-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, JKYzRPT2FNYgS1yapgjJKKxLusGRNXOJN+2/twIMWzW3hjKWIna++YAht1gbvm+u 8dVC3X3aRK+UkB47A3zHvA== 0000912057-94-002697.txt : 19940816 0000912057-94-002697.hdr.sgml : 19940816 ACCESSION NUMBER: 0000912057-94-002697 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOLL REAL ESTATE GROUP INC CENTRAL INDEX KEY: 0000840216 STANDARD INDUSTRIAL CLASSIFICATION: 1531 IRS NUMBER: 020426634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17189 FILM NUMBER: 94544304 BUSINESS ADDRESS: STREET 1: 4343 VON KARMAN AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92660- BUSINESS PHONE: 7148333030 MAIL ADDRESS: STREET 1: 4343 VON KARMAN AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92660- FORMER COMPANY: FORMER CONFORMED NAME: BOLSA CHICA CO/ DATE OF NAME CHANGE: 19921229 FORMER COMPANY: FORMER CONFORMED NAME: HENLEY GROUP INC/DE/ DATE OF NAME CHANGE: 19910415 FORMER COMPANY: FORMER CONFORMED NAME: HENLEY NEWCO INC DATE OF NAME CHANGE: 19900109 10-Q 1 FORM 10-Q This Form 10-Q consists of 13 sequentially numbered pages. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------------------------------------- QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 ------------- Commission file number 0-17189 ------- KOLL REAL ESTATE GROUP, INC. ---------------------------- (Exact name of registrant as specified in its charter) Delaware 02-0426634 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization.) Identification No.) 4343 Von Karman Avenue Newport Beach, California 92660 ------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 833-3030 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 ----- ----- The number of shares of Class A Common Stock outstanding at July 31, 1994 were 43,319,703 KOLL REAL ESTATE GROUP, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1994 I N D E X ------------------- Page No. -------- PART I - Financial Information: Item 1 - Financial Statements Introduction to the Financial Statements . . . . . .3 Balance Sheets - December 31, 1993 and June 30, 1994. . . . . . . . .4 Statements of Operations - Three and Six Months Ended June 30, 1993 and 1994. .5 Statements of Cash Flows - Six Months Ended June 30, 1993 and 1994. . . . . . .6 Notes to Financial Statements. . . . . . . . . . . .7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . .9 PART II - Other Information: Item 1 - Legal Proceedings . . . . . . . . . . . . . . . 11 Item 4 - Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 12 Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . 12 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2 KOLL REAL ESTATE GROUP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTRODUCTION TO THE FINANCIAL STATEMENTS The condensed financial statements included herein have been prepared by Koll Real Estate Group, Inc. and its consolidated subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and the current year's previously issued Quarterly Report on Form 10-Q. The financial information presented herein reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year. 3 KOLL REAL ESTATE GROUP, INC. BALANCE SHEETS (in millions)
December 31, June 30, 1993 1994 ASSETS ----------- -------- Cash and cash equivalents $ 21.8 $ 27.1 Short-term investments 21.7 8.3 Real estate held for development or sale 47.7 45.6 Operating properties, net 16.3 16.2 Land held for development 315.9 321.3 Other assets 22.9 20.8 ------- ------- $ 446.3 $ 439.3 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 30.8 $ 31.1 Senior bank debt 7.0 3.6 Subordinated debentures 134.9 143.7 Other liabilities 110.1 105.8 ------- ------- Total liabilities 282.8 284.2 ------- ------- Stockholders' equity: Series A Preferred Stock .4 .4 Class A Common Stock 2.2 2.2 Capital in excess of par value 230.0 229.3 Deferred proceeds from stock issuance (1.5) (.7) Minimum pension liability (1.5) (1.5) Accumulated deficit (66.1) (74.6) ------- ------- Total stockholders' equity 163.5 155.1 ------- ------- $ 446.3 $ 439.3 ------- ------- ------- -------
See the accompanying notes to financial statements. 4 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF OPERATIONS (in millions, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 1993 1994 1993 1994 ---- ---- ---- ---- REVENUES: Asset Sales $ - $ 2.4 $ - $ 3.5 Operations .9 2.4 1.1 4.7 ------ ------ ------ ------ .9 4.8 1.1 8.2 ------ ------ ------ ------ COSTS OF: Asset Sales - 2.4 - 3.5 Operations .9 2.4 1.5 4.5 ------ ------ ------ ------ .9 4.8 1.5 8.0 ------ ------ ------ ------ Gross operating margin - - (.4) 0.2 General and administrative expenses 2.7 2.0 5.2 4.6 Interest expense 6.3 4.6 12.4 9.0 Other (income) expense, net - .2 (1.6) .6 ------ ------ ------ ------ Loss from continuing operations before income taxes (9.0) (6.8) (16.4) (14.0) Provision (benefit) for income taxes (3.6) (2.3) (6.5) (4.8) ------ ------ ------ ------ Loss from continuing operations (5.4) (4.5) (9.9) (9.2) Discontinued operations: Income from operations, net of income taxes 1.9 - 4.0 - Gain on disposition, net of income taxes - - - .7 Loss before the cumulative effect of accounting change (3.5) (4.5) (5.9) (8.5) Cumulative effect of an accounting change for income taxes - - (36.0) - ------ ------ ------ ------ Net loss ($3.5) ($4.5) ($41.9) ($8.5) ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) per common share: Continuing operations ($.14) ($.11) ($.25) ($.22) Discontinued operations .05 - .10 .02 Cumulative effect of accounting change - - (.90) - ------ ------ ------ ------ Net loss per common share ($.09) ($ .11) ($1.05) ($ .20) ------ ------ ------ ------ ------ ------ ------ ------
See the accompanying notes to financial statements. 5 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF CASH FLOWS (in millions)
Six Months Ended June 30, 1993 1994 ---- ---- Cash flows from operating activities: Loss before the cumulative effect of an accounting change ($ 5.9) ($8.5) Adjustments to reconcile to cash used by operating activity: Depreciation and amortization .7 .7 Non-cash interest expense 10.7 8.8 Gains on sales (.5) - Gain on disposition of discontinued operation - (.7) Proceeds from asset sales, net .5 3.5 Investments in real estate held for development or sale (.9) (1.6) Investments in land held for development (3.4) (5.4) Decrease (increase) in other assets (5.5) 1.8 Decrease in accounts payable, accrued and other liabilities (11.6) (4.3) ------ ------ Cash used by operating activities (15.9) ( 5.7) ------ ------ Cash flows from investing activities: Sale of short-term investments - 13.4 Proceeds from disposition of discontinued operation - 1.0 ------ ------ Cash provided by investing activities - 14.4 ------ ------ Cash flows from financing activities: Net proceeds from nonrecourse debt 43.4 - Repayments of senior bank debt (21.0) (3.4) ------ ------ Cash provided (used) by financing activities 22.4 (3.4) ------ ------ Net increase in cash and cash equivalents 6.5 5.3 Cash and cash equivalents - beginning of period 41.6 21.8 ------ ------ Cash and cash equivalents - end of period $ 48.1 $ 27.1 ------ ------ ------ ------
See the accompanying notes to financial statements. 6 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements should be read in conjunction with the Financial Statements and Notes thereto included in the Annual Report on Form 10-K of Koll Real Estate Group, Inc. (the "Company") for the year ended December 31, 1993, and the current year's previously issued Quarterly Report on Form 10-Q. Certain prior-period amounts have been reclassified to conform with their current presentation. NOTE 2 - LOSS PER COMMON SHARE The weighted average number of common shares outstanding for both the three and six month periods ended June 30, 1993 and 1994 were 39.8 million shares and 43.3 million shares, respectively. The Series A Preferred Stock is not included in the loss-per- share calculation because the effect is anti-dilutive. NOTE 3 - LAND HELD FOR DEVELOPMENT Land held for development consists of approximately 1,200 acres known as Bolsa Chica located in Orange County, California, surrounded by the City of Huntington Beach and approximately 35 miles south of downtown Los Angeles. The Company is seeking approvals from local, state and federal governmental entities for a residential project of approximately 4,900 units (including approximately 4,300 units on Company-owned land) on this site. On August 15, 1994, the Orange County Environmental Management Agency announced that it has proposed a lower density development alternative that contains options for the Bolsa Chica project with and without housing development in the lowland. The County planning staff's option with lowland development calls for a maximum of 3,200 units and a wetlands restoration plan financed by the Company. County staff has also proposed a second option without lowland development which includes a maximum of 2,500 units and would not require financial participation by the Company for wetlands restoration. If lowland development is eliminated, it would result in a substantial reduction in the book value of the Bolsa Chica project currently reflected in the Company's financial statements. Any such future impact on the Statement of Operations and stockholders' equity would be partially offset by a decrease in deferred taxes. Due to a number of factors beyond the Company's control, including possible objections of various environmental and so-called public interest groups that may be made in legislative, administrative or judicial forums, the required approvals could be delayed substantially. Subject to these and other uncertainties inherent in the entitlement process, the Company's goal is to obtain all material governmental approvals in 1995 and to begin infrastructure construction in 1996, depending on economic and market conditions. Realization of the Company's investment in Bolsa Chica will also depend upon various economic factors, including the demand for residential housing in the Southern California market and the availability of credit to the Company and to the housing industry. 7 NOTE 4 - DEBT SENIOR BANK DEBT The Company prepaid $3.4 million of senior bank debt during the six months ended June 30, 1994 with proceeds from sales of 10 residential homes at the Company's Wentworth By The Sea project in New Hampshire. Cash payments for interest on senior bank debt were approximately $1.7 million and $.2 million for the six months ended June 30, 1993 and 1994, respectively. SUBORDINATED DEBT Subordinated debt was comprised of the following (in millions):
December 31, June 30, 1993 1994 ----------- -------- Senior subordinated debentures $ 109.4 $ 116.0 Subordinated debentures 27.4 29.0 ------- ------- Total face amount 136.8 145.0 Less unamortized discount (6.7) (6.4) Plus accrued interest 4.8 5.1 ------- ------- $ 134.9 $ 143.7 ------- ------- ------- -------
NOTE 5 - INCOME TAXES Cash payments for federal, state and local income taxes were approximately $7.8 million and $.4 million for the six months ended June 30, 1993 and 1994, respectively. Tax refunds received were $1.0 million and $.7 million for the six months ended June 30, 1993 and 1994, respectively. NOTE 6 - COMMITMENTS AND CONTINGENCIES The Company was notified in March 1994 that a predecessor company and the Internal Revenue Service entered into a Stipulation of Settlement regarding an asserted tax deficiency that is the subject of certain tax sharing agreements. The Company was informed by the other parties to these tax sharing agreements that it is being charged with a net obligation of approximately $21 million under this settlement. The Company has accrued for this obligation since December 1989. In April 1994, the Company notified the other parties that it is contesting their assertion of this obligation, prompting the other parties to commence legal action against the Company by filing suit in Delaware state court. A trial date for this case is scheduled for September 7, 1994. The Company fully anticipated the prospect of litigation and is vigorously defending its position with respect to the nonpayment of the alleged tax sharing obligation, in addition to asserting its own claims for monetary damages. In that regard, the Company filed suit against one of the parties in New York state court in April 1994. See "Part II, Item 1 - Legal Proceedings". 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The principal activity of the Company has been to obtain zoning and other entitlements for land it owns and to improve the land for residential development. Once the land is entitled, the Company may sell unimproved land to other developers or investors; sell improved land to home builders; or participate in joint ventures with other developers, investors or home builders to finance and construct infrastructure and homes. The Company's principal activities also include providing commercial, industrial, retail and residential development services to third parties, including feasibility studies, entitlement coordination, project planning, construction management, financing, marketing, acquisition, disposition and asset management services on a national basis through its current offices throughout California, and in Dallas, Denver, Phoenix and Seattle. The Company intends to consider additional real estate acquisition opportunities; however, over the next two years the Company's principal objective is to maintain adequate liquidity to fully support the Bolsa Chica project entitlement efforts. Real estate held for development or sale and land held for development (real estate properties) are carried at the lower of cost or estimated net realizable value. The Company's real estate properties are subject to a number of uncertainties which can effect the future values of those assets. These uncertainties include delays in obtaining zoning and regulatory approvals, withdrawals or appeals of regulatory approvals and availability of adequate capital, financing and cash flow. The Company is seeking approvals from local, state and federal governmental entities for a residential project of approximately 4,900 units (including approximately 4,300 units on Company-owned land) on this site. On August 15, 1994, the Orange County Environmental Management Agency announced that it has proposed a lower density development alternative that contains options for the Bolsa Chica project with and without housing development in the lowland. The County planning staff's option with lowland development calls for a maximum of 3,200 units and a wetlands restoration plan financed by the Company. County staff has also proposed a second option without lowland development which includes a maximum of 2,500 units and would not require financial participation by the Company for wetlands restoration. If lowland development is eliminated, it would result in a substantial reduction in the book value of the Bolsa Chica project currently reflected in the Company's financial statements. Any such future impact on the Statement of Operations and stockholders' equity would be partially offset by a decrease in deferred taxes. In addition, future values may be adversely affected by heightened environmental scrutiny, limitations on the availability of water in Southern California, increases in property taxes, increases in the costs of labor and materials and other development risks, changes in general economic conditions, including higher mortgage interest rates, and other real estate risks such as the demand for housing generally and the supply of competitive products. Real estate properties do not constitute liquid assets and, at any given time, it may be difficult to sell a particular property for an appropriate price. The state of the nation's economy, and California's economy in particular, has had a negative impact on the real estate market generally, on the availability of potential purchasers for such properties and upon the availability of sources of financing for carrying and developing such properties. 9 LIQUIDITY AND CAPITAL RESOURCES The principal assets remaining in the Company's portfolio are residential land which must be held over an extended period of time in order to be developed to a condition that, in management's opinion, will ultimately maximize the return to the Company. Consequently, the Company requires significant capital to finance its real estate development operations. Historically, sources of capital have included bank lines of credit, specific property financings, asset sales and available internal funds. During the first six months of 1994, the Company utilized substantially all of the proceeds from asset sales to make required prepayments of senior bank debt. Although the Company reported income in 1993 as a result of gains on dispositions and extinguishment of debt, it reported losses in 1991, 1992 and for the six months ended June 30, 1994, and expects to report losses in the foreseeable future. While a significant portion of such losses is attributable to noncash interest expense on the Company's subordinated debentures, the Company's capital expenditures for project development are significant. In addition, the Company was notified in March 1994 that a predecessor company and the Internal Revenue Service entered into a Stipulation of Settlement regarding an asserted tax deficiency that is the subject of certain tax sharing agreements. The Company was informed by the other parties to these tax sharing agreements that it is being charged with a net obligation of approximately $21 million under this settlement. The Company has accrued for this obligation since December 1989. In April 1994, the Company notified the other parties that it is contesting their assertion of this obligation, prompting the other parties to commence legal action against the Company by filing suit in Delaware state court. A trial date for this case is scheduled for September 7, 1994. The Company fully anticipated the prospect of litigation and is vigorously defending its position with respect to the nonpayment of the alleged tax sharing obligation, in addition to asserting its own claims for monetary damages. In that regard, the Company filed suit against one of the parties in New York state court in April 1994. See "Part II, Item 1 - Legal Proceedings". Given the limited availability of capital for real estate development under current conditions in the financial markets, the Company will be dependent primarily on cash, cash equivalents and short-term investments on hand to fund project investments, and general and administrative costs. At June 30, 1994 the Company's cash, cash equivalents and short-term investments aggregated $35.4 million. However, if the Company is required to pay all or substantially all of the $21 million claimed under the tax sharing agreements as discussed above, and such amount is not financed, the Company will need to obtain other sources of financing or sell additional assets in order to meet projected cash requirements during 1995. FINANCIAL CONDITION JUNE 30, 1994 COMPARED WITH DECEMBER 31, 1993 The $13.4 million decrease in short-term investments primarily reflects the funding of project development and general and administrative costs, as well as a $5.3 million increase in cash and cash equivalents. 10 RESULTS OF OPERATIONS The results for 1993 have been reclassified to reflect the results of Lake Superior Land Company and Deltec Panamerica S.A. as discontinued operations. THREE MONTHS ENDED JUNE 30, 1994 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1993 The increase in revenues from $.9 million in 1993 to $4.8 million in 1994 and the increase in costs of sales from $.9 million in 1993 to $4.8 million in 1994 principally reflect the operations of the domestic real estate development business acquired from The Koll Company in September 1993, and residential home sales at the Wentworth By The Sea project during the three months ended June 30, 1994. The decrease in interest expense from $6.3 million in 1993 to $4.6 million in 1994 reflects both the reductions in outstanding senior bank debt throughout 1993, and the reduction in outstanding subordinated debt in December 1993. SIX MONTHS ENDED JUNE 30, 1994 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1993 The increase in revenues from $1.1 million in 1993 to $8.2 million in 1994 and the increase in costs of sales from $1.5 million in 1993 to $8.0 million in 1994 principally reflect the operations of the domestic real estate development business acquired from The Koll Company in September 1993, and residential home sales at the Wentworth By The Sea project during the six months ended June 30, 1994. The decrease in interest expense from $12.4 million in 1993 to $9.0 million in 1994 reflects both the reductions in outstanding senior bank debt throughout 1993, and the reduction in outstanding subordinated debt in December 1993. The change in other (income) expense, net from $1.6 million of income for 1993 to $.5 million of expense for 1994 primarily reflects a $2.0 million insurance reimbursement received in February 1993 related to 1992 environmental litigation costs. The gain on disposition of discontinued operations, net of income taxes for the 1994 period reflects the receipt of cash for the February 1994 termination of the contingent payment provision of a December 1993 agreement with Libra Invest & Trade Ltd. ("Libra") whereby the Company exchanged its Lake Superior Land Company subsidiary for approximately $42.4 million face amount of the Company's senior subordinated debentures held by Libra and other consideration. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On April 13, 1994, Abex Inc. ("Abex") and Wheelabrator Technologies Inc. ("WTI") filed suit in Delaware Chancery Court against the Company seeking, among other things, declaratory relief, specific performance, and monetary damages for the Company's alleged 11 failure to pay approximately $21 million claimed to be owed pursuant to tax sharing agreements entered into in 1988 and 1989. This suit was filed after the Company contested the alleged obligation and asserted various defenses to making any payment under these agreements. A trial date for the case is scheduled for September 7, 1994. The Company is vigorously defending its position with respect to the nonpayment of the alleged tax sharing obligation. In that regard, on April 18, 1994 the Company filed suit in the Supreme Court of the State of New York against WTI and Abex for damages of $7,600,000 for breach of their obligations under a related tax sharing agreement entered into in 1992. On April 27, 1994, the Company amended its complaint to name only Abex as a defendant in this action. No trial date has been set for the New York case. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the annual meeting of stockholders of the Company held May 20, 1994, the 1993 Stock Option/Stock Issuance Plan was approved as follows: 17,076,722 for; 5,045,841 withheld; 801,858 abstentions and broker nonvotes. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Netting Agreement dated as of October 1, 1993 between a subsidiary of the Registrant and an executive officer of the Registrant, together with a schedule identifying five (5) substantially identical documents not filed herewith.* (b) Reports on Form 8-K: None. 12 SIGNATURE Pursuant to the requirements 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. KOLL REAL ESTATE GROUP, INC. Date August 15, 1994 /s/ Raymond J. Pacini ----------------------------- RAYMOND J. PACINI Executive Vice President - Chief Financial Officer 13 SCHEDULE 10.1 Pursuant to Instruction 2 of Item 601 of Regulation S-K, the following documents have not been filed as exhibits because they are substantially identical in all material respects to Exhibit 10.1 filed herewith: Five (5) other Netting Agreements each dated as of October 1, 1993 between an executive officer of the Registrant and different subsidiaries and limited partnerships of the Registrant. EX-10.1 2 EXHIBIT 10.1 NETTING AGREEMENT This NETTING AGREEMENT ("Agreement") is entered into effective as of_______________________, 199__, by and between KREG-OC, INC., a Delaware corporation, or any successor entity who is the employer of Employee (as hereinafter defined) ("KREG"), KREG-OC, L.P., a California limited partnership (the "Partnership") and ___________________, an individual ("Employee"). R E C I T A L S : A. Employee is an employee of KREG. B. Employee has acquired a limited partnership interest in the Partnership. The Partnership was formed pursuant to, and is governed by, that certain Agreement of Limited Partnership of KREG-OC, L.P., as amended from time to time (the "Partnership Agreement"). C. The Partnership was formed for the purpose of acquiring, developing, owning, managing, operating, holding for investment, selling and otherwise realizing the economic benefits of, real property and/or interests in general partnerships, limited partnerships, corporations and/or any other entities holding interests in real property (collectively, the "Project Interests" and individually, a "Project Interest"). Employee as a limited partner in the Partnership has, and may hereafter acquire, percentage interest(s) in the profits, losses and cash distributions of the Partnership related to one (1) or more of the Project Interests (collectively, the "Project Percentages" and individually, a "Project Percentage"). Employee has agreed that the availability of cash for distribution to Employee in connection with Employee's Project Percentage in each Project Interest shall depend on the "netting out" of the aggregate Partnership operations of all of the Project Interests with respect to which Employee holds a Project Percentage. That is, in the event there is cash to be distributed to Employee by the Partnership on account of Employee's Project Percentage in a Project Interest, whether return of or on capital or repayment of debt (collectively, the "Distributions"), the Distributions shall first be applied against (i) Employee's share, as agreed upon by KREG and Employee, of any net operating loss sustained by KREG during any calendar year and (ii) any written obligation of Employee to fund any cash needs of another Project Interest with respect to which Employee holds a Project Percentage as determined by the general partner or other person or entity with management control of the Partnership in its sole discretion, including, without limitation, any written obligation to contribute capital to cover operating deficits or cost overruns with respect to a Project Interest, any written obligation to contribute capital to enable the Partnership to repay any advances previously made by the general partner of the Partnership or any affiliate thereof with respect to a Project Interest on final dissolution and liquidation and/or termination of such Project Interest, or any Pre-Development Acquisition Loss (as hereinafter defined) suffered by the Partnership in connection with a Project Interest (the obligations set forth in clauses (i) and (ii) above shall hereinafter be referred to as "Cash Calls"). D. Employee has further agreed to include Bonus Compensation (as hereinafter defined) otherwise payable to Employee as a source of funding to cover Employee's obligation for Cash Call(s). E. Employee has selected KREG as the party to perform accounting functions and to assist in cash flow management relating to the application of the Distributions and Bonus Compensation, as applicable, to meeting Cash Calls and to act as an escrow agent through whom Distributions and Bonus Compensation, as applicable, and Cash Calls with respect to Employee are netted. NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: A G R E E M E N T : 1. APPLICATION OF DISTRIBUTIONS AND BONUS COMPENSATION TO OUTSTANDING CASH CALLS. Employee agrees that if there is an outstanding Cash Call(s) made on Employee which has not been satisfied as of the date of a proposed Distribution to Employee and/or a proposed payment of Bonus Compensation to Employee, such Distribution and/or Bonus Compensation which would otherwise be made to Employee (or any trust, corporation or other entity such Employee has formed to hold Employee's partnership interest in the Partnership) and/or payable to Employee, as the case may be, shall instead be delivered to KREG as escrow agent to be applied as follows: (a) First, against the outstanding Cash Call(s) made on Employee. In the event the Distribution and/or Bonus Compensation delivered to KREG is less than the outstanding Cash Call(s) due from Employee, the Distribution and/or Bonus Compensation, as the case may be, shall be allocated among the outstanding Cash Call(s) for the various Project Interests on a first in, first out basis; and (b) Thereafter, the balance of the Distribution and/or proposed payment of Bonus Compensation, if any, shall be distributed and/or paid to Employee. If there is no outstanding Cash Call made on Employee as of the date of a proposed Distribution and/or proposed payment of Bonus Compensation, such Distribution and/or Bonus Compensation shall not be delivered to KREG but rather shall be distributed to Employee pursuant to the Partnership Agreement and/or paid to Employee, as the case may be. 2. PRE-DEVELOPMENT/ACQUISITION LOSS DEFINED. The term "Pre-Development/Acquisition Loss" shall mean expenses aggregating in excess of Twenty-Five Thousand Dollars ($25,000) incurred by KREG and/or the Partnership in the pre-development and/or pre-acquisition of a real estate project including, without limitation, architectural and engineering fees, legal fees, accounting fees, permit fees, soil tests, environmental consulting fees and the like, which real estate project the Partnership determines, in its sole and absolute discretion, for any reason whatsoever, to not acquire. 3. NET OPERATING LOSS SHARE. Employee's share of any net operating -2- loss sustained by KREG during any calendar year shall be agreed to in writing by KREG and Employee at the commencement of such calendar year and shall not be increased or decreased during such calendar year without the written agreement of KREG and Employee. If Employee's employment with KREG is terminated for any reason during a calendar year, Employee shall be responsible for Employee's share of the net operating loss of KREG for all of such calendar year notwithstanding such termination. 4. BONUS COMPENSATION DEFINED. The term "Bonus Compensation" shall mean discretionary compensation payable by KREG, in its sole and absolute discretion, to Employee in excess of Employee's base semi-monthly salary and/or wage. 5. AGENCY APPOINTMENT IRREVOCABLE. Employee agrees that the appointment of KREG as escrow agent is one coupled with an interest and is irrevocable and such appointment shall survive the death, legal incapacity or bankruptcy of Employee. Such appointment shall not be revoked, nor shall the instructions provided for by Paragraph 1 hereof be revoked, except with the written consent of KREG. 6. LIABILITY LIMITED TO FUTURE DISTRIBUTIONS. Notwithstanding the provisions of the Partnership Agreement to the contrary, Employee's personal liability for Cash Calls shall be limited to Bonus Compensation and Distributions, to which Employee becomes entitled subsequent to the date the obligation to make a Cash Call first arises and Employee shall in no way have any personal liability with respect to Cash Calls except to the extent of such Distributions and Bonus Compensation. 7. BOOKS AND RECORDS. KREG shall maintain or cause to be maintained accurate books and records at the principal executive office of KREG showing the sources and uses of Employee's funds hereunder as well as the outstanding Cash Calls made on Employee and shall provide such information annually. Such books and records shall be open during reasonable business hours for the reasonable inspection, examination and copying by Employee or Employee's representatives at Employee's sole cost and expense. 8. NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be delivered or sent, as the case may be, by any of the following methods: (i) personal delivery, (ii) overnight commercial carrier, (iii) registered or certified mail, postage prepaid, return receipt requested, or (iv) telegraph, telex, telecopy or cable. Any such notice or other communication shall be deemed received and effective upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice; (b) if delivered by overnight commercial carrier, one day following the receipt of such communication by such carrier from the sender as shown on the sender's delivery invoice from such carrier; (c) if mailed, two (2) business days after the date of posting by the United States post office; (d) if given by telegraph or cable, when delivered to the telegraph company with charges prepaid; or (e) if given by telex or telecopy, when sent. Any notice or other communication sent by cable, telex or telecopy must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. Any reference herein to the date of receipt, delivery, or giving, or effective date, as the case may be, of any notice or other communication shall refer to the date such communication becomes effective under the terms of this Paragraph 8. Any such notice or other communication so delivered shall be addressed to the party to be served at the address set forth below: -3- To KREG: KREG-OC, INC. 4343 Von Karman Avenue Newport Beach, California 92660 Attention: President With a copy to: Chief Financial Officer To Employee: ____________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Attention: _________________________________________ Notice of change of address shall be given by written notice in the manner detailed in this Paragraph 8. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice or communication sent. 9. ENTIRE AGREEMENT. This Agreement supersedes any prior agreements including, but not limited to, any prior netting agreements and amendments thereto entered into by the parties, negotiations and communications, oral or written, and contains the entire agreement between KREG and Employee as to the subject matter hereof. No subsequent agreement, representation or promise made by either party hereto, or by or to an employee, officer, agent or representative of either party shall be of any effect unless it is in writing and executed by the party to be bound thereby. 10. LEGAL FEES. In the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants or agreements or any inaccuracies in any of the representations and warranties on the part of the other party arising out of this Agreement, then in that event, the prevailing party in such action or dispute, whether by final judgment or out of court settlement, shall be entitled to have and recover of and from the other party all costs and expenses of suit, including actual attorneys' fees. 11. TIME OF ESSENCE. Time is of the essence of each and every term, condition, obligation and provision hereof. 12. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. The signature of any party hereto to any counterpart hereof shall be deemed a signature to, and may be appended to, any other counterpart hereof. 13. CAPTIONS. Any captions to, or headings of, the paragraphs or subparagraphs of this Agreement are solely for the convenience of the parties hereto, are not a part of this Agreement, and shall not be used for the interpretation or determination of the validity of this Agreement or any provision hereof. 14. NO OBLIGATIONS TO THIRD PARTIES. Except as otherwise expressly provided herein, the execution and delivery of this Agreement shall not be deemed to confer any rights upon, nor obligate any of the parties thereto, to any person or entity other than the parties hereto. 15. AMENDMENT TO THIS AGREEMENT. The terms of this Agreement may not be modified or amended except by an instrument in writing executed by each of the -4- parties hereto. 16. WAIVER. The waiver or failure to enforce any provision of this Agreement shall not operate as a waiver of any future breach of any such provision or any other provision hereof. 17. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 18. SEVERABILITY. If any part of this Agreement for any reason is declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if the Agreement had been executed with the invalid portion thereof eliminated. 19. AFFILIATED PARTNERSHIPS AND AFFILIATED CORPORATIONS. KREG Operating Co., a Delaware corporation, the majority shareholder of KREG and the general partner of the Partnership, is also the general partner of other partnerships (the "Affiliated Partnerships") holding real property or interests therein in other geographic locales and the majority shareholder of other corporations (the "Affiliated Corporations") doing business in such geographic locales. In the event Employee acquires a partnership interest in an Affiliated Partnership(s) and/or is entitled to Bonus Compensation from an Affiliated Corporation(s), the provisions of this Netting Agreement shall apply to such Affiliated Partnership(s) and/or such Affiliated Corporation(s). That is, any Distribution from an Affiliated Partnership to which Employee would otherwise be entitled shall be delivered to KREG as escrow agent pursuant to the provisions of Paragraph 1 to be applied first against outstanding Cash Call(s) made on Employee with respect to such Affiliated Partnership, other Affiliated Partnership(s) and/or the Partnership on a first in, first out basis, and thereafter, the balance of the Distribution, if any, shall be distributed to Employee. Similarly, any Bonus Compensation from an Affiliated Corporation to which Employee would otherwise be entitled shall be delivered to KREG as escrow agent pursuant to the provisions of Paragraph 1 to be applied first against outstanding Cash Call(s) made on Employee with respect to an Affiliated Partnership and/or the Partnership on a first in, first out basis, and thereafter, the balance of the Bonus Compensation, if any, shall be paid to Employee. 20. FEE AND OTHER EXPENSES. Except as otherwise provided herein, each of the parties shall pay its own fees and expenses in connection with this Agreement. IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. KREG: KREG-OC, INC., a Delaware corporation By: /s/ Raymond E. Wirta -------------------------------- Raymond E. Wirta, Chief Executive Officer Partnership: KREG-OC, L.P., a California limited partnership By: KREG Operating Co., a -5- Delaware corporation, General Partner By: /s/ Raymond E. Wirta ---------------------------------- Raymond E. Wirta, Chief Executive Officer Employee: By: /s/ Richard M. Ortwein ---------------------------------- -6- -----END PRIVACY-ENHANCED MESSAGE-----