the aggregate amount of scheduled amortization payments of the principal amount of Senior Credit Agreement Obligations to the extent actually made, (b) the aggregate amount of mandatory prepayments of the principal amount of Senior Credit Agreement Obligations actually made (including any amounts paid in accordance with Section 3.01 of the Third Amended and Restated Senior Secured Credit Agreement to the lenders thereunder) and (c) each permanent reduction of commitments to extend credit under the Senior Credit Agreement not otherwise caused pursuant to clause (a) or (b); (iii) the Company and its Subsidiaries may remain and may become and remain liable with respect to Intercompany Indebtedness; (iv) the Company and its Subsidiaries may remain liable with respect to, and may refinance, the Indebtedness which is described on Schedule B annexed hereto; 52 (v) current liabilities for taxes and assessments incurred in the ordinary course of business; (vi) Indebtedness incurred by the Company under an interest rate swap, cap or similar arrangement entered into in respect of any Indebtedness permitted hereunder; (vii) Permitted Purchase Money Indebtedness and refinancings thereof; (viii) Indebtedness with respect to letters of credit not to exceed in the aggregate at any time the sum of $1,000,000; (ix) Permitted Refinancing Indebtedness; (x) Non-Recourse Debt incurred in connection with the acquisition (directly or indirectly) of the Warehoused Real Property and secured by Liens permitted by Section 6.5(ii) and refinancings thereof which remain Non-Recourse Debt; (xi) any promissory note issued by the Company or any of its Wholly-owned Subsidiaries to fund the general partner's capital contribution in an investment partnership or other pooled investment vehicle of which the Company or any of its Subsidiaries is the general partner and which partnership or other investment vehicle is engaged solely in the business of acquiring, holding and disposing of Real Property; (xii) the Company and any Mortgage Banking Subsidiary may become and remain liable with respect to Indebtedness of the Company or such Mortgage Banking Subsidiary comprised of such entity's obligation to repurchase mortgage loans pursuant to mortgage loan purchase and sale agreements entered into in connection with Mortgage Banking Activities; (xiii) Melody Permitted Indebtedness and refinancings thereof; (xiv) Indebtedness of the Company comprised of a guarantee by Company of the Melody Seller Senior Notes and the Melody Seller Contingent Notes; (xv) Indebtedness incurred in connection with Permitted Acquisitions (including without limitation, (x) existing Indebtedness of any Person that becomes a Subsidiary and (y) Indebtedness assumed by the Company or any Subsidiary or that is secured by any asset acquired by the 53 Company or any Subsidiary, in each case upon consummation of such Permitted Acquisition) and refinancings thereof, in an aggregate amount not to exceed $50,000,000 at any time outstanding, provided -------- that (i) at the time of incurrence of any such Indebtedness, the Pro Forma Fixed Charges Coverage Ratio (as defined in the Senior Credit Agreement) shall not be less than 1.0:1.0, (ii) no Default or Event of Default shall have occurred and be continuing or shall result from the Permitted Acquisition (including by reason of any Indebtedness incurred in connection with such Permitted Acquisition), and (iii) not more than $25,000,000 of such Indebtedness at any time outstanding shall be Indebtedness that is not Permitted Seller Indebtedness; and (xvi) in addition to the Indebtedness permitted by clauses (i)-(xv), the Company and its Subsidiaries may become and remain liable with respect to Indebtedness other than indebtedness for borrowed money (the proceeds of which are not used to buy assets or make Capital Expenditures) not exceeding $20,000,000 in the aggregate at any time outstanding. Section 6.2 Transactions with Shareholders and Affiliates. --------------------------------------------- The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity securities of the Company (including, but not limited to, CB Holdings) or with any Affiliate of the Company or of any such holder, on terms that are less favorable to the Company or that Subsidiary, as the case may be, than those which might be obtained at the time from Persons who are not such a holder or Affiliate; provided, that the foregoing restriction shall not apply to -------- (i) any transaction between the Company and any of its Wholly-owned Subsidiaries or between any of its Wholly-owned Subsidiaries, (ii) customary fees paid to members of the Board of Directors of the Company and its Subsidiaries, (iii) any transaction between the Company or any of its Subsidiaries and any employee of the Company or any of its Subsidiaries that is approved by the Company's Board of Directors (provided, that such approval shall not be required with respect to -------- normal compensation arrangements involving any such employee), (iv) transactions pursuant to written agreements in effect prior to the Effective Date which have previously been consented to by the Lender in writing, and (v) the sale, assignment, transfer, lease or other disposition of Warehoused Real Property to a partnership in which the Company or a Wholly-owned Subsidiary of the Company is a general or limited partner or another pooled investment vehicle in which the Company or any of its Subsidiaries has an interest or which is managed by the Company or any of its Subsidiaries; and provided, further, that the -------- ------- transactions referred to in clauses (i) through (v) above are otherwise permitted by this Agreement. 54 Section 6.3 Maintenance of Adjusted Consolidated Net Worth. ---------------------------------------------- If the Company's Adjusted Consolidated Net Worth at the end of any two consecutive fiscal quarters on or after the Senior Loan Repayment Date is less than $30,000,000, the Company shall make an offer to purchase (an "Offer") on the last Business Day of the then current LIBOR Interest Period (or, if there is less than 60 days remaining in the current LIBOR Interest Period, on the last day of the next following LIBOR Interest Period) (the "Purchase Date") 10% of the aggregate principal amount of the Loan then outstanding at a purchase price of 100% of the principal amount plus interest accrued and unpaid to the Purchase Date. In no event shall the failure to meet the minimum Adjusted Consolidated Net Worth requirement stated above at the end of any fiscal quarter be counted toward the making of more than one Offer hereunder. Notice of an Offer shall be mailed by the Company not less than 25 days before the Purchase Date to the Lender. The Offer shall remain open from the time of mailing until the fifth Business Day preceding the Purchase Date. If less than 60 days remain in the current LIBOR Interest Period, the Company shall select a one month LIBOR Interest Period as the next LIBOR Interest Period, and the Purchase Date shall be the last day of such one-month period. The notice shall contain all instructions and materials necessary to enable the Lender to accept the Offer. If the Lender elects to accept the Offer, it will notify the Company at the address specified in the notice five Business Days prior to the Purchase Date. If the Lender makes timely acceptance of an Offer then the Company shall pay, as the purchase price, an amount equal to 10% of the aggregate principal amount of the Loan then outstanding on the Purchase Date, together with interest accrued on the amount so paid through the Purchase Date. Section 6.4 Restricted Junior Payments. -------------------------- The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any Restricted Junior Payment, except (i) dividends, distributions or payments by any ------ Subsidiary to the Company or a Wholly Owned Subsidiary of the Company, (ii) so long as no Default or Event of Default has occurred and is continuing, dividends or distributions by any Subsidiary to the Company and any other Person that is a stockholder or owner of another equity interest in such Subsidiary, so long as, in the case of each such dividend and distribution, the amounts thereof paid to the Company and such other Person are in the same proportion as the respective contributions to the capital of such Subsidiary made by the Company and such other Person, and (iii) if no Default or Event of Default shall exist, or as a result of the proposed declaration, payment or other event would exist: A. the Company may declare and pay dividends on its Capital Stock to the extent necessary to enable Holdings to pay expenses of its operations in the ordinary course of business, in an amount not to exceed $50,000 in any year; 55 B. the Company may declare and pay dividends on its Capital Stock as follows: (1) prior to December 31, 1999, the Company may declare and pay dividends on its Capital Stock to the extent necessary to permit CB Holdings to pay dividends accrued on its outstanding Series A-1, Series A-2 and Series A-3 Preferred Stock in the period from October 1, 1996 through the fiscal quarter last ended prior to the date of such payment by the Company (and not dividends accrued on such Preferred Stock in any period prior to October 1, 1996), or interest with respect to such accrued but unpaid dividends all in accordance with the certificates of designation with respect thereto in effect on the Effective Date; and (2) after December 31, 1999, the Company may declare and pay dividends on its Capital Stock to the extent necessary to permit CB Holdings to pay dividends accrued on its outstanding Series A-1, Series A-2 and Series A-3 Preferred Stock in the period of four fiscal quarters ended immediately prior to the date of such payment by the Company (and not dividends accrued on such Preferred Stock in any prior period) that may be declared by the Board of Directors of Holdings, or interest with respect to such accrued but unpaid dividends, all in accordance with the certificates of designation with respect thereto in effect on the Effective Date; provided, however, that the total amount of dividend and interest -------- ------- payments made by Company pursuant to clauses B.(1) and B.(2) does not exceed 50% of Consolidated Net Income (as defined in the Senior Credit Agreement) for the period commencing on the first day of the fiscal quarter within which the Effective Date occurs and ending on the last day of the last fiscal quarter ending prior to the date of declaration, taken as a single accounting period. Section 6.5 Liens. ----- Neither the Company nor any of its Subsidiaries will, directly or indirectly, create, incur, assume or permit to exist any Lien upon or with respect to any of the property or assets of the Company or any of its Subsidiaries whether now owned or hereafter acquired, or on any income or profits therefrom, or assign or otherwise convey any right to receive income to secure any Indebtedness which is pari passu or junior in right of payment to the ---- ----- Loan, unless, contemporaneously therewith, effective provision shall be made whereby the Loan is secured equally and ratably with such other Indebtedness which is pari passu or junior in right of payment to the Loan and secured by a ---- ----- Lien, pursuant to documentation providing that the Lender shall be entitled to vote as its interests appear in connection with the release of or enforcement against any property or assets subject to such Lien; provided that the -------- restrictions of this Section 6.5 shall not prohibit the creation or incurrence of (i) Permitted Encumbrances, (ii) Liens on assets securing Non-Recourse Debt incurred in connection with the acquisition of Warehoused Real Property so long as any such Lien does not encumber any property other than assets constructed or acquired with the proceeds of such Indebtedness, (iii) Liens on Permitted Investments owned by Melody, to secure Indebtedness under the Melody Loan Arbitrage 56 Facility, if such Permitted Investments were acquired by Melody with the proceeds of incurrence of such Indebtedness, and (iv) Liens on commercial mortgage loans originated and owned by Melody subject to an irrevocable, unconditional commitment to purchase such commercial mortgage loans made by the Federal Home Loan Mortgage Corporation, to secure Indebtedness of Melody under the Melody Warehousing Facility; provided further that any Liens granted -------- pursuant to this Section 6.5 shall be subject to the provisions of the Intercreditor Agreement. Section 6.6 Mergers. ------- A. The Company shall not consolidate or merge with, or sell, assign, transfer or lease all or substantially all of its assets in a single transaction or a series of related transactions to, any person unless: (i) the person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer or lease or conveyance shall have been made, is a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the corporation formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale or conveyance shall have been made, assumes by written agreement all the obligations of the Company under the Loan and this Agreement; (iii) immediately after giving effect to such transaction no Event of Default or Potential Event of Default exists and immediately after such transaction, the Company (or the corporation formed by or surviving such consolidation or merger if other than the Company) could incur $1.00 of Indebtedness under the first paragraph of Section 6.1; (iv) the Company or any corporation formed by or surviving any such consolidation or merger, or to which such sale or conveyance shall have been made shall have Consolidated Net Worth at least equal to the Consolidated Net Worth of the Company immediately prior to such transaction; and (v) the Company has delivered to the Lender an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iv)) and an Opinion of Counsel, each stating that such consolidation, merger or transfer complies with this subsection 6.6A and that all conditions precedent set forth in this subsection 6.6A relating to such transactions have been complied with provided that with respect to factual information included in the foregoing (including, without limitation, matters contained in subparagraphs (iii) and (iv)), 57 counsel may rely upon a certificate of an officer of the Company as to such matters. B. Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company in accordance with subsection 6.6A, the successor person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, and shall perform every obligation of the Company under this Agreement with the same effect as if such successor person had been named as the Company herein, and all the obligations of the Company hereunder and under the Notes shall terminate. Section 6.7 Limitation on Sale of Less Than Substantially All Assets. -------------------------------------------------------- Neither the Company nor any of its Subsidiaries will make any Asset Sale, unless (a) at the time thereof and after giving pro forma effect thereto --- ----- (after application of proceeds), the Company's Consolidated Fixed Charge Ratio for the four fiscal quarters (taken as a whole) for which financial statements of the Company are available (provided, that the immediately preceding fiscal -------- quarter shall be included in any such determination pursuant to this Section 6.7 made more than 45 days after the end of such fiscal quarter) immediately preceding the fiscal quarter in which such Asset Sale is to occur, determined on a pro forma basis as if such Asset Sale had occurred at the beginning of such --- ----- four-fiscal quarter period, is greater than 2.5 to 1 or (b)(i) the Company or its Subsidiary receives consideration at the time of and for such Asset Sale at least equal to the fair value (which, if greater than $2,500,000, shall be as determined in good faith by the Board of Directors, including valuation of all non-cash consideration) of the assets disposed of in such Asset Sale as of the date of such Asset Sale and (ii) the Company complies with Section 2.6; provided, however, that so long as any loans under the Senior Credit Agreement - -------- ------- remain outstanding, this Section 6.7 shall not prohibit any Asset Sale which would be permitted under Section 6.08 of the Senior Credit Agreement. Notwithstanding the foregoing, nothing contained herein shall prevent the Company from selling all or any part of its ownership interest in CB Canada. Section 6.8 Limitation on Dividend and Other Payment Restrictions ----------------------------------------------------- Affecting Subsidiaries. - ---------------------- The Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Company to (a) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary of the Company, (b) make loans or advances to the Company or a Subsidiary of the Company or (c) transfer any of its properties or assets to the Company or to any Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reasons of (i) any restrictions existing under or contemplated by agreements in effect on the date hereof, (ii) any restrictions existing under or contemplated by the Senior Credit Agreement; (iii) any restrictions, with respect to a Subsidiary of the Company that is not a Subsidiary of the Company on the date hereof, in existence at the time such Person becomes a Subsidiary of the 58 Company and (iv) any restrictions existing under any agreement that refinances or replaces the agreements containing the restrictions in clauses (i) and (ii); provided that the terms and conditions of any such restrictions are not - -------- materially less favorable to the Lender than those under or pursuant to the agreement evidencing the Indebtedness refinanced. Nothing contained in this Section 6.8 shall prevent the Company or any of its Subsidiaries from entering into any agreement (i) imposing any such restrictions or limitations upon Westmark, Westmark Acquisition Partnership, or any Subsidiary pursuant to any Permitted Acquisition, (ii) permitting or providing for the incurrence of Liens otherwise permitted by Section 6.5 or (iii) restricting the sale or other disposition of property securing Indebtedness. Section 6.9 Certain Tax Payments. -------------------- If the Company Group (as such term is defined in the definition of "Permitted Tax Payment" in Section 1.1 of this Agreement) would, assuming it has filed a separate federal consolidated income tax return for each taxable year ending after April 18, 1989, be entitled to a refund of federal income tax, together with interest thereon, for a taxable year (whether resulting from a tax attribute carryback or otherwise) (a "Refund"), then CB Holdings shall pay (at the time a Refund is received by CB Holdings from the Internal Revenue Service or a final determination is otherwise made with respect to items resulting in a Refund) an amount equal to the Refund to the Company; provided that the amount -------- of such payment shall not exceed the amount paid by the Company as a Permitted Tax Payment for such taxable year plus interest on such amount at the rate specified in Section 6621 of the Code for overpayments of tax. In the event that CB Holdings and any member of the Company Group join in filing any combined or consolidated (or similar) state or local income or franchise tax returns for a taxable year and a member of the Company Group is entitled to a refund of state or local income or franchise taxes with respect to such taxable year, then CB Holdings shall pay (at the time it receives such refund from such taxing authority) an amount to the Company determined in a manner as similar as possible to that provided in the preceding sentence for federal income taxes. Any refund (together with interest actually received thereon) of taxes paid by a member of the Company Group for a taxable year ending prior to such member's becoming a member of the CB Holdings Group (whether such refund arises from a tax attribute carryback from the CB Holdings Group or otherwise) shall be the property of such member. Section 6.10 Limitation on Creation of Senior Debt. ------------------------------------- The Company will not incur or agree or attempt to incur any Senior Debt (including Permitted Refinancing Indebtedness) which is not fully and adequately secured, and the Company will not affirmatively cause any Senior Debt to become other than fully and adequately secured; provided, however, that this -------- ------- covenant shall be deemed satisfied if the Company delivers an Officers' Certificate certifying that such Senior Debt is fully and adequately secured; and provided, further, that no such Officers' Certificate shall be required and -------- ------- this Section 6.10 shall be satisfied to the extent that Permitted Refinancing Indebtedness is secured by the same collateral that secures the Senior Credit Agreement Obligations at the time of any such refinancing thereof. 59 Section 6.11 Restrictions on Investments in Warehoused Real Property. ------------------------------------------------------- The Company or any of its Subsidiaries may make Investments in Warehoused Real Property so long as at the time any such Investment is made (A) the aggregate amount of all such Investments then outstanding in connection with the purchase or other acquisition of all Warehoused Real Property does not exceed twenty percent (20%) of the Company's Adjusted Consolidated Net Worth as of the most recent quarter (less the amount by which aggregate losses exceed aggregate gains realized from all Investments made pursuant to this Section 6.11) and (B) the amount of any such single Investment made by the Company or any of its Subsidiaries does not exceed ten percent (10%) of the Company's Adjusted Consolidated Net Worth as of the most recent fiscal quarter. Section 6.12 General. ------- The Company covenants and agrees that until payment in full of the Loan and the Notes and all amounts due under this Agreement at the time of such termination or payment have been indefeasibly paid in full, unless the Lender shall otherwise give prior written consent, the Company will perform all covenants in this Article VI. Section 6.13 Certain Financial Covenants in Senior Credit Agreement. ------------------------------------------------------ On and after the Senior Loan Repayment Date, each of the covenants and agreements of the Company set forth in Section 6.05 and 6.06 of the Third Amended and Restated Senior Secured Credit Agreement dated as of November 25, 1996 (the "Surviving Financial Covenants") shall be deemed to be included and ----------------------------- incorporated by reference in this Article VI, mutatis mutandis, for the benefit of the Lender, without regard to the continuing effectiveness or, or any amendments of, such Senior Secured Credit Agreement; and the Company covenants and agrees to perform each and all of the Surviving Financial Covenants as if expressly contained herein and made in favor of the Lender hereunder; provided, however, that each requirement established by such Surviving Financial Covenants shall continue to apply until all amounts owing to the Lender in connection with the Loan or otherwise hereunder are paid in full; and provided, further, that for purposes of the calculation of "Consolidated Interest Expense" as used in the Surviving Financial Covenants shall include all interest payable in kind or in cash accrued hereunder. 60 ARTICLE VII EVENTS OF DEFAULT Section 7.1 Events of Default. ----------------- If any of the following conditions or events ("Events of Default") shall occur and be continuing: A. Failure to Make Payments When Due. --------------------------------- Failure to pay any installment of principal of the Loan when due, whether at stated maturity, by acceleration, by notice of prepayment, by operation of Section 2.5 or otherwise; or failure to pay any interest on the Loan within 15 days after the date due (in each case whether or not such payment is prohibited by Article VIII); or B. Default in Other Agreements. --------------------------- Failure of the Company or any of its Subsidiaries to pay principal of Indebtedness (other than Indebtedness referred to in subsection A of this Section 7.1 and Non-Recourse Debt) in an aggregate amount of $2,500,000 or more at its stated maturity, or breach or default of the Company or any of its Subsidiaries with respect to any other material term of (x) any evidence of Indebtedness with an aggregate principal amount of $2,500,000 or more or (y) any loan agreement, mortgage, indenture or other agreement relating thereto, if the effect of such failure, default or breach is to cause the holder or holders of that Indebtedness (or a trustee on behalf of such holder or holders) of the Company or any of its Subsidiaries then to cause that Indebtedness to be declared due prior to its stated maturity; or C. Breach of Certain Covenants. --------------------------- Failure of the Company to perform or comply with any term or condition contained in Sections 2.11, 5.2 (in so far as it requires preservation of the corporate existence of the Company), 5.11 or Article VI; or D. Breach of Warranty. ------------------ Any representation or warranty made by the Company in any Loan Document or in any statement or certificate at any time given by the Company in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or E. Other Defaults Under Agreement or Loan Documents. ------------------------------------------------ (a) The Company shall default in the performance of or compliance with any material term contained in this Agreement or the other Loan Documents, other than 61 those referred to above in Subsection A, C or D of this Section 7.1 (b) CB Holdings shall default in the performance of or compliance with any material covenant contained in the Stock Pledge Agreement or (c) the Guarantors shall default in the performance of or compliance with any material covenant contained in the Guarantee, and, in each case, such default shall not have been remedied or waived within 30 days after receipt of written notice from the Lender of such default; or F. Involuntary Bankruptcy; Appointment of Receiver, Etc. ----------------------------------------------------- (1) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of CB Holdings, the Company or any Material Subsidiary in an involuntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (2) an involuntary case is commenced against CB Holdings, the Company or any Material Subsidiary under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over CB Holdings, the Company, or any Material Subsidiary, or over all or a substantial part of any of their respective properties, shall have been entered; or an interim receiver, trustee or other custodian of CB Holdings, the Company or any Material Subsidiary for all or a substantial part of the property of CB Holdings, the Company or any Material Subsidiary is involuntarily appointed; or a warrant of attachment, execution or similar process is issued against any substantial part of the property of CB Holdings, the Company or any Material Subsidiary, and the continuance of any such events in subpart (2) for 60 days unless dismissed, bonded or discharged; or G. Voluntary Bankruptcy; Appointment of Receiver, Etc. -------------------------------------------------- CB Holdings, the Company or any Material Subsidiary shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; the making by CB Holdings, the Company, or any Material Subsidiary of any assignment for the benefit of creditors; the admission by CB Holdings, the Company or any of Material Subsidiaries in writing of its inability to pay its debts as such debts become due; or the Board of Directors of CB Holdings, the Company or any Material Subsidiary (or any committee thereof) adopts any resolution or otherwise authorizes action to approve any of the foregoing; or H. Judgments and Attachments. ------------------------- Any money judgment, writ or warrant of attachment, or similar process involving in any individual case or in the aggregate at any time an amount in excess of $2,500,000 shall be entered or filed against CB Holdings, the Company, or any Material Subsidiary or any of 62 their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 30 days or in any event later than ten days prior to the date of any proposed sale thereunder; or I. Dissolution. ----------- Any order, judgment or decree shall be entered against CB Holdings, the Company or any Material Subsidiary decreeing the dissolution or split up of CB Holdings, the Company or any Material Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or J. Foreclosure Under Senior Credit Agreement. ----------------------------------------- The lenders party to the Senior Credit Agreement or Permitted Refinancing Indebtedness acting together, directly or indirectly, after any event of default under, and as defined in, the Senior Credit Agreement or other documents has occurred shall commence judicial proceedings to foreclose upon any material portion of the collateral subject to the security documents delivered in connection with the Senior Credit Agreement or shall have exercised any right under law or such security documents to take ownership of any such material portion in lieu of foreclosure. THEN (i) upon the occurrence of any Event of Default described in the foregoing subsections F or G of Section 7.1 the unpaid principal amount of and accrued interest on the Loan shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Company, and the obligation of the Lender hereunder shall thereupon terminate, and (ii) upon the occurrence of any other Event of Default, the Lender may, by written notice to the Company and the Senior Agent, if applicable declare the Loan to be, and the same shall forthwith become, due and payable, together with accrued interest thereon and the obligations of the Lender hereunder shall thereupon terminate; provided, -------- however, that if any declaration of acceleration under this Agreement occurs - ------- because an Event of Default set forth in subsection B of this Section 7.1 has occurred and is continuing, such declaration of acceleration shall be automatically annulled if the holders of the Indebtedness which is the subject of such Event of Default have rescinded their acceleration in respect of such Indebtedness within 30 days thereof and no other Event of Default has occurred during such 30-day period which has not been cured or waived. Nevertheless, if any time within 60 days after acceleration of the maturity of the Loan, the Company shall pay all arrears of interest and all payments on account of the principal which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement or the Notes) and all Events of Default and Potential Events of Default (other than non-payment of principal of and accrued interest on the Loan due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 9.6, then the Lender by written notice to the Company may rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. Notwithstanding anything in this Section 7.1 to the contrary, the Lender shall not accept any payment or prepayment from the Company until five Business Days after 63 notice shall have been given to the Senior Agent, if applicable, and the Lender will be entitled to receive payment or prepayment only to the extent permissible under the provisions of Article VIII of this Agreement. ARTICLE VIII SUBORDINATION Section 8.1 Obligations Subordinated to Senior Debt. --------------------------------------- The Company and the Guarantors covenant and agree, and the Lender likewise covenants and agrees, that: (a) to the extent and in the manner hereinafter set forth in this Article VIII, the Obligations are hereby expressly made subordinate and subject in right of payment to the prior payment in full in cash of all Senior Indebtedness; (b) the subordination is for the benefit of the lender under the Senior Credit Agreement and other holders of Senior Indebtedness; and (c) each holder of Senior Indebtedness whether now outstanding or hereafter created, incurred, assumed or guaranteed shall be deemed to have extended or acquired such Senior Indebtedness in reliance upon the covenants and provisions contained in this Agreement. Section 8.2 Subordination Upon Insolvency or Liquidation Proceedings. -------------------------------------------------------- In the event of any Insolvency or Liquidation Proceeding: (a) Upon any payment or distribution of assets or securities of any kind or character, whether in cash, securities or other property, all Senior Indebtedness shall first be paid in full in cash or in a manner satisfactory to the holders of Senior Indebtedness before the Lender is entitled to receive any payment or distribution of any cash, securities or other property on account of principal of or interest on or other amounts constituting Obligations. (b) The holders of Senior Indebtedness shall be entitled to receive directly (pro rata on the basis of the respective amounts of Senior Indebtedness --- ---- held by them), for application to the payment thereof (to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any substantially concurrent payment to the holders of such Senior Indebtedness), any payment or distribution of any kind or character, whether in cash, securities or other property (including any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Company or the Guarantors being subordinated to the payment of the Obligations) which may be payable or deliverable in respect of the Obligations in any such Insolvency or Liquidation Proceeding. 64 (c) In the event that, notwithstanding the foregoing provisions of this Section 8.2, the Lender shall have received any payment from or distribution of assets or securities of the Company or the Guarantors or the estate created by the commencement of any such Insolvency or Liquidation Proceeding, of any kind or character in respect of the Obligations, whether in cash, securities or other property (including any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Company or the Guarantors being subordinated to the payment of the Obligations) before all Senior Indebtedness is paid in full, then and in such event such payment or distribution shall be received and held in trust for and shall be paid over or delivered to the holders of the Senior Indebtedness remaining unpaid (pro rata on the basis of the respective amounts of such Senior -------- Indebtedness held by them), to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any substantially concurrent payment to the holders of such Senior Indebtedness, for application to the payment in full of such Senior Indebtedness. Section 8.3 No Payment on Obligations in Certain Circumstances. -------------------------------------------------- (a) Upon the maturity of any Senior Indebtedness, by lapse of time, acceleration or otherwise (including the time of due payment (including any mandatory prepayment) of any principal or interest), all principal thereof and interest thereon and other amounts constituting Senior Indebtedness shall first be paid in full in cash or in a manner satisfactory to the holders of Senior Indebtedness before any payment or distribution is made by or on behalf of the Company or the Guarantors on account of principal of or interest on or other amounts constituting Obligations. (b) Upon the happening and continuing of any default in respect of the payment of any Senior Indebtedness (a "Payment Default"), no direct or indirect payment or distribution shall be made by the Company or the Guarantors on account of the principal of or interest on or other amounts constituting Obligations, unless and until (i) such Payment Default shall have been cured or waived by the holders of the respective Senior Indebtedness or shall have ceased to exist or (ii) the holder or holders of the respective Senior Indebtedness shall have waived in writing the application of this Section 8.3(b) to such Payment Default. (c) Without limiting the effect of Section 8.3(b), upon the happening and continuing of any default or event of default (other than a Payment Default) with respect to any Senior Indebtedness, as such default or event of default is defined in the Senior Credit Agreement or in any instrument, agreement or other document under which such Senior Indebtedness is outstanding (a "Non-Payment Default"), then upon written notice thereof given to the Company by the Senior Agent, by holders of a majority in principal amount of the Indebtedness under the Senior Credit Agreement or the agreement governing Permitted Refinancing Indebtedness, or by the holders of a majority in principal amount of all Senior Indebtedness ("Payment Blockage Notice"), no direct or indirect payment or distribution shall be made by the Company or the Guarantors on account of the principal of or interest on or other amounts constituting Obligations unless and until (i) such Non-Payment Default shall have been cured or waived by the holder or holders of the respective Senior Indebtedness or shall have ceased to exist or (ii) the holder or holders of the respective Senior Indebtedness shall have waived in writing the application of this Section 8.3(c) to such Non-Payment Default; provided, -------- 65 however, that (A) this Section 8.3(c) shall not prevent the making of any - ------- payment for more than 179 days after a Payment Blockage Notice shall have been given or deemed to have been given ("Payment Blockage Period") unless the Senior Indebtedness in respect of which such default or event of default exists has been declared due and payable in its entirety, in which case no payment or distribution may be made until such acceleration has been rescinded or annulled and (B) not more than one effective Payment Blockage Notice shall be given within a period of 360 consecutive days and there shall be a period of at least 181 consecutive days in each 360-day period when no Payment Blockage Period is in effect. (d) In the event that, notwithstanding the foregoing provisions of Section 8.3(a), (b) or (c), the Lender shall have received any payment or distribution at a time when such payment was prohibited by the provisions of Section 8.3(a), (b) or (c) then and in such event such payment or distribution shall be received and held in trust for and shall be paid over to the holders of Senior Indebtedness (pro rata, on the basis of the respective amounts of such --- ---- Senior Indebtedness held by them), to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any substantially concurrent payment to the holders of such Senior Indebtedness, for application to the payment in full of Senior Indebtedness. (e) The provisions of this Section 8.3 shall not modify or limit in any way the application of Section 8.2. Section 8.4 Subrogation to Rights of Holders of Senior Indebtedness. ------------------------------------------------------- After all amounts payable under or in respect of Senior Indebtedness are paid in full, the Lender shall be subrogated to the extent of the payments or distributions made to the holders of, or otherwise applied to payment of, such Senior Indebtedness pursuant to the provisions of this Article VIII, to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, securities and other property applicable to the Senior Indebtedness until the principal of and interest on the Obligations shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, securities or other property to which the Lender would be entitled except for the provisions of this Article VIII, and no payments over pursuant to the provisions of this Article VIII to the holders of the Senior Indebtedness by the Lender shall be deemed to be a payment or distribution by the Company or the Guarantors to or on account of the Senior Indebtedness, it being understood that the provisions of this Article VIII are solely for the purpose of defining the relative rights of the Lender, on the one hand, and the holders of Senior Indebtedness on the other hand. A release of any claim by any holder of Senior Debt shall not, as between the Company, the Guarantors and the Lender, limit the Lender's rights of subrogation under this Section 8.4. Section 8.5 Rights of Holders Not to be Impaired. ------------------------------------ Nothing contained in this Article VIII is intended to or shall: (a) impair, as among the Company or the Guarantors, their respective creditors other than holders of Senior Indebtedness and the Lender, the obligation of the 66 Company or the Guarantors, which is absolute and unconditional, to pay to the Lender the principal of and interest on the Obligations as and when the same shall become due and payable in accordance with its terms; or (b) affect the relative rights against the Company or the Guarantors of the Lender and creditors of the Company or the Guarantors other than the Senior Indebtedness; or (c) prevent the Lender from exercising all remedies otherwise permitted by applicable law upon default under this Agreement, subject to the rights, if any, under this Agreement of the holders of Senior Indebtedness to receive payments or distributions otherwise payable or deliverable to, or received by, such holder upon the exercise of any such remedy and subject to the restrictions with respect to Liens set forth in Article III of the Intercreditor Agreement. Section 8.6 Effectuation of Subordination. ----------------------------- In the event of any Insolvency or Liquidation Proceeding, the Senior Agent is irrevocably authorized and empowered, in its discretion, to make and present for and on behalf of the Lender such proofs of claims against the Company or the Guarantors on account of the Obligations or other motions or pleadings as the Senior Agent may deem expedient or proper; provided, however, -------- ------- the Senior Agent may make and present such proofs of claims only if the Lender has not filed such proofs of claims by the thirtieth day prior to the date on which such claims are required to be filed. After such thirty-day period, if the Lender has not filed such proofs of claims, the Lender irrevocably authorizes and empowers the Senior Agent to file claims and take such other actions (other than vote such proof of claims in such proceedings), in the name of the Senior Agent or the Lender or otherwise, as the Senior Agent may deem necessary or advisable for the enforcement of this Agreement. In such event, the Lender will execute and deliver to the Senior Agent such powers of attorney, assignments and other instruments or documents as may be requested by the Senior Agent in order to enable such Senior Agent to enforce any and all claims upon or with respect to the Obligations. Section 8.7 No Waiver of Subordination Provisions. ------------------------------------- No right of the Senior Agent under the Senior Credit Agreement or any other holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or the Guarantors or by any act or failure to act by the Senior Agent under the Senior Credit Agreement or any such holder or by any noncompliance by the Company or the Guarantors with the terms, provisions and covenants of this Agreement or the Senior Credit Agreement regardless of any knowledge thereof which the Senior Agent or such other holder thereof may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the Senior Agent under the Senior Credit Agreement and any other holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Lender, without 67 incurring responsibility to the Lender and without impairing or releasing the subordination and other benefits provided in this Agreement or the obligations hereunder of the Lender to the holders of Senior Indebtedness, do any one or more of the following even if any right to reimbursement or subrogation or other right or remedy of the Lender is affected, impaired or extinguished thereby: (a) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend or alter, the terms of any Senior Indebtedness, any security therefor or guaranty thereof or any liability of the Company, the Guarantors or any other guarantor to such holder, or any liability incurred directly or indirectly in respect thereof, or otherwise amend, renew, exchange, modify or supplement in any manner Senior Indebtedness or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Indebtedness is outstanding; (b) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and any order any property pledged, mortgaged or otherwise securing Senior Indebtedness or any liability of the Company or the Guarantors or any other guarantor to such holder, or any liability incurred directly or indirectly in respect thereof; (c) settle or compromise any Senior Indebtedness or any other liability of the Company or the Guarantors or any other guarantor of the Senior Indebtedness to such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Indebtedness) in any manner or order; and (d) fail to take or to record or otherwise perfect, for any reason or for no reason, any Lien securing Senior Indebtedness by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against the Company or the Guarantors or any security or any other guarantor or any other Person, elect any remedy and otherwise deal freely with the Company or the Guarantors and security and any other guarantor of the Senior Indebtedness or any liability of the Company or the Guarantors or any other guarantor to such holder or any liability incurred directly or indirectly in respect thereof. The Lender by purchasing or accepting the Note waives any and all notice of the creation, modification, renewal, extension or accrual of any Senior Indebtedness and notice of or proof of reliance by any holder of Senior Indebtedness upon this Agreement and the Senior Indebtedness shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Agreement, and all dealings between the Company or the Guarantors and the holders of Senior Indebtedness shall be deemed to have been consummated in reliance upon this Agreement. Section 8.8 Reliance on Court Orders; Evidence of Status. -------------------------------------------- Upon any payment or distribution of assets of the Company or the Guarantors referred to in Section 8.2, the Lender shall be entitled to rely upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or 68 distribution delivered to the Lender for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company or the Guarantors, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or this Article VIII. Section 8.9 Payment. ------- A payment with respect to principal of or interest on the Obligations shall include, without limitation, payment of principal of and interest on the Loan, any depositing of funds for the defeasance of the Obligations, any sinking fund and any payment on account of mandatory prepayment or optional redemption provisions. Section 8.10 Section Not to Prevent Events of Default. ---------------------------------------- The failure to make a payment on account of principal of or interest on or other amounts constituting Obligations by reason of any provision of this Article VIII shall not be construed as preventing the occurrence of an Event of Default under Article VII. ARTICLE IX MISCELLANEOUS Section 9.1 Representation of the Lender. ---------------------------- The Lender hereby represents that it is a limited liability company engaged in finance. Section 9.2 Assignment. ---------- (a) This Agreement shall be binding upon and shall be enforceable by the Company, the Lender and their respective successors and assigns, provided -------- that, except as provided in Section 6.6 the Company shall have no right to - ---- assign or otherwise transfer its rights or obligations hereunder without the prior written consent of the Lender. The Lender may assign, grant participations in or otherwise transfer all or any portion of its rights and obligations hereunder, and any such assignment, participation or other transfer shall be effective and binding upon the Company as of the date of such assignment, participation or other transfer subject to the Lender and the Company having complied with the requirements of subsection (b) of this Section 9.2 hereof. Upon any such assignment or transfer by the Lender, the assignee or transferee shall be (i) entitled, to the extent of the interest transferred, to the benefit of the indemnities, the covenants and the yield protection provisions pursuant to the provisions of this Agreement (including without limitation the provisions of Section 2.3, 2.12, 2.13, 2.14, 2.15 and 9.4) as fully as if a party hereto and (ii) subject to all of the obligations of the Lender hereunder (including without limitation the provisions of Section 2.14 and this Section 9.2) as 69 fully as if a party hereto. Upon any such participation by the Lender, the participant shall be (i) entitled, to the extent of the interest transferred, to the benefit of the indemnities, the covenants and the yield protection provisions pursuant to the provisions of this Agreement (including without limitation the provisions of Section 2.3, 2.12, 2.15, 2.14, 2.15 and 9.4) as fully as if a party hereto and (ii) subject to all of the obligations of the Lender under the provisions of Section 2.14 and this Section 9.2 as fully as if a party hereto. (b) The Company shall, during the term of this Agreement, maintain on its books a record of the beneficial interests held in this Agreement based upon the information which the Lender is required to provide pursuant to this Section 9.2. Upon any assignment, participation or other transfer by the Lender of any of its interests hereunder, the Lender shall provide, or cause to be provided, to the Company, a statement or certificate signed under penalty of perjury by each person which is a participant, assignee or transferee setting forth such person's name and address and, with respect to any person which is not a United States Person, certifying that (i) such person is not a United States Person, (ii) such person is not licensed to conduct a banking business or to accept deposits from members of the public and, in fact, does not accept such deposits, (iii) such person is not a 10% shareholder of the Company or any Guarantor within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code of 1986, as amended and (iv) such person undertakes with the Lender for the benefit of the Lender and the Company, to provide to the Lender and the Company such tax forms as may reasonably be requested from time to time by the Lender or the Company to ensure the availability to the Company of an exemption from United States withholding tax on interest pursuant to Sections 871(h) and 881(c) of the Internal Revenue Code of 1986, as amended. Such statements or certificates given by a person that is not a United States Person shall be accompanied by a copy of a Certificate of Foreign Status (Internal Revenue Code Form W-8) duly executed by each person named in such statements or certificates. The Lender shall also provide or cause to be provided to the Company from time to time any other documentation or information required by Temporary Treasury Regulation Section 35a.9999-5(b) or any successor provision, or by any other provision of law, with respect to any such applicable exemption from United States withholding tax on interest with respect to payments to be made hereunder. The Company shall promptly record the beneficial interest of each such assignee, participant or transferee upon the Lender's compliance with the requirements of subsection (a) hereof and this subsection (b), and the Company shall, upon the request of the Lender or any such assignee, participant or transferee, provide a certification of the beneficial interest of such assignee, participant or transferee (which certification shall be provided at no cost to the Lender or such assignee, participant or transferee). The Company shall have no liability to the Lender or any such assignee, participant or transferee for any error in the recordation of such information on its books other than an error arising from the Company's gross negligence or willful misconduct. (c) In connection with any sales, assignments or transfers referred to in subsection (a) of this Section 9.2, the Lender shall obtain agreements from the purchasers, assignees and transferees, as the case may be, reasonably satisfactory to the Company, that all information given to such parties will be held in strict confidence subject to customary exceptions. 70 Section 9.3 Expenses. -------- Whether or not the Effective Date occurs or the transactions contemplated hereby shall be consummated, the Company agrees to promptly pay to Lender (i) all the actual and reasonable costs and expenses of preparation of the Loan Documents (including, without limitation, any opinions requested by the Lender as to any legal matters arising hereunder) and of the Company's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (ii) the reasonable fees, expenses and disbursements of counsel (including allocated costs of internal counsel) and other professional advisors (including financial advisors) in connection with the negotiation, preparation, execution, performance and administration of the Loan Documents, and the Loan hereunder, and any amendments and waivers hereto or thereto; and (iii) after the occurrence of an Event of Default, all costs and expenses (including reasonable attorneys' fees, including allocated costs of internal counsel, fees of other professional advisors including financial advisors and costs of settlement) incurred by the Lender in enforcing any Obligations of or in collecting any payments due from the Company hereunder or under the Notes issued hereunder by reason of such Event of Default or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings. The Lender agrees to deliver to the Company, as soon as reasonably practicable, a certificate setting forth in reasonable detail a computation of amounts owing under this Section 9.3; provided, however, the delivery of such certificate is not a condition of - -------- ------- payment under this Section 9.3. Section 9.4 Indemnity. --------- In addition to the payment of expenses pursuant to Section 9.3, whether or not the Effective Date occurs or the transactions contemplated hereby shall be consummated, the Company agrees to indemnify, pay and hold the Lender and any holder of the Notes, and the officers, directors, employees, agents, and affiliates of the Lender and such holders (collectively called the "Indemnitees") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of one counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto), which may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Agreement, the other Loan Documents, the Lender's agreement to extend the maturity of the Loan or the use or intended use of the proceeds of any of the Loan hereunder (the "indemnified liabilities"); provided that the Company shall -------- have no obligation to an Indemnitee hereunder with respect to indemnified liabilities arising from the gross negligence or willful misconduct of that Indemnitee. The Company will not be liable to any Indemnitee for any settlement of any claim pursuant to this Section 9.4 that is effected without the Company's prior written consent. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Company shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the 71 payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. Section 9.5 Set-Off. ------- Subject to the provisions of Section 2.10, the last sentence of Section 7.1 and of Article VIII of this Agreement and to any waivers of set-off that may be required in the exhibits to the Security Agreements (as defined in the Senior Credit Agreement), in addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default, the Lender and each subsequent holder of any Notes is hereby authorized by the Company at any time or from time to time, without notice to the Company, or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured but not including trust accounts) and any other Indebtedness at any time held or owing by the Lender or that subsequent holder to or for the credit or the account of the Company against and on account of the obligations and liabilities of the Company to the Lender or that subsequent holder under this Agreement and the Notes, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement or the Notes, irrespective of whether or not (a) the Lender or that subsequent holder shall have made any demand hereunder or (b) the Lender or that subsequent holder shall have declared the principal or the interest on the Loan and Notes, and other amounts due hereunder to be due and payable as permitted by Article VII hereof and although said obligations and liabilities, or any of them, may be contingent or unmatured. Section 9.6 Amendments and Waivers. ---------------------- No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, or consent to any departure by the Company therefrom, shall in any event be effective without the written concurrence of the Lender and the Company and an opinion of counsel of the Company to the effect that such amendment, modification, termination, or waiver does not violate the Senior Credit Agreement or any agreements or documents evidencing any Senior Indebtedness. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Company in any case shall entitle the Company to any further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 9.6 shall be binding upon each holder of the Notes, each future holder of the Notes, and, if signed by the Company, on the Company. Section 9.7 Independence of Covenants. ------------------------- All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitation of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 72 Section 9.8 Change in Federal Tax Laws. -------------------------- If there is a material change in federal tax laws which materially affects the Company's ability to comply with the financial covenants, standards or terms found in Articles I, V or VI, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the Company's financial condition shall be the same after such changes as if such changes had not been made. Section 9.9 Notices. ------- Any notice or other communication herein required or permitted to be given shall be in writing electronically communicated or hand delivered or delivered by courier, addressed to the party hereto as provided in this Section 9.9. All communications intended for the Company shall be sent to:. CB Commercial Real Estate Group, Inc. 533 South Fremont Avenue Los Angeles, California 90071-1798 Attention: Treasurer Fax Numbers: (213) 613-3228 (213) 613-3015 All communications intended for CB Holdings shall be sent to: CB Commercial Holdings, Inc. 533 South Fremont Avenue Los Angeles, California 90071-1798 Attention: Treasurer Fax Numbers: (213) 613-3228 or (213) 613-3015 All communications intended for the Lender shall be sent to: Sumitomo Finance (Dublin) Limited. La Touche House I.F.S.C. Custom House Docks Dublin 1, Ireland Telex Number: 91909 Fax Number: 353-1-67 003 53 All notices shall be sent as aforesaid or at any other address of which any of the foregoing shall have notified the others in any manner prescribed in this Section 9.9. 73 For all purposes of this Agreement, a notice or communication will be deemed effective: (a) if delivered by hand or sent by courier, on the day it is delivered unless (i) that day is not a day upon which commercial banks are open for business in the city specified (a "Local Business Day") in the address for notice provided by the recipient or (ii) if delivered after the close of business on a Local Business Day, then on the next succeeding Local Business Day, (b) if sent by telex, on the day the recipient's answerback is received unless that day is not a Local Business Day or the answerback is received after the close of business on such day, in which case on the next succeeding Local Business Day, (c) if sent by facsimile transmission, on the date transmitted, provided oral or written confirmation of receipt is obtained by the sender, unless the transmission and confirmation date is not a Local Business Day, in which case on the next succeeding Local Business Day. provided, that notices to the Lender shall only be effective upon receipt - -------- thereof by the Lender. Section 9.10 Survival of Warranties and Certain Agreements. ---------------------------------------------- (a) All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the Effective Date hereunder and the execution and delivery of the Notes. (b) Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of the Company set forth in Sections 2.12, 2.13, 2.14, 9.3 and 9.4, shall survive the payment of the Loan and the Notes and the termination of this Agreement. Section 9.11 Failure or Indulgence Not Waiver; Remedies Cumulative. ----------------------------------------------------- No failure or delay on the part of the Lender or any holder of any Notes in the exercise of any power, right or privilege hereunder or under the Notes shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or the Notes are cumulative to and not exclusive of, any rights or remedies otherwise available. Section 9.12 Severability; Partial Invalidity. -------------------------------- In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 74 Section 9.13 Article and Section Headings. ---------------------------- The headings or titles of the several Articles and Sections in this Agreement and any table of contents appended to copies hereof shall be solely for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. Section 9.14 Applicable Law. -------------- THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 9.15 Successors and Assigns; Subsequent Holders of the Notes. ------------------------------------------------------- This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of the Lender. The terms and provisions of this Agreement and all other certificates and opinions delivered pursuant to Section 3.1 shall inure to the benefit of any assignee, participant or transferee of the Notes pursuant to Section 9.2, and in the event of such transfer, participation or assignment, the rights and privileges herein conferred upon the Lender shall automatically extend to and be vested in such participant, transferee or assignee, all subject to the terms and conditions hereof. The Company's rights or any interest therein hereunder may not be assigned without the written consent of the Lender. Section 9.16 Consent to Jurisdiction and Service of Process. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY OR ANY GUARANTOR WITH RESPECT TO THIS AGREEMENT OR THE NOTES MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT THE COMPANY AND EACH GUARANTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY OR ANY GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION. THE COMPANY AND EACH GUARANTOR RESPECTIVELY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID. Section 9.17 Counterparts; Effectiveness. --------------------------- This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, 75 each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall be deemed executed and delivered upon the execution of a counterpart hereof by each of the parties hereto, and written or telephonic notification of such execution and authorization of delivery thereof has been received by the Company and the Lender. Section 9.18 Highest Lawful Rate. ------------------- The rate of interest payable on the Loan shall in no event exceed the maximum rate permissible under applicable law. If the rate of interest payable on the Loan is ever reduced as a result of this Section 9.18 and at any time thereafter the maximum rate permitted by applicable law shall exceed the rate of interest provided for in this Agreement, then the rate of interest provided for in this Agreement shall be increased to the maximum rate provided by applicable law for such period as is required so that the total amount of interest received by the Lender is that which would have been received by the Lender but for the operation of the first sentence of this Section 9.18. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal or interest on the Loan or the Notes wherever enacted, or at any time hereafter in force. The Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede, by resort to any such law, the execution of any power herein granted to the Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 9.19 Entire Agreement. ---------------- The Loan Documents embody the entire agreement among the parties and supersede all prior agreements, oral statements and understandings, if any, relating to the subject matter hereof and thereof. Section 9.20 Relationship of the Lender to Participants; Appointment ------------------------------------------------------- of an Agent. - ----------- The Company and each of the Guarantors acknowledge and agree that the Lender may sell interests in the Loan and the Notes to various institutions (the "Participants") pursuant to participation agreements. The Lender shall have no liability for any action taken or omitted to be taken pursuant to the instructions of Participants having direct or indirect interests in the Loan (including by way of "risk" participations) in excess of fifty percent (50%). Further, should any such participation be converted to an assignment of the Lender's interest, the Lender shall have no further rights or obligations with respect to the Loan or the Company to the extent of the interest transferred provided, that the indemnities in favor of the Lender, including without - -------- limitation those contained in Sections 2.12, 2.13 and 2.14, shall continue to enure to the benefit of the Lender. 76 The Lender may, at any time, appoint an Agent to act as agent under this Agreement pursuant to agency provisions substantially in the form of Exhibit VI (the "Agency Agreement") provided that no such appointment shall -------- subject the Company to any increased liability or costs under Section 2.12 or 2.14 of this Agreement. Any Agent so appointed shall be a bank or financial institution having capital and surplus in excess of $500,000,000. The parties agree to execute the Agency Agreement and such other documentation and amendments hereto as may be necessary to appoint the Agent. Upon such appointment all notices hereunder to be given to the Lender shall be given to the Agent and all actions or consents to be taken or given by the Lender shall be thereafter taken or given by the Agent acting pursuant to the directions of the appropriate instructing group under the terms of the Agency Agreement. Section 9.21 Effective Date. -------------- This Agreement shall be effective (the "Effective Date") as of the Offering Closing Date, provided that all conditions precedent set forth in Section 3.1 are satisfied to the satisfaction of Lender or waived in writing by the Lender as notified by the Lender and provided that the Offering Closing Date shall have occurred by not later than March 31, 1997. ARTICLE X GUARANTEES Section 10.1 Guarantees. ---------- Each Guarantor hereby unconditionally guarantees, on a joint and several basis, to the Lender the due and the punctual payment of the principal of and interest on the Loan and the Notes, when and as the same shall become due and payable, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, the due and punctual payment of interest on the overdue principal of and interest, if any, on the Loan and the Notes, to the extent lawful, and the due and punctual performance of all other Obligations of the Company to the Lender all in accordance with the terms of this Agreement. The obligations of the Guarantors hereunder constitute a guarantee of payment and not merely of collection. The Guarantors hereby agree that their respective obligations under the Guarantees shall be absolute and unconditional and shall remain in full force and effect until the entire Obligations shall have been paid and such Guarantee obligations shall not be affected, modified or impaired upon the happening from time to time of any event, including without limitation any of the following, whether or not with notice to, or the consent of, any of the Guarantors: (a) the waiver, surrender, compromise, settlement, release or termination of any or all of the obligations, covenants or agreements of the Company under this Agreement or the Notes; (b) the failure to give notice to any Guarantor of the occurrence of an Event of Default under this Agreement; 77 (c) the waiver, compromise or release of the payment, performance or observance by the Company or by any Guarantor, respectively, of any or all of the obligations, covenants or agreements contained in this Agreement; (d) the extension of the time for payment of any Obligation or of the time for performance of any other obligations, covenants or agreements under or arising out of this Agreement; (e) the modification or amendment (whether material or otherwise) of any obligation, covenant or agreement set forth in this Agreement; (f) the taking or the omission of any of the actions referred to in this Agreement including any acceleration of sums owing hereunder; (g) any failure, omission, delay or lack on the part of the Lender to enforce, assert or exercise any right, power or remedy conferred on the Lender in this Agreement; (h) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition with creditors or readjustment of, or other similar proceedings affecting any Guarantor or the Company or any of the respective assets of either of them, or any allegation or contest of the validity of this Guarantee in any such proceeding; (i) any defense based upon any legal disability of the Company or any other party or, to the extent permitted by law, any release, discharge, reduction or limitation of or with respect to any sums owing the Company or any other liability of the Company to the Lender; (j) to the extent permitted by law, the release or discharge by operation of law of any Guarantor from the performance or observance of any obligation, covenant or agreement contained in this Guarantee; (k) the default or failure of any Guarantor fully to perform any of its obligations set forth in this Guarantee; or (l) the invalidity of this Agreement or any part hereof or any defense which the Company may have against the Lender or any other circumstances which might constitute a legal or equitable discharge or defense of a surety or guarantor. If any payment by the Company to the Lender is rescinded or must be returned by the Lender, the obligations of the Guarantors hereunder shall be reinstated with respect to such payment. 78 Each Guarantor waives demand for payment, protest and notice of nonpayment and all other notices and demands whatsoever relating to the Obligations. No set-off, counterclaim, reduction, or diminution of any obligation, or any defense of any kind or nature which any Guarantor has or may have against the Lender shall be available hereunder against the Lender to reduce the payments to the Lender under the Guarantee. Each Guarantor assumes responsibility for being and remaining informed of the financial condition of the Company and of all other circumstances bearing upon the risk of nonpayment of amounts owing under this Agreement which diligent inquiry would reveal and agrees that the Lender shall have no duty to advise such Guarantor of information known to it regarding such condition or any such circumstances. In the event of a default in the payment of any Obligation when and as the same shall become due, the Lender shall have the right to proceed first and directly against any Guarantor without proceeding against the Company or exhausting any other remedies which it may have. The obligations of each Guarantor under this Agreement shall be joint and several and are subject to Article VIII. The Guarantors shall have no right of subrogation, and hereby waive and release any right of subrogation (or other right as a creditor) which they might otherwise have now or in the future vis-a-vis the Company. The Guarantors waive any and all right to enforce any remedy and to participate in any security which any Guarantor may now or hereafter have against the Company, any other Guarantor or any other party. Demands against any Guarantor hereunder shall be conclusive as to the amount due from such Guarantor (absent manifest error), and each Guarantor agrees to pay any amount so demanded on the date of demand to the account specified in Section 2.8 of this Agreement. Section 10.2 Contribution. ------------ In order to provide for just and equitable contribution among the Guarantors, the Guarantors (other than CB Holdings), shall promptly enter into a contribution agreement providing that such Guarantors agree, inter se, that in -------- the event any payment or distribution is made by such Guarantor (a "Funding Guarantor") under this Guarantee, that Funding Guarantor shall be entitled to a contribution from all other Guarantors for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's Obligations or any other Guarantor's obligations with respect to the Loan as set forth in such contribution agreement. 79 WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. CB COMMERCIAL REAL ESTATE GROUP, INC. By ---------------------------------- Name: David A. Davidson Title: Senior Executive Vice President GUARANTORS: CB COMMERCIAL HOLDINGS, INC. By ---------------------------------- Name: David A. Davidson Title: Senior Executive Vice President CB COMMERCIAL HOLDINGS, INC., CB COMMERCIAL REAL ESTATE GROUP OF IOWA, INC., CB COMMERCIAL PARTNERS, INC., CB COMMERCIAL REALTY ADVISORS, INC., CB COMMERCIAL BROKERAGE, INC., SUTTER FREMONT PROPERTY SERVICES, INC., CB COMMERCIAL REAL ESTATE GROUP OF HAWAII, INC., CB COMMERCIAL REAL ESTATE FUND MANAGEMENT, INC., CB COMMERCIAL REAL ESTATE MANAGEMENT SERVICES, INC., CB COMMERCIAL SUTTON & TOWNE, INC., SUTTER FREMONT REAL ESTATE MERCHANT CAPITAL CORPORATION, SUTTON & TOWNE N.J., INC., SUTTER FREMONT, INC., CB COMMERCIAL WAREHOUSE PROPERTY CORP., L.J. MELODY INVESTMENTS, INC. L.J. MELODY & COMPANY, and L.J. MELODY & COMPANY OF CALIFORNIA By: ---------------------------------- Name: David A. Davidson Title: Senior Executive Vice President/ Treasurer By: ---------------------------------- Name: Karen A. Tallman Title: Secretary/Assistant Secretary SUMITOMO FINANCE (DUBLIN) LIMITED By: ---------------------------------- Shinchi Nishikiori Managing Director S-1 EX-10.8 6 AMENDED AND RESTATED DEFERRED COMPENSATION PLAN EXHIBIT 10.8 CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- DEFERRED COMPENSATION PLAN -------------------------- (AS AMENDED AND RESTATED)
TABLE OF CONTENTS ----------------- PAGE ---- 1. PURPOSE............................................................... 1 ------- 2. DEFINITIONS........................................................... 1 ----------- 3. ELECTION TO DEFER..................................................... 3 ----------------- 4. DEFERRED COMPENSATION ACCOUNTS........................................ 4 ------------------------------ 5. INVESTMENT OPTIONS.................................................... 5 ------------------ 6. VESTING OF ACCOUNTS................................................... 6 ------------------- 7. PAYMENT OF ACCOUNTS................................................... 6 ------------------- 8. PLAN ADMINISTRATION................................................... 8 ------------------- 9. NO FUNDING OBLIGATION................................................. 8 --------------------- 10. NONALIENATION OF BENEFITS............................................. 9 -------------------------------- 11. NO LIMITATION OF EMPLOYER RIGHTS...................................... 9 -------------------------------- 12. APPLICABLE LAW........................................................ 9 --------------------------------
EXHIBIT A PARTICIPATING EMPLOYERS -i- CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ---------------------------------------------- DEFERRED COMPENSATION PLAN -------------------------- (AS AMENDED AND RESTATED) 1. PURPOSE ------- The purpose of the CB Commercial Real Estate Services Group, Inc. Deferred Compensation Plan (the "Plan") is to allow a select group of management or highly compensated employees of CB Commercial Real Estate Services Group, Inc. and its affiliates that adopt this Plan to defer receipt of Compensation. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, as described in section 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 2. DEFINITIONS ----------- Whenever referred to in this Plan, the following terms shall have the meanings set forth below except where the context indicates otherwise. Capitalized terms used in this Plan that are not defined in this Section 2 are defined elsewhere in the Plan. 2.1 "Account" means a Participant's Deferred Compensation Account. ------- 2.2 "Beneficiary" means the person or persons who are the ----------- Participant's beneficiaries pursuant to the Employer's group term life insurance programs unless otherwise designated by the Participant on a form prescribed by the Committee. 2.3 "CAP Plan" means the CB Commercial Real Estate Services Group, -------- Inc. Capital Accumulation Plan, as amended from time to time. 2.4 "CBC Stock Fund Unit" shall have the meaning set forth in Section --------- ---- ---- 5.2. 2.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- 2.6 "Committee" means the Chief Executive Officer of CB Commercial --------- Real Estate Services Group, Inc., or a committee consisting of two or more employees of the Employer selected by the Chief Executive Officer. 2.7 "Compensation" has the same meaning as it has under the CAP Plan ------------ without regard to deferrals under this -1- Plan, the limitations of Code section 401(a)(17), income earned from the exercise of stock options, stock appreciation or other rights, car allowances, reimbursements for moving or other expenses or the imputed value of life insurance. 2.8 "Deferral Date" means January 1 of the year in or for which ------------- deferrals are to commence. 2.9 "Employee" means a salaried employee of an Employer whose -------- Compensation for the Plan Year preceding any Deferral Date equals or exceeds $100,000, any commissioned employee of an Employer or a key management employee selected by the Committee. For purposes of this section, car allowances and stock option income paid to any Employee shall be included in Compensation solely for purposes of determining whether the Employee's Compensation equals $100,000. 2.10 "Employer" means CB Commercial Real Estate Services Group, Inc. -------- ("CB Commercial") and any entity affiliated with CB Commercial Real Estate Services Group, Inc. that, with the consent of the Committee, adopts this Plan. A list of participating Employers is attached as Exhibit A. 2.11 "Participant" means any Employee who has made an election to ----------- defer Compensation under Section 3.1 or for whom the Plan maintains an Account. 2.12 "Payment Year" means the year selected by the Employee under ------------ Section 3.4. 2.13 "Plan Year" means the calendar year. --------- 2.14 "Stock" means the Common Stock, par value $0.01 per share, of CB ----- Commercial Real Estate Services Group, Inc. In the event of any change in the outstanding shares of Stock that occurs by reason of a stock dividend or split, recapitalization, merger, consolidation, combination, exchange of shares, or other similar corporate change, the aggregate number of shares of Stock (or CBC Stock Fund Units) credited to any Participant's Account shall be adjusted appropriately by the Committee, whose determination shall be final and conclusive; provided, however, that fractional shares shall be rounded to the nearest whole share. 2.15 "Termination of Employment" means any voluntary or involuntary ------------------------- termination of employment, except on account of death or Total and Permanent Disability, but does not include a transfer among the entities which make up the Employer, a transfer to an entity affiliated with CB Commercial Real Estate Services Group, Inc. unless such transfer is otherwise determined to be a Termination of Employment by the Committee in its sole discretion or a change of status from employee to independent contractor. -2- 2.16 "Total and Permanent Disability" has the same meaning given to ------------------------------ such term or comparable term under the Company's long term disability plan as in effect from time to time. 2.17 "Valuation Date" means the last day of each year, or such other -------------- dates as may be selected by the Committee. 3. ELECTION TO DEFER ----------------- 3.1 An Employee may elect to defer receipt of his or her Compensation for any Plan Year by completing the deferral election form prescribed by the Committee, specifying a percentage or percentages of Compensation to be deferred, which shall not exceed one hundred percent, and, at the Employee's option, the maximum dollar amount of any deferral. The deferral election form must be filed with the Committee by no later than fifteen days before the Deferral Date for the applicable Plan Year (December 31, 1996 in the case of the 1997 Plan Year). Unless otherwise determined in writing by the Committee, an Employee who has an outstanding loan from an Employer or is a commissioned salesperson on transitional draw shall not be eligible to make a deferral election or his then current election will become ineffective upon achievement of either status. 3.2 An election to defer shall be effective on the date the Employee delivers a completed deferral election form to the Committee; provided, however, that if an Employee subsequently delivers a properly completed deferral election form to the Committee no later than fifteen days before the Deferral Date (or December 31, 1996 in the case of the 1997 Plan Year), the latest dated deferral election form shall take effect. The election of any Employee who is a commissioned salesperson of an Employer shall not become effective for any Plan Year until such Employee's Compensation for the Plan Year (including for this purpose only car allowances and stock option income) exceeds $100,000 and shall only be effective with respect to that portion of the Employee's Compensation earned thereafter. After the fifteenth day before the Deferral Date for the applicable Plan Year (or December 31 in the case of the 1997 Plan Year), the elections made on the deferral election form for that Plan Year shall be irrevocable; provided, however, that a Participant may elect, with fifteen days' written notice, to revoke completely his or her deferrals for the remainder of the Plan Year as of the first day of any succeeding calendar month. Any Participant who so revokes his or her election to defer shall not be eligible to make an election pursuant to Section 3.1 for the Plan Year succeeding the Plan Year during which the Participant revoked his or her election but may resume deferrals in the next successive Plan Year. -3- 3.3 A separate election to defer must be made for each successive Plan Year no later than fifteen days prior to the Deferral Date for that Plan Year. 3.4 The Employee shall elect, when completing the deferral election form, to defer receipt of all of the Compensation deferred for that Plan Year and all prior Plan Years until one of the following "Payment Years": (a) The calendar year specified by the Employee, which shall be at least the third year after the year in which the election is made; or (b) The calendar year following the Employee's Termination of Employment. The Employee shall elect, when completing his or her deferral election form, to receive his or her Account in a single lump sum payment or in a specified number of annual installment payments not to exceed ten. If the Employee fails to elect a form of distribution, his or her Account will be distributed in five annual installments following Termination of Employment. 3.5 A Participant may, so long as such Participant is employed by the Employer, elect to change the Payment Year selected under Section 3.4 subject to the following: (i) if the Participant specifies a calendar year, the year selected must be at least the third year after the year in which the Committee receives the Participant's election under this Section 3.5; (ii) if the Participant changes the Payment Year to the calendar year following Termination of Employment, the Participant's election under this Section 3.5 must be received by the Committee by the end of the calendar year before the year in which the Participant's Termination of Employment occurs; and (iii) notwithstanding any elections that the Participant may make, the Committee shall have the absolute right in its sole and absolute discretion to have the CBC Stock Fund Units or dollar amounts credited to a Participant's Account paid in not more than five annual installments commencing one year after the Payment Year selected by the Participant. 3.6 A Participant may, so long as such Participant remains employed by the Employer, change his or her election from a single lump sum payment to annual installments over a period not to exceed ten years or from annual installments to a single lump sum payment. 4. DEFERRED COMPENSATION ACCOUNTS ------------------------------ 4.1 Compensation deferred pursuant to Section 3 shall be credited to an Account in the name of the Participant -4- established for this purpose on the Employer's books or the books of the Employer who has assumed the obligation to make payments hereunder to the Participant in accordance with Section 9. Compensation shall be credited to the Account as of the first day of the month after the month in which it otherwise would have been paid, except that amounts that would have been payable in December shall be credited to the Account as of December 31. 4.2 The balance credited to each Participant's Account shall be allocated to one or both of the following investment option(s) offered under the Plan: (a) CBC Stock Fund; and (b) Interest Index Fund. The measure of the investment return for any Participant's Account shall be equal to the proportionate gain (or loss) of the two investment options as described in Section 5. 5. INVESTMENT OPTIONS ------------------ 5.1 Each Participant may direct the Committee on the investment mix for the balance credited to his or her Account. Such direction shall be writing and shall be made on the form prescribed by the Committee no later than 15 days prior to the last day of any calendar year (December 31 in the case of an election in 1996). Any portion of the Participant's Account allocated to the CBC Stock Fund may not be subsequently allocated to the Interest Index Fund. 5.2 If any portion of a Participant's Account is allocated to the CBC Stock Fund during the Plan Year, the Participant's Account shall be credited with units ("CBC Stock Fund Units") equal to the number of shares of Stock which could be purchased based on the average closing price of the Stock for the last five trading days of the month in which the deferred amount would otherwise have been paid to Participant; provided that in the case of a deferral of Compensation consisting of a bonus payable in the first 90 days of a year, shares of Stock shall be credited based on the average closing price of the Stock for the last five trading days of February of such year. In the event dividends are paid or payable during the Plan Year on Stock underlying CBC Stock Fund Units credited to a Participant's Account, the Participant's Account shall be credited with the number of whole shares equal to the number of shares which could be purchased with such dividends based on the average closing price of the Stock for the five trading days preceding the date the dividend is paid. 5.3 Any portion of a Participant's Account allocated to the Interest Index Fund shall be accumulated and credited with interest at the rate payable by CB Commercial -5- Real Estate Services Group, Inc. on its senior secured debt, determined as of the first day of any calendar quarter and compounded monthly on the last day of each month based on the Participant's balance in the Interest Index Fund as of the first day of that month. 5.4 So long as a Participant remains employed by the Employer, such Participant may elect to have all or any portion of the value of the Interest Index Fund credited to such Participant's Account transferred to the CBC Stock Fund. Such election shall be effective on January 1 of the year following the year in which the Participant makes such election under this Section 5.4. To be effective, such election must be received by the Committee by December 16 of such year (December 31 in the case of an election in 1996). A Participant who elects to transfer all or any portion of the Interest Index Fund credited to such Participant's Account to the CBC Stock Fund shall be credited with the number of CBC Stock Fund Units determined by dividing the dollar amount being transferred by the average closing price of the Stock for the last five trading days of the year in which the election is made. 6. VESTING OF ACCOUNTS ------------------- 6.1 Amounts credited to a Participant's Account shall be vested and nonforfeitable (except to the extent of investment losses) at all times. 7. PAYMENT OF ACCOUNTS ------------------- 7.1 Amounts credited to a Participant's Account shall be distributed as described in Sections 3.4 and 3.5, subject to the terms and conditions of this Section 7. 7.2 If a Participant has elected to receive his or her Account in a single lump sum payment, such Account shall be valued as of the last day of the Plan Year immediately preceding the Payment Year and a single lump sum payment of cash and/or whole shares of Stock (determined in accordance with Section 7.4) shall be made during the first quarter of the Payment Year. The Account shall not be credited with any additional investment return under Sections 5.2 and 5.3 after the last day of the Plan Year preceding the Payment Year except that any CBC Stock Fund Units shall reflect appreciation or depreciation in the Stock. 7.3 If a Participant has elected to receive his or her Account in installments, the installments of such Account shall be distributed during the first quarter of the Payment Year and each subsequent year in which installments are payable. Each installment payment shall be calculated based on the value of the Interest Index Fund credited, and the number of CBC Stock Fund Units allocated, to the Account on -6- the last day of the Plan Year immediately preceding the year in which such installment is payable and distributed in cash and/or in whole shares of Stock. When a Participant's Account is payable in installments, it will continue to be credited with dividends, in the case of the CBC Stock Fund, or interest, in the case of the Interest Index Fund until the applicable Payment Year with respect to any installment payment. The amount of the installment payment to be distributed in any year shall be determined by multiplying the value of the Account on the last day of the preceding year by a fraction, the numerator of which is one and the denominator of which is the total number of installments remaining to be paid (including the installment for which the calculation is being made). 7.4 The portion of a Participant's Account consisting of CBC Stock Fund Units shall be distributed in whole shares of Stock equal to the number of CBC Stock Fund Units credited to the Participant's Account. The Interest Index Fund credited to a Participant's Account shall be distributed in cash. 7.5 If a Participant dies before all of the amounts credited to his or her Account have been distributed, the Participant's Beneficiary shall receive the amounts in the Participant's Account in accordance with such Participant's election then in effect; provided, however, that the Committee may, in its sole discretion, distribute the balance credited to the Participant's Account to the Participant's Beneficiary in such other manner as the Committee shall determine. 7.6 If a Participant suffers Total and Permanent Disability before all of the amounts credited to his or her Account have been distributed, the Participant shall receive the amounts in his or her Account in accordance with such Participant's election then in effect; provided, however, that the Committee may, in its sole discretion, distribute the balance credited to the Participant's Account to the Participant in such other manner as the Committee shall determine. 7.7 Prior to the date on which payments are distributable under the Plan, distributions of amounts credited to the Participant's Account shall be permitted only on account of an unforeseeable emergency, and only if the distribution is necessary in light of immediate and heavy financial needs of the Participant. The amount of any hardship distribution shall not exceed the amount required to meet the need as determined by the Committee. The Participant shall submit a written request to the Committee which shall have sole discretion to establish rules and standards for making hardship distributions, to determine whether to make a hardship distribution from a Participant's Account and to determine the amount of such distribution, if any. The -7- Committee's decision shall be final and binding on all interested parties. 8. PLAN ADMINISTRATION ------------------- 8.1 This Plan shall be adopted by each Employer and shall be administered by the Committee. 8.2 This Plan may be amended in any way or may be terminated, in whole or in part, at any time, in the discretion of the Committee or the Board of Directors of CB Commercial Real Estate Services Group, Inc. Upon termination of the Plan, the Committee or the Board of Directors may, in its sole discretion, elect to distribute all Accounts immediately or in accordance with each Participant's deferral election(s) and the provisions of the Plan as they existed at the time of the Plan's termination. 8.3 The Committee shall have the sole authority, in its discretion, to adopt, amend and rescind such rules and regulations as it deems advisable for the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and deferral election forms, and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be binding on all persons. The Committee may delegate its responsibilities as it sees fit. 9. NO FUNDING OBLIGATION --------------------- No Employer is under any obligation to secure any amount credited to a Participant's Account by any specific assets of any Employer or any other assets in which any Employer has an interest. Neither the Participant nor his or her estate shall have any rights against any Employer with respect to any portion of the Account except as a general unsecured creditor. No Participant has an interest in his or her Account except to the extent the Participant actually receives a distribution of cash or Stock. The obligation to make payments to any Participant hereunder shall be that of the Employer that employed such Participant during the period or periods that such Participant deferred receipt of Compensation unless any other Employer agrees to assume such obligation and such Participant was informed of such assumption at the time of his or her election to defer, in which case only the Employer that agreed to assume such obligation shall have such obligation. 10. NONALIENATION OF BENEFITS ------------------------- No benefit under this Plan may be sold, assigned, transferred, conveyed, hypothecated, encumbered, anticipated, -8- or otherwise disposed of, and any attempt to do so shall be void. No such benefit, prior to receipt thereof by a Participant, shall be in any manner subject to the debts, contracts, liabilities, engagements, or torts of such Participant. 11. NO LIMITATION OF EMPLOYER RIGHTS -------------------------------- Nothing in this Plan shall be construed to limit in any way the right of any Employer to terminate an Employee's employment at any time for any reason; nor shall it be evidence of any agreement or understanding, express or implied, that any Employer (a) will employ an Employee in any particular position, (b) will ensure participation in any incentive programs, or (c) will grant any awards under such programs. 12. APPLICABLE LAW -------------- This Plan shall be construed and its provisions enforced and administered in accordance with ERISA and, to the extent not preempted, the laws of the State of Delaware. IN WITNESS WHEREOF, CB Commercial Real Estate Services Group, Inc. has ------------------ caused this Deferred Compensation Plan (as amended and restated) to be duly executed by the undersigned this _____ day of December, 1996. CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. By _________________________ James J. Didion Chief Executive Officer -9- EXHIBIT A --------- Participating Employers in the CB Commercial Real Estate Services Group, Inc. Deferred Compensation Plan -------------------------- CB Commercial Real Estate Services Group, Inc. CB Commercial Real Estate Group, Inc. Westmark Realty Advisors L.L.C. L.J. Melody & Company CB Commercial Real Estate Group of Hawaii, Inc. EX-10.10 7 CB COMMERCIAL MELODY STOCK OPTION PLAN EXHIBIT 10.10 CB COMMERCIAL HOLDINGS, INC. L. J. MELODY ACQUISITION STOCK OPTION PLAN SECTION 1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN 1.1 Establishment. CB COMMERCIAL HOLDINGS, INC., a Delaware corporation -------------- (the "Company"), hereby establishes the L. J. MELODY ACQUISITION STOCK OPTION PLAN (the "Plan"). 1.2 Purpose. The L. J. Melody Acquisition Stock Option Plan was -------- established in connection with the acquisition of the outstanding capital stock of L. J. Melody & Company and L. J. Melody & Company of California for the purpose of granting options thereunder to certain key employees of such firms as an inducement to enter into or remain in the service of the Company and its subsidiaries and as an incentive for extraordinary efforts during such service. 1.3 Effective Date. The Plan shall become effective immediately upon --------------- its adoption by the Board of Directors of the Company. SECTION 2. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have ------------ their respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means the Compensation Committee of the Board. (d) "Disability" means the inability to engage in any Substantial Gainful Activity by reason of any medically determinable physical or mental impairment which, in the sole and final judgment of the Committee, can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than twelve months. (e) "Employee" means a regular employee (including officers and directors who are also employees) or independent contractor (including any independent contractor operating in the form of a corporation, partnership, limited liability company or otherwise) of L. J. Melody & Company or any of its subsidiaries, or any branch or division thereof. 1 (f) "Fair Market Value" of the Stock on any date means, in the event that the Stock is listed on an established national or regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, or is publicly traded in an established securities market, the closing price of the Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on such date, or, if there is no such closing price, the mean between the highest bid and lowest asked prices or between the high and low prices on such date or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale shall have been made; or the value determined by using such other method as the Committee may determine. (g) "Option" means the right to purchase Stock at a stated price for a specified period of time. (h) "Participant" means any Employee granted an option under the Plan. (i) "Stock" means the Class B-2 Common Stock of the Company, par value $.01 per share. (j) "Substantial Gainful Activity" means the performance of significant duties over a reasonable period of time in work for remuneration or profit (or in work or a type generally performed for remuneration or profit). 2.2 Gender and Number. Except when otherwise indicated by the context, ------------------ words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. SECTION 3. ELIGIBILITY AND PARTICIPATION Options may be granted under the Plan to any Employee. SECTION 4. ADMINISTRATION 4.1 Compensation Committee. The Committee shall be responsible for the ----------------------- administration of the Plan. The Committee, by majority action thereof, is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interest of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, all in the Committee's sole and absolute discretion, but only to the extent not contrary to the express provisions of the Plan. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final and binding and conclusive for all purposes and upon all persons whomsoever. 2 4.2 No Liability. No member of the Committee shall be liable for and ------------- the Company shall indemnify and hold each such member harmless with respect to any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. SECTION 5. STOCK SUBJECT TO PLAN 5.1 Number. The total number of shares subject to Options may not ------- exceed 90,750 shares. The number of shares of Stock subject to Options under the Plan and the Option prices are subject to adjustment upon occurrence of any of the events indicated in Section 5.3. The shares to be delivered under the Plan may consist, in whole or in part, of authorized but unissued Stock or treasury Stock not reserved for any other purpose. 5.2 Lapsed Options. To the extent any Option granted under the Plan --------------- terminates, expires or lapses for any reason, any shares subject to such Option again shall be available for the grant of an Option. 5.3 Adjustment in Capitalization. In the event of any change in the ----------------------------- outstanding shares of Stock that occurs by reason of a stock dividend or split, recapitalization, merger, consolidation, combination, exchange of shares, or other similar corporate change, the aggregate number of shares of Stock subject to each outstanding Option, and its stated Option price, shall be adjusted appropriately by the Committee, whose determination shall be final and conclusive; provided, however that fractional shares shall be rounded to the nearest whole share. In such event, the Committee also shall have complete discretion to make adjustments in the number and type of shares subject to Stock grants then outstanding under the Plan pursuant to the terms of such grants or otherwise as it deems appropriate. SECTION 6. DURATION OF PLAN 6.1 Duration of Plan. The Plan shall remain in effect, subject to the ----------------- Board's right to earlier terminate the Plan pursuant to Section 11 hereof, until all Stock subject to it shall have been purchased, acquired or lapsed pursuant to the provisions hereof. Notwithstanding the foregoing, no Option may be granted under the Plan on or after the tenth (10th) anniversary of the Plan's effective date. SECTION 7. STOCK OPTIONS 7.1 Grant of Options. Options may be granted to Participants at any time ----------------- and from time to time as shall be determined by the Committee or the Board. The Committee or the Board, as applicable, shall have complete discretion in determining the number, type and price of Options granted to each Participant; provided, however, the aggregate Fair Market Value (determined at the time the Option is granted) of the Stock with respect to which an incentive stock option under Section 422A of the Code becomes exercisable for the first time by a Participant during any calendar year shall not exceed $100,000, nor shall any incentive stock option under Section 422A of the Code be granted to any person who owns, directly or 3 indirectly, Stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. Nothing in this Section 7 of the Plan shall be deemed to prevent the grant of nonstatutory stock options in amounts which exceed the maximum established by Section 422A of the Code with respect to incentive stock options. 7.2 Option Agreement. Each Option shall be evidenced by an Option ----------------- Agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of shares of Stock to which the Option pertains, and such other provisions as the Chief Executive Officer or Committee shall determine. 7.3 Option Price. No Option granted pursuant to the Plan which is ------------- intended to be an incentive stock option under Section 422A of the Code shall have an Option price that is less than the Fair Market Value of the Stock on the date the Option is granted. 7.4 Duration of Options. Each Option shall expire at such time as the -------------------- Committee shall determine at the time it is granted, provided, however, that no Option shall be exercisable later than ten years from the date of its grant. 7.5 Exercise of Options. Options granted under the Plan shall be -------------------- exercisable at such time and be subject to such restrictions and conditions as the Committee or the Board, as applicable, shall in each instance approve, which need not be the same for all Participants. Each Option which is intended to qualify as an incentive stock option pursuant to Section 422A of the Code shall comply with the applicable provisions of the Code pertaining to such Options. 7.6 Payment. The purchase price of Stock upon exercise of any Option -------- shall be paid in full either (i) in cash or (ii) with the consent of the Committee, through the tender to the Company of shares of Stock valued at Fair Market Value on the date of exercise, or (iii) by a combination of (i) and (ii). If shares of Stock are surrendered by an officer of the Company who is subject to Section 16(b) of the Securities Exchange Act of 1934 as payment of the Option Price and the Stock surrendered was acquired pursuant to an option to acquire Stock and such acquisition was not an exempt transaction under Section 16 of the Securities Exchange Act of 1934, then six (6) months must have elapsed since the date of grant of such option. The payment in full of the Option price shall be deemed to have been made with the written notice of exercise provided the notice of exercise directs that the stock certificate or certificates for the shares of Stock for which the Option is exercised be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the Option and, at the time such stock certificate or certificates are delivered, the broker tenders to the Company cash (or cash equivalents acceptable to the Company) equal to the Option price for the shares of Stock purchased plus the amount (if any) of Federal and/or other taxes which the Company, in its discretion, requires to be withheld with respect to the exercise of the Option. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment or deemed payment in full of the Option price therefor and any applicable withholding taxes, the individual exercising the Option shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of such shares. A separate stock certificate or certificates shall 4 be issued for any shares purchased pursuant to the exercise of an Option which is an incentive stock option, which certificate or certificates shall not include any shares which were purchased pursuant to the exercise of an Option which is not an incentive stock option. An individual holding or exercising an Option shall have none of the rights of a stockholder until the shares of Stock covered thereby are fully paid and issued, and except as provided in Section 5.3 above, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 7.7 Restriction on Stock Transferability. The Committee shall impose ------------------------------------- such restrictions on any shares of Stock acquired pursuant to the exercise of an Option under the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange upon which such shares of Stock are then listed, under any blue sky or state securities laws applicable to such shares, and under any Stockholders' Agreement then in effect. 7.8 Termination Due to Death or Disability. In the event a Participant --------------------------------------- ceases to be an Employee by reason of death or Disability, any outstanding Options then exercisable may be exercised at any time prior to the expiration date of the Options or within twelve (12) months after such date of termination of employment, whichever period is the shorter. 7.9 Termination other then for Death or Disability. If a Participant ----------------------------------------------- ceases to be an Employee for any reason other than death or Disability, the rights which he or she may have under any then outstanding Option granted pursuant to the Plan shall terminate in accordance with the terms of the Option agreement. Except with respect to grants of incentive stock options, a Participant who is a common law employee of the Company shall not cease to be an Employee if he or she becomes an independent contractor with respect to the Company and an independent contractor with respect to the Company shall not cease to be an Employee if he or she immediately becomes a common law employee of the Company. 7.10 Nontransferability of Options. No Option granted under the Plan may ------------------------------ be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or by such Participant's conservator of the estate or the equivalent. SECTION 8. RIGHTS OF EMPLOYEES 8.1 Termination. Nothing in the Plan shall interfere with or limit in ------------ any way the right of the Company or its subsidiaries to terminate any Participant's employment as a common law employee or engagement as an independent contractor at any time, with or without cause, nor confer upon any Participant any right to continue in the employ of the Company or its subsidiaries. 8.2 Participation. No employee shall have a right to be selected as a -------------- Participant or, having been so selected, to be selected again as a Participant. 5 SECTION 9. AMENDMENT, MODIFICATION AND TERMINATION OF PLAN 9.1 Amendment, Modification and Termination of Plan. Unless sooner ------------------------------------------------ terminated as provided herein, the Plan will automatically terminate on September 24, 2006. The Board at any time may terminate, and from time to time may amend or modify, the Plan. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant. SECTION 10. TAX WITHHOLDING The Company shall have the right to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local withholding tax requirements on any Option under the Plan and, notwithstanding any other provision to the contrary, no Option shall be subject to exercise until withholding satisfactory to the Company has been made. SECTION 11. MISCELLANEOUS 11.1 Requirements of Law. The granting of Options and the issuance of -------------------- shares of Stock upon exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 11.2 Use of Proceeds. The proceeds received by the Company from the sale ---------------- of Stock pursuant to Options granted under the Plan shall constitute general funds of the Company. 11.3 Gender and Number. Except as otherwise indicated by the context, ------------------ words in the masculine gender when used in this Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. 11.4 Headings. The headings herein are for convenience only and shall --------- not be used in interpreting the Plan. 11.5 Governing Law. The validity, interpretation and effect of this -------------- Plan, and all agreements hereunder, shall be governed by and construed in accordance with and governed by the laws of the State of Delaware, other than the choice of law rules thereof. 6 IN WITNESS WHEREOF, CB Commercial Holdings, Inc. has caused this Plan to be adopted this 24th day of September, 1997. CB COMMERCIAL HOLDINGS, INC. By: _________________________ JAMES J. DIDION CHIEF EXECUTIVE OFFICER 7 EX-21 8 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF --------------- CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. ----------------------------------------------
JURISDICTION OF NAME 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 Colorado, 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 Investments, Inc. Texas Sutter Fremont, Inc. California Sutter Fremont Property Services, Inc. Washington Sutter Fremont Real Estate Merchant Capital Corporation California Sutton & Towne N.J., Inc. New Jersey Westmark Real Estate Acquisition Partnership, L.P. Delaware Westmark Realty Advisors L.L.C. Delaware HoldPar A Delaware HoldPar B Delaware Sol L. Rabin, Inc. California Roger C. Schultz, Inc. California Bruce L. Ludwig, Inc. California Vincent F. Martin, Jr., Inc. California Stanton H. Zarrow, Inc. California
EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statements: Form S-8 (File No. 33-39436), Form S-8 (File No. 33-40953), Form S-8 (File No. 33-44346), Form S-8 (File No. 33-273236), Form S-8 (File No. 33-90014), Form S-8 (File No. 333-21597) and Form S-8 (File No. 333-21599). ARTHUR ANDERSON LLP Los Angeles, California March 28, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 49,328 0 45,350 4,423 0 113,952 82,213 41,365 278,944 106,005 0 0 40 133 (1,688) 278,944 583,068 583,068 0 534,639 0 0 24,123 25,809 (44,740) 70,549 0 0 0 70,549 5.02 4.97
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