-----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, WTj+ltPCHZC7DXk3e5QoPG9RzYIB6P6q1Ul89Ya1ENRe284gSl+IuekMfNBbiXQJ 2I7dJ6B9fJNHcbnQAChGtw== 0000912057-97-015025.txt : 19970502 0000912057-97-015025.hdr.sgml : 19970502 ACCESSION NUMBER: 0000912057-97-015025 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOLL REAL ESTATE GROUP INC CENTRAL INDEX KEY: 0000840216 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 020426634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17189 FILM NUMBER: 97592725 BUSINESS ADDRESS: STREET 1: 4343 VON KARMAN AVE STREET 2: NULL CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7148333030 MAIL ADDRESS: STREET 1: 4343 VON KARMAN AVE 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-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] 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: 0-17189 KOLL REAL ESTATE GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 02-0426634 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON STOCK, PAR VALUE $.05 PER SHARE (TITLE OF CLASS) SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) 12% SENIOR SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002 (TITLE OF CLASS) 12% SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002 (TITLE OF CLASS) 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 VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF JANUARY 31, 1997 WAS $6,069,279. THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JANUARY 31, 1997 WAS 48,938,543. DOCUMENTS INCORPORATED BY REFERENCE NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE: - --------------------- THE REGISTRANT IS AMENDING THE FOLLOWING ITEMS TO ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 IN ORDER THAT SUCH ITEMS ARE IDENTICAL TO THE CORRESPONDING TEXT SET FORTH IN THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, FILE NO. 333-22121. - -------------------------------------------------------------------------------- PART I ITEM 2. PROPERTIES The Company's principal executive offices are located in Newport Beach, California. The Company and each of its subsidiaries believe that their properties are generally well maintained, in good condition and adequate for their present and proposed uses. The inability to renew any short-term real property lease would not be expected to have a material adverse effect on the Company's results of operations. The principal properties of the Company and its subsidiaries, which are owned in fee unless otherwise indicated, are as follows:
PROPERTY LOCATION ACRES PRESENT OR PLANNED USE - ---------------------------- -------------------------- --------- -------------------------------------- Newport Beach* Newport Beach, CA -- Headquarters Bolsa Chica Huntington Beach, CA 310 Oceanfront residential community Rancho San Pasqual Escondido, CA 650 Residential community Fairbanks Highlands** San Diego, CA 390 Residential community Aliso Viejo** Aliso Viejo, CA 230 Residential community Michigan Land Upper Peninsula, MI 1,100 Resort/residential lots Signal Hill Signal Hill, CA 2 Commercial/industrial land PetsMart Phoenix, AZ 20 Corporate headquarters EDS*** Allen, TX 14 Office/distribution center Nokia**** Irving-Las Colinas, TX 11 Office building
- ------------------------ *Leased **Minority interest in partnership or limited liability company ***Majority interest in partnership ****50% interest in partnership ITEM 3. LEGAL PROCEEDINGS On January 13, 1995, the Huntington Beach City School District and the Huntington Beach Union High School District (collectively, the "School Districts") and the Bolsa Chica Land Trust, et al. each filed a lawsuit naming the County of Orange as defendant, with the Company as real party in interest, (the "School Districts Action" and the "Environmental Action," respectively) in Orange County Superior Court (the "Superior Court") challenging the Orange County Board of Supervisors' approval of the Bolsa Chica project, which lawsuits generally alleged, among other things, violations of the California Environmental Quality Act and violations of the California Government Code planning and zoning laws. The plaintiffs in the School Districts Action sought monetary damages. The School Districts Action has been settled with an agreement regarding school fees to be paid by the Company to the plaintiff districts. The plaintiffs in the "Environmental Action" did not seek monetary damages, but instead asked the Superior Court to set aside the approval of the Bolsa Chica project. In February 1996, the Superior Court ruled on the Environmental Action," rejecting all but one of the arguments, and requiring an additional 45-day public review and comment period regarding the tidal inlet portion of the wetlands restoration plan, which was completed in the second quarter of 1996. The County reapproved the plan without change in June 1996 and the Superior Court approved a judgment dismissing the lawsuit on January 24, 1997. On March 6, 1996 and March 11, 1996 two lawsuits were filed in the San Francisco County Superior Court by the Bolsa Chica Land Trust, et al. and the League for Coastal Protection et al., respectively, against the Coastal Commission, the Company and other Bolsa Chica landowners as real parties in interest, alleging that the Coastal Commission's approval of the 3,300-unit LCP is not in compliance with the Coastal Act and other statutory requirements. These lawsuits, which have subsequently been transferred to, and are currently pending in, the San Diego County Superior Court, seek to set aside the approval of the Bolsa Chica project. These lawsuits are currently scheduled to be tried on May 27, 1997. Given the recent sale of the Bolsa Chica lowlands described above, the primary issues which were the subject of this litigation have been eliminated. Furthermore, the plaintiffs in one of these lawsuits have informed the Company that given the sale of the lowlands, they will work with the Company in an effort to resolve the remaining issues of their lawsuit. The Company believes that there is no factual basis to support the remaining litigation issues which challenge development of the Bolsa Chica mesa. Furthermore, the Company does not believe that these lawsuits will be successful in permanently preventing the Company from completing the Bolsa Chica project, however, there can be no assurance in this regard or that these suits will not result in delays. See also "Business and Properties of the Company--Environmental and Regulatory Matters, and--Corporate Indemnification Matters." On March 31, 1994, Svedala Industries, Inc. ("Svedala") filed a lawsuit naming Nichols Engineering & Research Corporation ("Nichols"), as well as several other unrelated companies, as defendants in New Jersey Superior Court in Morris County, New Jersey. Svedala filed a Second Amended Complaint on August 16, 1994. The lawsuit seeks recovery of the costs of clean-up of a property in Mt. Olive, New Jersey (the "Property"). Svedala has asserted that the clean-up costs total approximately $10 million. The lawsuit alleges that Nichols, which is a wholly-owned subsidiary of New Henley Holdings Inc., which is a direct wholly-owned subsidiary of the Company, is responsible, in whole or in part, for contaminating the Property with hazardous substances during Nichols' operations there from the 1940's to the 1970's. Nichols has not engaged in business operations since approximately 1983. New Henley Holdings Inc. acquired the stock of Nichols in 1989, after Nichols was no longer operational. On February 9, 1995, Nichols filed for Chapter 7 bankruptcy protection. On July 19, 1995, the Nichols' bankruptcy plan was approved and the case was closed. On or about October 11, 1995, Svedala served a Third Amended Complaint on The Henley Group, Inc., which was the parent company of New Henley Holdings Inc. and was a direct wholly-owned subsidiary of the Company, alleging that they are liable for the purported acts of Nichols that allegedly resulted, in whole or in part, in Svedala's cleanup costs. Neither the Company, The Henley Group, Inc. nor New Henley Holdings Inc. (collectively, "Henley") has been ordered by any federal, state or local agency to undertake any remediation at the Property. On December 15, 1995, Henley moved to dismiss Svedala's action for lack of jurisdiction and on the basis that Henley is not liable as a successor for Nichols' liability. The Superior Court denied the motion without prejudice and ordered discovery on these defenses. Subsequent thereto The Henley Group, Inc. was merged into the Company. Pursuant to the Superior Court's most recent decision on these issues, discovery will run until August 15, 1997. The Company anticipates renewing the motions on the issues of personal jurisdiction and successor liability before August 15, 1997. As the action is still in the early stages, it is difficult to predict the outcome of the anticipated motion and the case. On March 25, 1997, Whiting Corporation, a Delaware corporation, filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division, naming, among others, WT/HRC Corporation and KREG-OC, Inc., which are direct and indirect subsidiaries of the Company, as defendants in a complaint for declaratory judgment and breach of contract and indemnification. The complaint seeks indemnification for approximately 70 asbestos cases pending in New York and Michigan and two cases pending in Pennsylvania as well as for any similar asbestos claims which may be filed in the future. The complaint states no specified amount of damages. The lawsuit alleges that, pursuant to an Asset Purchase Agreement dated December 30, 1983, the seller, Whiting-Illinois, sold certain assets, properties and businesses of its "Whiting Engineered Products Group" to the plaintiff's predecessor-in-interest, Gask Corporation. Under the Asset Purchase Agreement, the plaintiff contends that seller agreed to indemnify it for personal injury, sickness, death or property damage claims which arise from occurrences prior to the closing date (December 30, 1983). The complaint further alleges that WT/HRC Corporation and KREG-OC, Inc. are the successors- in-interest to and/or the owners of Whiting-Illinois, the seller. The Company's subsidiaries deny any and all liability and will vigorously defend the action. PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. The principal activities of the Company include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; (ii) single and multi-family residential construction in Southern California; and (iii) 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 and international basis, through its offices throughout California, and in Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or investors; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. The Company intends to consider additional real estate acquisition and joint venture opportunities; however, the Company's immediate strategic goals are to (i) obtain new financing for development of the Bolsa Chica Mesa; (ii) successfully defend against the litigation challenging the California Coastal Commission's approval of the Bolsa Chica project; (iii) complete the secondary permitting for development of the Bolsa Chica Mesa; (iv) commence infrastructure construction on the Bolsa Chica Mesa in the fourth quarter of 1997; (v) continue the growth of the Company's commercial development business on a national and international basis; and (vi) complete the Exchange Offer to deleverage the Company's capital structure. There can be no assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals. The Company has been over-leveraged since its December 1989 spin-off from The Henley Group, Inc. when it had $290 million of debt (including $144 million of subordinated debt due to The Henley Group, Inc.) and $268 million of accounts payable and other liabilities against $707 million of assets and stockholders equity of $149 million. This excessive leverage was exacerbated by continual delays between 1990 and 1996 in obtaining the governmental approvals necessary to develop the Company's principal asset, the Bolsa Chica property. At the time of the 1989 spin-off from The Henley Group, Inc., the Company expected that the Bolsa Chica property would be fully entitled and under construction as early as 1991. During the last seven years, the Company has generated approximately $300 million in cash from asset sales. The Company has utilized the majority of the proceeds of such asset sales to repay approximately $131 million of senior debt, to pay various liabilities, and to fund project development and infrastructure costs for its principal residential development projects, including Bolsa Chica. With the California Coastal Commission's approval of the LCP for Bolsa Chica in 1996 and the sale of the Bolsa Chica lowlands in February 1997 to the California State Lands Commission, the Company is proceeding with residential development on the Bolsa Chica Mesa and expects to commence infrastructure construction in the fourth quarter of 1997. While litigation challenging the Coastal Commission's approval of Bolsa Chica remains outstanding, the Company does not expect such litigation to delay the start of infrastructure construction. The Company has not been able to generate significant gross operating margins or cash flows from operating activities due to the nature of its principal assets. The substantial majority of the Company's assets are residential land which has required significant investments before the land could be sold to homebuilders or developed in joint ventures. In addition, the relatively high book value of these assets has resulted in sales approximating break-even. While future land sales are also expected to approximate, or only modestly exceed, break-even, the net cash flow to be generated by residential land development and sales is expected to exceed $200 million in the aggregate over the next three to five years. In addition, the continuing real estate recovery has increased the demand for the Company's commercial real estate development services. Accordingly, the Company expects that these operations will make a greater contribution to gross operating margins over the next several years. Despite the expected greater contribution from commercial development services, total gross margins in 1997 are expected to be less than 1996 due to lower margins on asset sales. Absent a write-down of Bolsa Chica (which would reduce future cost of sales) under Fresh Start Accounting in the event the Recapitalization is implemented through the Prepackaged Plan, the Company does not expect to be profitable until 1999 when it expects to generate income by reinvesting cash to be generated by the Bolsa Chica project in other development activities. 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 based on undiscounted cash flows. The Company's real estate properties are subject to a number of uncertainties which can affect the future values of those assets. These uncertainties include litigation or appeals of regulatory approvals and availability of adequate capital, financing and cash flow. In addition, future values may be adversely affected by 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 California's economy 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. However, over the past year, the number of potential purchasers and capital sources interested in Southern California residential properties appears to have increased. LIQUIDITY AND CAPITAL RESOURCES. The principal assets 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. During the year ended December 31, 1996, the Company borrowed $8.7 million under its construction loan agreement with Nomura Asset Capital Corporation ("Nomura") to fund infrastructure improvements at its Rancho San Pasqual golf and residential community in San Diego county. During the year ended December 31, 1996, the Company also completed sales of 218 residential lots at Rancho San Pasqual to four homebuilders for gross proceeds aggregating approximately $10.1 million. These four homebuilders have rolling options which if exercised would result in the sale of an additional 230 lots over the next eighteen (18) months for aggregate gross proceeds approximating $10.4 million. In June 1996, the Company sold its Eagle Crest Golf Course at Rancho San Pasqual to a nationally recognized owner/ operator of high-end daily fee golf courses and private country clubs for $6.1 million. After paying termination related costs to the operator of the golf course and closing costs, the Company realized net proceeds of approximately $5 million. During 1996, the Company also formed a joint venture to develop the Fairbanks Highlands property. Under the terms of the joint venture agreement, the Company contributed its land to the venture at market value of $7.6 million in exchange for an initial cash payment of $4 million, a preferred return on its $3.6 million capital contribution and a continuing partnership interest in the venture. The Company's partner will manage the day-to-day operations of the venture, provide all construction financing and expects to build the majority of the homes at the site. Under loan agreements with Nomura, the Company utilized 90% of such sales and joint venture proceeds, along with 50% of the net proceeds from Rancho San Pasqual assessment district reimbursements, to prepay approximately $18.2 million of outstanding senior bank debt during the year ended December 31, 1996. As of December 31, 1996, the Company had fully utilized its availability under the construction loan. On February 18, 1997, the Company repaid the remaining balance of its senior bank debt with a portion of the proceeds from the sale of the Bolsa Chica lowlands and the Nomura credit facility was terminated. Historically, sources of capital have included bank lines of credit, specific property financings, asset sales and available internal funds. The Company has reported losses since 1991, with the exception of 1993 results which included gains on dispositions and extinguishment of debt, and expects to report losses in the foreseeable future. However, a significant portion of such losses is attributable to non-cash asset revaluations and non-cash interest expense on the Company's subordinated debentures. The Company will continue to be dependent primarily on real estate asset sales, and cash and cash equivalents on-hand to fund project development costs for Bolsa Chica and general and administrative expenses during 1997. Following completion of the sale of the Bolsa Chica lowlands in February 1997 and utilization of $6.6 million to repay Nomura, the Company's cash balance exceeded $15 million. The Company is also seeking new financing for development of Bolsa Chica and implementing the Recapitalization to deleverage the Company's capital structure. If the Recapitalization is not completed, the Company will continue to incur in excess of $20 million of interest expense on the Debentures per year. However, since the Debentures do not mature until March 2002, it is possible that the Company could continue to operate without facing a liquidity problem until 2002. Nevertheless, the Company believes the current capital structure restricts its ability to maximize asset values and grow its business. If the Company does not receive valid tenders of at least the 90% Requisite Exchange Acceptance, the Company intends to pursue the Recapitalization through the Prepackaged Plan. FINANCIAL CONDITION. DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995. The $2.8 million decrease in cash and cash equivalents primarily reflects spending for Bolsa Chica project development costs, and general and administrative expenses, partially offset by approximately $3.6 million in proceeds from land sales at the Company's resort/residential property in Michigan during the year ended December 31, 1996, as well as other activity presented in the Statement of Cash Flows. Restricted cash of $.2 million at December 31, 1996 reflects funds remaining in escrow accounts for funding certain infrastructure costs at Rancho San Pasqual. The $2.9 million decrease in real estate held for development or sale primarily reflect the sales of residential lots at Rancho San Pasqual, formation of the Fairbanks Highlands joint venture and the disposition of Oceanside Hills, partially offset by construction costs for build-to-suit projects in Signal Hill, California, Phoenix, Arizona and Allen, Texas. The Company has contracted for these buildings to be sold upon completion of construction in the first quarter, third quarter and third quarter, respectively, of 1997. The $4.8 million decrease in operating properties reflects the June 1996 sale of the Eagle Crest Golf Course at Rancho San Pasqual. The $4.3 million increase in other assets primarily reflects the Company's $3.6 million joint venture interest in Fairbanks Highlands. The $6.8 million increase in accounts payable and accrued liabilities primarily reflects accruals related to the sale of the Bolsa Chica lowlands and the Recapitalization, along with contractor payments on build-to-suit projects. The $9.5 million decrease in senior bank debt reflects net prepayments on the Nomura loans, resulting primarily from sales of 218 residential lots and the Eagle Crest Golf Course at Rancho San Pasqual and formation of the Fairbanks Highlands joint venture, partially offset by construction borrowings during the year ended December 31, 1996. The $12.5 million increase in project debt reflects borrowings from banks for the three build-to-suit projects discussed above by subsidiaries of the Company. The Company has entered into purchase and sale agreements for the sale of each building upon completion. The $9.0 million decrease in other liabilities primarily reflects a $4.3 million decrease in accrued pensions and benefits and a $4.2 million decrease related to the disposition of the Company's interest in the Oceanside Hills partnership. See Note 7 to "Audited Historic Financial Statements." DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994. Cash and cash equivalents aggregated $4.9 million at December 31, 1995 compared with $13.0 million at December 31, 1994. The decrease in cash and cash equivalents primarily reflects continued investments in Bolsa Chica and Rancho San Pasqual along with general and administrative expenses, partially offset by proceeds from asset sales, as well as other activity presented in the Statements of Cash Flows. Restricted cash of $2.5 million at December 31, 1995 reflects funds deposited into escrow accounts for funding infrastructure costs at Rancho San Pasqual. Restricted cash of $7.5 million at December 31, 1994 reflects funds on deposit to secure a $25 million letter of credit facility arranged to finance the settlement of the Abex litigation described above. See Notes 6 and 8 to "Audited Historic Financial Statements." The $5.6 million decrease in real estate held for development or sale is primarily due to the sale of all residential property at Wentworth, offset by investments in Rancho San Pasqual infrastructure. The $4.5 million decrease in operating properties, net is primarily due to the sale of the Wentworth marina in December 1995. The $105.8 million decrease in land held for development reflects the revaluation of the Bolsa Chica property resulting primarily from management's decision in the fourth quarter of 1995 (following approval of additional funding by the Ports) to make completing the sale of the lowlands to a public agency a strategic goal of the Company, along with updated estimates of future cash flows for the mesa portion of the project reflecting recent market conditions. The $6.9 million decrease in other assets primarily reflects the March 1995 collection of a note receivable from AV Partnership, the reclassification of a note receivable to real estate held for development or sale upon acquisition of title to industrial property in Ontario, California and the refund of a deposit upon termination of a purchase contract for property adjacent to the Bolsa Chica site. The $23.2 million decrease in accounts payable and accrued liabilities primarily reflects the $22 million settlement of the Abex litigation in February 1995. See Notes 6 and 8 to "Audited Historic Financial Statements." The $16.6 million increase in senior bank debt reflects the borrowing of $15.5 million to fund the Abex settlement and $1.1 million of net borrowings to fund infrastructure construction at Rancho San Pasqual. See Note 8 to "Audited Historic Financial Statements." The $39.4 million decrease in other liabilities primarily reflects the recognition of $25.4 million of deferred tax benefits and a reduction of $10.0 million of other tax liabilities during 1995. RESULTS OF OPERATIONS. The nature of the Company's business is such that individual transactions often cause significant fluctuations in operating results from year to year. 1996 COMPARED WITH 1995. The $10.1 million increase in asset sales revenues from $23.5 million in 1995 to $33.6 million in 1996 and the related $8.6 million increase in costs of asset sales from $21.6 million in 1995 to $30.2 million in 1996 primarily reflect the sale of the residential lots and Eagle Crest Golf Course at Rancho San Pasqual, formation of the Fairbanks Highlands joint venture and sales of resort/ residential lots in Michigan during the year ended December 31, 1996. These increases were partially offset by the absence in 1996 of Wentworth residential sales as a result of the sale of the entire Wentworth project in the fourth quarter of 1995. The $1.5 million improvement in gross margin on asset sales primarily reflects gains on sales of Michigan lots, partially offset by the absence in 1996 of the gains on sales of the Coronado wharfage rights and leasehold interest in 1995. The $.7 million and $1.0 million increases in revenues and gross margin, respectively, from operations primarily reflect higher revenues in the Company's commercial development business during the year ended December 31, 1996, partially offset by the absence of Wentworth marina revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June 1996. The $1.9 million increase in general and administrative expenses primarily reflects costs incurred in connection with the Recapitalization and the sale of the Bolsa Chica lowlands. The $2.3 million increase in interest expense from $22.6 million in 1995 to $24.9 million in 1996 principally reflects compounded noncash interest on the Company's Senior Debentures and Subordinated Debentures. The $4.2 million decrease in other expense, net primarily reflects the absence in 1996 of a $3.0 million reserve recorded in 1995 related to the Company's investment in AV Partnership, and a decrease in accrued pensions and benefits approximating $4.3 million, primarily due to termination of certain group annuity contracts for the pension plan of a discontinued operation, partially offset by a $1.5 million reserve for environmental clean up costs for the Bolsa Chica lowlands. The benefit for income taxes for the year ended December 31, 1996 has been offset by a corresponding valuation allowance. 1995 COMPARED WITH 1994. The $12.6 million increase in revenues from $21.4 in 1994 to $34.0 in 1995 and the increase in cost of sales from $20.2 million in 1994 to $31.9 million in 1995 was primarily due to the sale of residential property and the marina at Wentworth, along with the sale of industrial property in Murietta, California, and the sale of wharfage rights in Coronado, California. The write-down of real estate properties of $121.1 million in 1995 reflects the valuation adjustments recorded to reflect current estimates of net realizable value for the Company's Bolsa Chica property as well as the Wentworth project and the golf course at Rancho San Pasqual. See Note 5 to "Audited Historic Financial Statements." The change in other expense (income), net from $2.1 million of expense in 1994 to $3.1 million of expense for 1995 primarily reflects a loss reserve of approximately $3 million related to the Company's investment in AV Partnership. See Note 3 to "Audited Historic Financial Statements." The improvement in provision (benefit) for income taxes of $25.2 million primarily reflects the benefit related to the write-down of real estate properties. See Note 8 to "Audited Historic Financial Statements." 1994 COMPARED WITH 1993. The $4.7 million increase in revenues from $16.7 million in 1993 to $21.4 million in 1994 and the increase in cost of sales from $16.3 million in 1993 to $20.2 million in 1994 were both principally related to operations of the domestic real estate development business acquired from The Koll Company in September 1993, as well as residential home sales and the golf course sale at the Company's Wentworth By The Sea project during 1994, offset by the absence in 1994 of the Company's November 1993 sale of two office buildings in La Jolla, California. The decrease in interest expense from $24.4 million in 1993 to $19.4 million in 1994 reflects both the reductions in outstanding subordinated debt in connection with the Libra transaction in December 1993 and prepayments of senior bank debt principally during 1993. See Note 6 to "Audited Historic Financial Statements." The change in other expense (income), net from $2.4 million of income in 1993 to $2.1 million of expense for 1994 primarily reflects nonrecurring income of $3.0 million received in August 1993 in connection with the termination of a put option agreement with Abex a former subsidiary of The Henley Group, Inc., and a $2.0 million insurance reimbursement received in February 1993, offset by $.7 million of carrying costs related to the two La Jolla office buildings sold in November 1993. The gain on disposition of discontinued operations, net of income taxes in 1994 reflects the receipt of cash for the February 1994 termination of the contingent payment provision of a December 1993 agreement with Libra whereby the Company exchanged its Lake Superior Land Company subsidiary for approximately $42.4 million face amount of the Company's Senior Debentures held by Libra and other consideration. See Note 3 to "Audited Historic Financial Statements." SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Certain of the foregoing information is forward looking in nature and involves risks and uncertainties that could significantly impact the ability of the Company to achieve its currently anticipated goals and objectives. These risks and uncertainties include, but are not limited to, litigation or appeals of regulatory approvals (including pending litigation challenging the California Coastal Commission's approval of the Bolsa Chica project) and availability of adequate capital, financing and cash flow. In addition, future values may be adversely affected by increases in property taxes, increases in the costs of labor and materials and other development 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. PART III ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 31, 1997, the name and address of each person believed to be a beneficial interest holder of more than 5% of the Common Stock, the number of shares beneficially owned and the percentage so owned. Except as set forth below, management knows of no person who, as of March 31, 1997, owned beneficially more than 5% of the Company's outstanding Class A Common Stock.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF TITLE OF CLASS BENEFICIAL INTEREST HOLDER BENEFICIAL OWNERSHIP CLASS(1) - ------------------------------------- -------------------------------------- ----------------------- ------------- Class A Common Stock................. Bridge Partners, L.P. 17,518,200 shares(2) 28.8(2) 115 East Putnam Avenue Greenwich, CT 06830 Class A Common Stock................. Wheelabrator Technologies Inc. 5,097,207 shares(3) 9.8(3) Liberty Lane Hampton, NH 03842 Class A Common Stock................. Asher B. Edelman 3,477,700 shares(4) 6.6(4) 717 Fifth Avenue New York, NY 10022 Class A Common Stock................. Merrill Lynch & Co., Inc. 2,851,692 shares(5) 5.6(5) World Financial Center North Tower 250 Vesey Street New York, NY 10281
- ------------------------ (1) These percentages are calculated assuming the conversion of all securities convertible within 60 days into the Company's Class A Common Stock which are held by the individual beneficial interest holder of more than 5% listed in the table above, but not those held by others. (2) According to Schedule 13D dated July 14, 1995 filed jointly with the Securities and Exchange Commission (the "SEC") by Mr. John W. Gildea ("Gildea"), Carson Street Partners, Inc. ("Carson"), and Bridge Partners, L.P. ("Bridge"). Carson is the sole general partner of Bridge and has the power to vote and dispose of shares. Gildea is the Chairman of the Board of Directors, Chief Executive Officer, President and controlling stockholder of Carson. As a result, Gildea and Carson may be deemed to be the indirect beneficial interest holders of the shares held by Bridge, a partnership whose general partner is controlled by Gildea. Gildea disclosed that through Bridge and Carson, as of that date, he was the beneficial interest holder of 17,518,200 shares of Class A Common Stock, as to which he had sole voting and dispositive power. This number includes 11,878,800 shares of Preferred Stock which shares are generally nonvoting and are currently convertible into shares of the Class A Common Stock on a share-for-share basis. (3) According to the Company's records, including shares held by wholly-owned subsidiaries. This number includes 3,339,198 shares of Preferred Stock which shares are generally nonvoting and are currently convertible into shares of the Class A Common Stock on a share-for-share basis. (4) According to Schedule 13D (Amendment No. 1) dated December 5, 1996 filed jointly with the SEC by Mr. Asher B. Edelman; Edelman Value Partners, L.P.; Edelman Value Fund, Ltd.; and A.B. Edelman Management Company, Inc. (collectively, "Edelman"). Edelman is the beneficial owner of 3,477,700 shares of Preferred Stock which shares are generally non-voting and are currently convertible into shares of the Class A Common Stock on a share-for-share basis. (5) According to Schedule 13G dated February 11, 1994 filed jointly with the SEC by Merrill Lynch & Co., Inc. and Merrill Lynch Pierce, Fenner & Smith Incorporated (collectively "Merrill"). Merrill beneficially owns an aggregate of 2,851,692 shares, including 957,246 shares of Class A Common Stock and 1,894,446 shares of Preferred stock which shares are generally non-voting and are currently convertible into shares of the Class A Common Stock on a share-for-share basis. Information about the beneficial ownership of the Common Stock as of December 1, 1996 by each nominee, director, executive officer named in the Summary Compensation Table, and all directors and executive officers of the Company as a group is set forth below:
SHARES OF CLASS A PERCENT OF NAME OF BENEFICIAL INTEREST HOLDER COMMON STOCK(1) CLASS(2) - --------------------------------------------------------------- ----------------- ------------- Donald M. Koll(3).............................................. 2,436,701 4.7 Ray Wirta(4)................................................... 2,040,000 4.0 Harold A. Ellis, Jr.(5)........................................ 293,263 * Paul C. Hegness(5)............................................. 360,571 * J. Thomas Talbot(5)............................................ 252,000 * Marco F. Vitulli(5)............................................ 371,000 * Richard Ortwein(3)............................................. 2,407,340 4.7 Raymond J. Pacini(6)........................................... 2,223,434 4.3 Directors and Executive Officers as a group (8 persons including the above named).................................... 10,384,309 17.6
- ------------------------ (1) Except as otherwise indicated in the notes below, the persons indicated have sole voting and investment power with respect to shares listed. In addition to the specific shares indicated in the following footnotes, this column includes shares held directly and shares subject to stock options which are currently exercisable. (2) These percentages are calculated assuming the conversion of all securities convertible within 60 days into Class A Common Stock, which are held by the executive officer or director listed above but not those held by others. Asterisks indicate beneficial ownership of 1% or less of the class. (3) Includes vested options to purchase 1,200,000 shares each of Class A Common Stock and Series A Convertible Preferred Stock granted pursuant to the Company's 1993 Stock Option/Stock Issuance Plan and which options are subject to certain restrictions on disposition. (4) Includes vested options to purchase 1,000,000 shares each of Class A Common Stock and Preferred Stock granted pursuant to the Company's 1993 Stock Option/Stock Issuance Plan and which options are subject to certain restrictions on disposition. (5) Includes 2,000 shares of Common Stock granted pursuant to the Company's Restricted Stock Plan for Non-Employee Directors, and vested options to purchase 125,000 shares each of Class A Common Stock and Preferred Stock granted pursuant to the Company's Automatic Option Grant Program which shares and options are subject to certain restrictions on disposition. (6) Includes vested options to purchase 1,100,000 shares each of Class A Common Stock and Series A Convertible Preferred Stock granted pursuant to the Company's 1993 Stock Option/Stock Issuance Plan which options are subject to certain restrictions on disposition. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS EMPLOYMENT AND CONSULTING AGREEMENTS. In April of 1997, the Company entered into employment agreements with each of Messrs. Koll, Ortwein and Pacini which provide for employment terms of three (3) years. The Company also entered into a consulting agreement with Mr. Wirta. Under the employment agreements each of Messrs. Koll, Ortwein and Pacini has agreed to serve in their current capacities as the Company's Chief Executive Officer, President and Chief Financial Officer, respectively, at their current base salaries. The employment agreements provide that if an officer is terminated without cause (as defined) during such three (3) year period, the officer shall receive a severance payment equal to his current annual salary for twelve (12) months plus the amount of his most recent annual bonus for the prior fiscal year, and any unvested stock options shall immediately become 100% vested. The employment agreements also provide for bonuses payable upon completion of the Recapitalization. The consulting agreement with Mr. Wirta calls for him to provide services for an annual fee of $50,000. The consulting agreement is subject to termination upon 30 days' prior notice. If the agreement is terminated without cause (as defined), Mr. Wirta is entitled to a $50,000 severance payment and immediate vesting of any unvested stock options. Given the significance to the Company of completing the Recapitalization, the Compensation Committee has approved bonuses of $275,000, $125,000, $100,000, and $250,000 payable upon completion of the Recapitalization to Messrs. Koll, Wirta, Ortwein and Pacini, respectively. These bonuses are intended to (i) retain these individuals during the pendency of the Recapitalization; (ii) incentivize the completion of the Recapitalization on a timely basis; and (iii) to reward these individuals for their substantial efforts during the past several years, which efforts have been necessary prerequisites to completing the Recapitalization. In the event the Company pursues a prepackaged plan of bankruptcy in order to effect the Recapitalization, as part of such prepackaged plan confirmation process, the Company would seek approval of these employment and consulting agreements and the bonuses pursuant to Section 365 of the Bankruptcy Code. To the extent applicable, the Company would also seek approval of the bonuses pursuant to Section 1129(a)(4) of the Bankruptcy Code. LICENSE AND NON-COMPETITION AGREEMENTS. A wholly-owned subsidiary of the Company has amended certain agreements with Donald M. Koll, the Chairman of the Board and Chief Executive Officer of the Company, which agreements include a license to use the "Koll" name and which contain certain non-compete provisions. Pursuant to such amendments, upon completion of the Recapitalization, and the occurrence of any one of the following (i) the resignation of Mr. Koll as an officer and director of the Company after the first anniversary of the Recapitalization, (ii) the resignation of Mr. Koll as an officer and director of the Company at any time following the completion of the Recapitalization in the event the Board duly resolves to authorize any sale of all or substantially all of the properties or interests in the properties of the Company, any merger or consolidation of the Company with any other entity, other than a merger or consolidation in which the Company will control the merged or consolidated entity, any dissolution of the Company, any cessation of a present operation of the Company or any other extraordinary corporate transaction involving properties or interests in property of the Company, (iii) the removal of Mr. Koll from his positions as an officer or director of the Company, or (iv) the failure to elect Mr. Koll to such offices at any future meeting of stockholders held after completion of the Recapitalization, Mr. Koll will be released from currently existing covenants not to compete with the Company, the Company and its subsidiaries will be obligated to change their respective names to delete all usage of the name "Koll". These agreements have been amended (i) in order to delete an event of default which would occur under the License Agreement if it becomes necessary to complete the Recapitalization through a prepackaged plan of bankruptcy, and (ii) in order to retain Mr. Koll following the Recapitalization in light of the changed circumstances with respect to corporate goverance and control of the Company which will result from the completion of the Recapitalization, which circumstances did not exist at the time these agreements were originally negotiated and executed. Information in answer to this item also appears in Note 10 to the Financial Statements included in this Annual Report. PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: The following financial statements and supplementary data of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
PAGE ---- Index to Financial Statements and Supplementary Data...................... F-1 Independent Auditors' Report.............................................. F-2 Balance Sheets as of December 31, 1995 and 1996........................... F-3 Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996..................................................................... F-4 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996..................................................................... F-5 Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1996........................................................ F-6 Notes to Financial Statements............................................. F-7
(2) Financial Statement Schedules: All schedules have been omitted since they are not applicable, not required, or the information is included in the financial statements or notes thereto. (3) Listing of Exhibits: 3.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.01 to the Registrant's Annual Report on Form 10-K for 1992. 3.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for 1992. 4.01 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.01). 4.02 Amended By-Laws of the Registrant (filed as Exhibit 3.02). 4.03 Indenture dated as of July 15, 1992 for 12% Senior Subordinated Pay-In-Kind Debentures Due March 15, 2002 ("Senior Subordinated Debentures"), issued by the Registrant in the aggregate principal amount of $127,550,000, incorporated by reference to Exhibit 4.08 to the Registrant's Annual Report on Form 10-K for 1992. 4.04 Indenture dated as of July 15, 1992 for 12% Subordinated Pay-In-Kind Debentures Due March 15, 2002, ("Subordinated Debentures"), issued by the Registrant in the aggregate principal amount of $75,688,000, incorporated by reference to Exhibit 4.09 to the Registrant's Annual Report on Form 10-K for 1992. 4.05 Form of Senior Subordinated Debentures (included in Exhibit 4.03). 4.06 Form of Subordinated Debentures (included in Exhibit 4.04). 10.01 Tax Sharing Agreement dated as of December 18, 1989, between the Registrant and The Henley Group, Inc. ("Henley Group"), incorporated by reference to Exhibit 10.03 to the Registrant's Annual Report on Form 10-K for 1989. 10.02 Tax Sharing Agreement dated as of December 15, 1988, between Wheelabrator Technologies, Inc. (formerly The Wheelabrator Group, Inc.) ("WTI") and the Registrant ("WTI Tax Sharing Agreement"), incorporated by reference to Exhibit 10.02 to Amendment No. 3 on Form 8 to the Registrant's Registration Statement on Form 10. 10.02A Amendment No. 1 to WTI Tax Sharing Agreement dated February 14, 1994, incorporated by reference to Exhibit 10.02A to the Registrant's Annual Report on Form 10-K for 1993. 10.03 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.03A to the Registrant's Annual Report on Form 10-K for 1993. 10.04 Deferred Compensation Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form 10. 10.05 Retirement Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form 10.
10.06 Retirement Plan of the Registrant, incorporated by reference to Exhibit 10.16 to Amendment No. 3 on Form 8 to the Registrant's Registration Statement on Form 10. 10.06A Amendment to Retirement Plan of the Registrant dated December 8, 1993, incorporated by reference to Exhibit 10.07A to the Registrant's Annual Report on Form 10-K for 1993. 10.07 The Koll Company 401(k) Plus Plan and Trust Agreement dated July 1, 1989 under which the Registrant elected to participate as an employer effective as of October 1, 1993, incorporated by reference to Exhibit 10.08 to the Registrant's Annual Report on Form 10-K for 1993. 10.08 Restated Environmental Matters Agreement dated as of July 28, 1989, among a predecessor to the Registrant, Allied-Signal, New Hampshire Oak, Fisher Scientific Group Inc. ("Fisher Group") and the Registrant, incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989 as amended by the Assignment, Assumption and Indemnification Agreement dated as of December 21, 1989, among the Registrant, Henley Group, New Hampshire Oak, Fisher Group, WTI and Allied-Signal, incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for 1989. 10.09 Environmental Expenditures Agreement dated as of July 28, 1989, among the Registrant, WTI, New Hampshire Oak and Fisher Group, incorporated by reference to Exhibit 10(b) to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1989 as amended by Assignment and Assumption Agreement dated as of January 1, 1990, among the Registrant, Henley Group, New Hampshire Oak, Fisher Group, WTI and Henley Holdings, Inc., incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for 1989. 10.10 Transition Agreement dated as of July 16, 1992 ("Transition Agreement"), among the Registrant, Henley Group and Abex Inc., incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for 1992. 10.10A Amendment to Transition Agreement dated April 1, 1993, incorporated by reference to Exhibit 10.12A to the Registrant's Annual Report on Form 10-K for 1993. 10.11 Tax Sharing Agreement dated as of June 10, 1992, between Henley Group and Abex Inc., incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for 1992. 10.12 Conditional Guarantee dated as of July 9, 1992, among the Registrant, Abex Inc., Henley Group and Allied-Signal, incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for 1992. 10.13 Reimbursement Agreement dated as of July 16, 1992, among the Registrant, Henley Group and Abex Inc., incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for 1992. 10.14 Pension Agreement dated as of July 16, 1992, among the Registrant, Henley Group and Abex Inc., incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for 1992. 10.15 Stock Purchase Agreement ("Stock Agreement") dated December 17, 1993 between the Registrant, certain of its subsidiaries and Libra Invest & Trade Ltd. ("Libra") incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for 1993. 10.15A Amendment No. 1 to the Stock Agreement dated as of February 15, 1994, incorporated by reference to Exhibit 10.19A to the Registrant's Annual Report on Form 10-K for 1993. 10.16 Exchange Agreement dated December 17, 1993, between the Registrant and Libra, incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for 1993. 10.17 Financing and Accounting Services Agreement dated as of September 30, 1993 between the Registrant and The Koll Company, incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for 1993.
10.18 Management Information Systems and Human Resources Services Agreement dated as of September 30, 1993 between the Registrant and Koll Management Services, Inc., incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for 1993. 10.19 License Agreement dated September 30, 1993 between the Registrant, The Koll Company and Mr. Donald M. Koll, incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.20 Sublease Agreement dated September 30, 1993 between the Registrant and the Koll Company, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for 1993. 10.21 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 therewith, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 10.22 Agreement of Limited Partnership 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 therewith, incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.23 Agreement Respecting Vesting of Rights 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 therewith, incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.24 Promissory Note Agreement dated April 29, 1995 between the Registrant and AV Partnership, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.25 Koll Asia Pacific Development Services Amended and Restated Pacific Rim Joint Business Opportunity Agreement, dated as of May 24, 1996, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.26 Bargain Purchase and Sale Agreement and Escrow Instructions dated as February 14, 1997 between a subsidiary of the Registrant and the State of California, acting by and through the State Lands Commission.* 21.01 Subsidiaries of the Registrant.* 27.01 Financial Data Schedule.*
- ------------------------ * Filed herewith. (b) Reports on Form 8-K: On November 26, 1996, the Company filed a report on Form 8-K reporting, under Item 5 thereof, that it had been informed by the representatives of certain holders of its outstanding senior subordinated debentures and its subordinated debentures that they intended to support the Company's proposed Recapitalization. The report also included a disclosure of certain confidential financial and other information received by the representatives of the holders of the Company's Debentures. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE --------- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Independent Auditor's Report............................................................................. F-2 Financial Statements..................................................................................... F-3 Notes to Financial Statements............................................................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of Koll Real Estate Group, Inc.: We have audited the accompanying balance sheets of Koll Real Estate Group, Inc. as of December 31, 1996 and 1995, and the related statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Koll Real Estate Group, Inc. at 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. The Company carries its real estate properties at cost, net of impairment losses. As discussed in Note 2, the estimation process is inherently uncertain and relies to a considerable extent on future events and market conditions. As discussed in Note 5, the development of the Company's Bolsa Chica project is dependent upon various governmental approvals and various economic factors. Accordingly, the amount ultimately realized from such project may differ materially from the current estimate of fair value. Deloitte & Touche LLP Costa Mesa, California February 18, 1997 F-2 KOLL REAL ESTATE GROUP, INC. BALANCE SHEETS
1995 1996 --------- --------- DECEMBER 31, -------------------- (IN MILLIONS) ASSETS Cash and cash equivalents...................................................................... $ 4.9 $ 2.1 Restricted cash................................................................................ 2.5 .2 Real estate held for development or sale....................................................... 28.1 25.2 Operating properties, net...................................................................... 4.8 -- Land held for development...................................................................... 220.0 223.5 Other assets................................................................................... 16.9 21.2 --------- --------- $ 277.2 $ 272.2 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities................................................... $ 4.9 $ 11.7 Senior bank debt........................................................................... 16.6 7.1 Project debt............................................................................... -- 12.5 Subordinated debentures.................................................................... 173.2 195.9 Other liabilities.......................................................................... 52.9 43.9 --------- --------- Total liabilities........................................................................ 247.6 271.1 --------- --------- Commitments and Contingencies Stockholders' equity: Series A (convertible redeemable nonvoting) Preferred Stock--$.01 par value; 42,505,504 shares authorized; 40,290,735 and 38,886,626 shares outstanding, respectively............ .4 .4 Class A (voting) Common Stock--$.05 par value; 625,000,000 shares authorized; 47,534,472 and 48,938,543 shares outstanding, respectively.......................................... 2.4 2.4 Class B (convertible nonvoting) Common Stock--$.05 par value; 25,000,000 shares authorized and no shares outstanding................................................................ -- -- Capital in excess of par value............................................................. 229.9 229.2 Deferred proceeds from stock issuance...................................................... (1.1) (.4) Minimum pension liability.................................................................. (1.0) (.6) Accumulated deficit........................................................................ (201.0) (229.9) --------- --------- Total stockholders' equity............................................................... 29.6 1.1 --------- --------- $ 277.2 $ 272.2 --------- --------- --------- ---------
See the accompanying notes to financial statements. F-3 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenues: Asset sales........................................................................ $ 11.1 $ 23.5 $ 33.6 Operations......................................................................... 10.3 10.5 11.2 --------- --------- --------- 21.4 34.0 44.8 --------- --------- --------- Costs of: Asset sales........................................................................ 10.7 21.6 30.2 Operations......................................................................... 9.5 10.3 10.0 --------- --------- --------- 20.2 31.9 40.2 --------- --------- --------- Gross operating margin............................................................... 1.2 2.1 4.6 General and administrative expenses.................................................. 8.7 7.7 9.6 Interest expense..................................................................... 19.4 22.6 24.9 Write-down of real estate properties................................................. -- 121.1 -- Other expense (income), net.......................................................... 2.1 3.1 (1.1) --------- --------- --------- Loss from continuing operations before income taxes.................................. (29.0) (152.4) (28.8) Provision (benefit) for income taxes................................................. (10.3) (35.5) .1 --------- --------- --------- Loss from continuing operations...................................................... (18.7) (116.9) (28.9) Discontinued operations: Gain on disposition, net of income taxes of $.3.................................... .7 -- -- --------- --------- --------- Net loss............................................................................. $ (18.0) $ (116.9) $ (28.9) --------- --------- --------- --------- --------- --------- Earnings (loss) per common share: Continuing operations.............................................................. $ (0.43) $ (2.48) $ (.60) Discontinued operations............................................................ 0.02 -- -- --------- --------- --------- Net loss per common share............................................................ $ (0.41) $ (2.48) $ (.60) --------- --------- --------- --------- --------- ---------
See the accompanying notes to financial statements. F-4 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- (IN MILLIONS) Cash flows from operating activities: Net loss........................................................................... $ (18.0) $ (116.9) $ (28.9) Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization.................................................... 1.2 1.2 1.2 Non-cash interest expense........................................................ 18.0 20.5 23.2 Write-down of real estate properties............................................. -- 121.1 -- Gains on asset sales............................................................. (.4) (1.9) (3.4) Gains on dispositions of discontinued operations................................. (.7) -- -- Proceeds from asset sales, net................................................... 10.5 22.5 31.5 Investments in real estate held for development or sale.......................... (6.1) (18.2) (20.4) Investment in land held for development.......................................... (9.9) (7.8) (3.5) Decrease (increase) in other assets.............................................. (.6) 11.9 (5.5) Decrease in accounts payable, accrued and other liabilities...................... (9.7) (61.8) (2.7) Other, net....................................................................... (.1) -- .4 --------- --------- --------- Cash used by operating activities.............................................. (15.8) (29.4) (8.1) --------- --------- --------- Cash flows from investing activities: Sale of short-term investments..................................................... 21.7 -- -- Proceeds from disposition of discontinued operation................................ 1.0 -- -- Acquisitions....................................................................... (1.2) (.3) -- --------- --------- --------- Cash provided (used) by investing activities................................... 21.5 (.3) -- --------- --------- --------- Cash flows from financing activities: Borrowings of senior bank debt..................................................... -- 21.6 8.7 Repayments of senior bank debt..................................................... (7.0) (5.0) (18.2) Borrowings of project debt......................................................... -- -- 12.5 Use of restricted cash............................................................. -- 10.0 2.3 Deposits of restricted cash........................................................ (7.5) (5.0) -- --------- --------- --------- Cash provided (used) by financing activities................................... (14.5) 21.6 5.3 --------- --------- --------- Net decrease in cash and cash equivalents............................................ (8.8) (8.1) (2.8) Cash and cash equivalents--beginning of year......................................... 21.8 13.0 4.9 --------- --------- --------- Cash and cash equivalents--end of year............................................... $ 13.0 $ 4.9 $ 2.1 --------- --------- --------- --------- --------- ---------
See the accompanying notes to financial statements. F-5 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996
DEFERRED CAPITAL PROCEEDS IN EXCESS FROM MINIMUM PREFERRED COMMON OF PAR STOCK PENSION ACCUMULATED STOCK STOCK VALUE ISSUANCE LIABILITY DEFICIT TOTAL -------- -------- --------- --------- --------- ------------- ------ (IN MILLIONS) Balance January 1, 1994............ $ .4 $ 2.2 $ 230.0 $ (1.5) $ (1.5) $ (66.1) $163.5 Net Loss......................... -- -- -- -- -- (18.0) (18.0) Minimum pension liability........ -- -- -- -- (.5) -- (.5) Valuation adjustment to deferred proceeds from stock issuance... -- -- .1 (.1) -- -- -- Issuance of stock related to acquisition.................... -- .1 .4 -- -- -- .5 --- --- --------- --------- --------- ------------- ------ Balance December 31, 1994.......... .4 2.3 230.5 (1.6) (2.0) (84.1) 145.5 Net loss......................... -- -- -- -- -- (116.9) (116.9) Minimum pension liability........ -- -- -- -- 1.0 -- 1.0 Valuation adjustment to deferred proceeds from stock issuance... -- -- (.5) .5 -- -- -- Conversion of preferred to common......................... -- .1 (.1) -- -- -- -- --- --- --------- --------- --------- ------------- ------ Balance December 31, 1995.......... .4 2.4 229.9 (1.1) (1.0) (201.0) 29.6 Net loss......................... -- -- -- -- -- (28.9) (28.9) Minimum pension liability........ -- -- -- -- .4 -- .4 Valuation adjustment to deferred proceeds from stock issuance... -- -- (.7) .7 -- -- -- --- --- --------- --------- --------- ------------- ------ Balance December 31, 1996.......... $ .4 $ 2.4 $ 229.2 $ (.4) $ (.6) $ (229.9) $ 1.1 --- --- --------- --------- --------- ------------- ------ --- --- --------- --------- --------- ------------- ------
See the accompanying notes to financial statements. F-6 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1--FORMATION AND BASIS OF PRESENTATION The principal activities of Koll Real Estate Group, Inc. and its consolidated subsidiaries (the "Company", formerly known as The Bolsa Chica Company and Henley Properties Inc.) include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; (ii) single and multi-family residential construction in Southern California; and (iii) providing commercial, industrial, retail and residential real estate 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 and international basis, through its offices throughout California, and in Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or investors; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. On December 31, 1989, The Henley Group, Inc. separated its business into two public companies through a distribution to its Class A and Class B common stockholders of all of the common stock of a newly formed Delaware corporation to which The Henley Group, Inc. had contributed its non-real estate development operations, assets and related liabilities. The new company was named The Henley Group, Inc. ("Henley Group") immediately following the distribution. The remaining company was renamed Henley Properties Inc. ("Henley Properties") and consisted of the real estate development business and assets of Henley Group, including its subsidiary Signal Landmark. On July 16, 1992, a subsidiary of Henley Properties merged with and into Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of Henley Properties. In the Merger, Henley Properties, through its Henley Group subsidiary, received net assets having a book value as of July 16, 1992 of approximately $45.3 million, consisting of approximately $103.6 million of assets, including $58.3 million of cash and a 44% interest in Deltec Panamerica S.A. ("Deltec"), and $58.3 million of liabilities. In connection with the Merger, Henley Properties was renamed The Bolsa Chica Company. On September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the domestic real estate development business and related assets of The Koll Company. In connection with this acquisition, The Bolsa Chica Company was renamed Koll Real Estate Group, Inc. The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts have been reclassified to conform with the current year presentation. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. REAL ESTATE Real estate held for development and land held for development (real estate properties) are carried at cost net of impairment losses based on undiscounted cash flows. Real estate held for sale is carried at cost, net of impairment losses and selling costs based on undiscounted cash flows. The estimation process involved in the determination of fair value is inherently uncertain since it requires estimates as to future F-7 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) events and market conditions. Such estimation process assumes the Company's ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market, environmental and political conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the ultimate fair values of the Company's real estate properties are dependent upon future economic and market conditions, the availability of financing, and the resolution of political, environmental and other related issues. In March 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"), which requires an impaired asset (real property or intangible) to be written down to fair value. If an impairment occurs, the fair value of an asset for purposes of SFAS 121 is deemed to be the amount a willing buyer would pay a willing seller for such asset in a current transaction. As required, the Company adopted SFAS 121 during the quarter ended March 31, 1996 which did not have any effect on its financial statements. The Company is currently implementing an Exchange Offer to deleverage its capital structure as discussed in Note 6. Under the Exchange Offer as proposed, no revaluation of real estate properties would be required based on undiscounted cash flows. If an alternative recapitalization is implemented by the Company pursuant to Court confirmation of a Prepackaged Plan of reorganization, the Company would apply the principles required by the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh Start Accounting") and the carrying value of real estate properties would be adjusted to fair value. The cost of sales of multi-unit projects is generally computed using the relative sales value method, with direct construction costs and property taxes accumulated by phase, using the specific identification method. Interest cost is capitalized to real estate projects during their development and construction period. Operating properties are generally depreciated utilizing the straight-line method over estimated lives ranging principally from 5 to 7 years. Accumulated depreciation amounted to $1.1 million and $1.0 million at December 31, 1995 and 1996, respectively. INTANGIBLE ASSETS Goodwill, which represents the difference between the purchase price of a business acquired in 1993 and the related fair value of net assets acquired, is amortized on a straight-line basis over 15 years. Goodwill of $7.9 million and $7.3 million as of December 31, 1995, and 1996, respectively, is included in other assets. The carrying value of goodwill is reviewed periodically based on projected cash flows to be received from related operations over the remaining amortization period of the goodwill. If such projected cash flows were less than the carrying value of the goodwill, the difference would be charged to operations. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company accounted for the cost of post-retirement benefits other than pensions, which are primarily health care related, during each employee's active working career under a plan which was frozen in 1993. As of December 31, 1995, and 1996, the accrued unfunded costs totaled $1.3 million and $.9 million, respectively. F-8 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes on the liability method. Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect in the years in which these differences are expected to reverse. RECOGNITION OF REVENUES Sales are recorded using the full accrual method when title to the real estate sold is passed to the buyer and the buyer has made an adequate financial commitment. When it is determined that the earning process is not complete, income is deferred using the installment, cost recovery or percentage of completion methods of accounting. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") which required the Company to adopt disclosure provisions for stock-based compensation effective January 1, 1996. The standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. This standard encourages rather than requires adoption of the fair value method of accounting for employee stock-based transactions. Companies are permitted to continue to account for such transactions under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," but will be required to disclose in a note to the financial statements pro forma net income and net income per share as if the new method of accounting had been applied. The Company has elected to continue to apply APB Opinion No. 25 in its financial statements and no pro forma disclosure was required as of and for the year ended December 31, 1996. EARNINGS PER COMMON SHARE The weighted average numbers of common shares outstanding for the years ended December 31, 1994, 1995 and 1996 were 43.8 million, 47.1 million, and 48.3 million, respectively. The Series A Preferred Stock, as well as outstanding stock options are not included in the loss per share calculation for each year because the effect is antidilutive. The earnings per share calculations include the effect of 2.0 million shares of Class A Common Stock issued on November 9, 1994, in connection with the acquisition of the Kathryn G. Thompson Company (Note 3). The 1994, 1995 and 1996 earnings per share calculations reflect the conversion of 1.2 million shares, an additional 1.0 million shares, and an additional 1.4 million shares, respectively, of Series A Preferred Stock to an equal number of shares of Class A Common Stock. NOTE 3--ACQUISITIONS AND DISPOSITIONS In November 1994, the Company acquired the stock of Kathryn G. Thompson Company ("KGTC") and related assets. The principal activities of the acquired business are residential real estate development and homebuilding, focusing on the entry-level and first time move-up market segments. The principal project of the acquired business is a 49% general partnership interest in a 230-acre project planned for approximately 1,200 residential units in Aliso Viejo in southern Orange County ("AV Partnership"). In connection with the acquisition, the Company paid $1.2 million in cash and a $.5 million note, issued 2 F-9 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED) million shares of Class A Common Stock and warrants to purchase an additional 2 million shares. The Company guaranteed approximately $4.8 million of capital contribution notes related to the Aliso Viejo partnership interest, which notes are primarily payable out of positive net cash flow to be generated by the partnership interest and are not due until the earlier of the completion of the project or April 1999. In addition, in November 1994, Ms. Kathryn G. Thompson, who was appointed as a director of the Company, entered into a covenant not to compete with the Company with respect to real estate development, subject to certain limited exceptions. Ms. Thompson resigned as an officer and director of the Company effective November 1, 1996. In conjunction with her resignation, the covenant of Ms. Thompson was released. Summarized financial information of AV Partnership is presented below at December 31, 1995 and 1996 and for the years then ended (in millions):
1995 1996 ----------- ----------- Balance Sheet Data: Total assets........................................................ $ 111.9 $ 102.5 Total project debt and other liabilities............................ 107.9 110.5 ----------- ----------- Partners' capital................................................... $ 4.0 $ (8.0) ----------- ----------- ----------- ----------- Statement of Operations Data: Revenues............................................................ $ -- $ 44.3 Expenses............................................................ (4.1) (55.3) ----------- ----------- Net loss............................................................ $ (4.1) $ (11.0) ----------- ----------- ----------- -----------
The Company uses the equity method to account for its investment in AV Partnership and accordingly, the statement of operations includes a $.1 million loss for the period from the acquisition date through December 31, 1994, and losses of $2.0 million and $1.2 million, respectively, for the years ended December 31, 1995 and 1996. The loss recorded in 1996 reflects accrued interest on guaranteed capital contribution notes only, as the Company's net investment is $0 and the recorded liability reflects the Company's guaranty of capital contribution notes due to the partnership discussed below. Due to a significant shortfall in sales during 1995 versus forecast, the financial structure of the partnership and the significant amount of participating mortgages with preference to the Company's equity interest, the Company does not expect to receive a financial return from this partnership and in 1995 reserved for its guaranty of $4.8 million of capital contribution notes. In 1996, certain information came to the Company's attention concerning the enforceability of the Company's guarantee of $4.8 million of capital contribution notes. While the Company has reserved for this guarantee, the Company intends to dispute the enforceability of the guarantee. A reserve relating to the guaranteed capital contribution notes, including accrued interest, for this partnership of $4.8 million and $6.0 million at December 31, 1995 and 1996, respectively, is included in other liabilities. In December 1993, the Company completed a transaction with Libra whereby it exchanged the Company's Lake Superior Land Company subsidiary for approximately $42.4 million in aggregate face amount of Senior Subordinated Debentures held by Libra, and net cash proceeds to be generated by Libra's periodic sale of up to approximately 3.4 million shares of the Company's Class A Common Stock held by Libra through a series of transactions to be effected in an orderly manner. The Company also completed a separate transaction with Libra in December 1993, whereby the Company exchanged F-10 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED) approximately 3.4 million newly issued shares of its Class A Common Stock for approximately $10.6 million in aggregate face amount of Subordinated Debentures held by Libra. The shares issued to Libra were deposited in a custodial account for periodic sale in accordance with instructions from the Company. In February 1994, the Company received $1 million in cash from Libra in exchange for the immediate termination of a contingent payment provision of the December 1993 transaction with Libra. NOTE 4--REAL ESTATE HELD FOR DEVELOPMENT OR SALE Real estate held for development or sale consists of the following at December 31 (in millions):
1995 1996 --------- --------- Residential.................................................................. $ 26.3 $ 12.4 Commercial/industrial........................................................ 1.8 12.8 --------- --------- $ 28.1 $ 25.2 --------- --------- --------- ---------
NOTE 5--LAND HELD FOR DEVELOPMENT Following completion of the Company's sale of approximately 880 lowland acres of its Bolsa Chica property to the State of California on February 14, 1997 as described below, land held for development consists of approximately 310 acres located in Orange County, California, adjacent to the Pacific Ocean, surrounded by the City of Huntington Beach and approximately 35 miles south of downtown Los Angeles ("Bolsa Chica"). The planned community at Bolsa Chica is expected to offer a broad mix of home choices, including single-family homes, townhomes and condominiums at a wide range of prices. In December 1994, the Orange County Board of Supervisors unanimously approved a Local Coastal Program ("LCP") for up to 3,300 units of residential development and a wetlands restoration plan for this property. The 3,300-unit LCP provides for development of up to 2,500 homes on the mesa (high ground) portion of the property and up to 900 homes on the lowland portion of the property, not to exceed 3,300 homes in the aggregate. The related Development Agreement was unanimously approved by the Orange County Board of Supervisors in April 1995. The California Coastal Commission approved the LCP in January 1996 subject to suggested modifications. These suggested modifications were approved by the Orange County Board of Supervisors in June 1996, and on July 11, 1996 the California Coastal Commission certified the LCP for the Company's Bolsa Chica property. On February 14, 1997, the Company completed the sale of approximately 880 lowland acres owned by the Company at Bolsa Chica to the California State Lands Commission for $25 million and will, therefore, forego opportunities to develop 900 homes in the lowland. Under an interagency agreement among various state and federal agencies, these agencies have agreed to restore the Bolsa Chica lowlands utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve of $1.5 million has been included in other liabilities as of December 31, 1996, with respect to potential costs payable by the Company under agreements negotiated with the State Lands Commission and certain oil field operators regarding environmental clean-up at the Bolsa Chica lowlands. In connection with the lowlands sale, the Company paid $833,333 of these costs at closing, leaving a reserve balance of $700,000 on its financial statements for potential additional clean-up costs. F-11 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5--LAND HELD FOR DEVELOPMENT (CONTINUED) The Company is now pursuing the secondary permitting process for the mesa through the County of Orange in order to implement the approved development plan for up to 2,500 homes. This process is currently expected to be completed in the fourth quarter of 1997. The Company expects, subject to its ability to obtain financing on a commercially reasonable and timely basis, and subject to obtaining the secondary permits, to commence infrastructure construction on the mesa in the fourth quarter of 1997. However, due to certain 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 start of construction could be delayed. In this regard, on January 13, 1995, two lawsuits challenging the Orange County Board of Supervisors' approval of the Bolsa Chica project were filed in Orange County Superior Court (the "Court"). Although the lawsuits differed in the particular issues they raised, generally they each alleged, among other things, violations of the California Environmental Quality Act and violations of the California Government Code planning and zoning laws. One lawsuit, which was brought by the school districts, has been settled with an agreement regarding school fees to be paid to the plaintiff districts. In the other "environmental lawsuit", the plaintiffs did not seek monetary damages, but instead asked the Court to set aside the approval of the Bolsa Chica project. In February 1996, the Court ruled on the "environmental lawsuit", rejecting all but one of the arguments, and requiring an additional 45-day public review and comment period regarding the tidal inlet portion of the wetlands restoration plan, which was completed in the second quarter of 1996. The County reapproved the plan without change in June 1996. On January 24, 1997 this lawsuit was dismissed by the Court. In filing the judgement, the Court ruled that the County had fulfilled all requirements for approval of the Bolsa Chica development plans, without the Court requiring any change to the plans. In addition, on March 6, 1996 and March 11, 1996 two lawsuits were filed against the Coastal Commission, the Company and other Bolsa Chica landowners as real parties in interest, alleging that the Coastal Commission's approval of the LCP is not in compliance with the Coastal Act and other statutory requirements. These lawsuits seek to set aside the approval of the Bolsa Chica project, and are currently scheduled to be tried in April 1997. Given the recent sale of the Bolsa Chica lowlands described above, the primary issues which were the subject of this litigation have been eliminated. Furthermore, the plaintiffs in one of these lawsuits have informed the Company that given the sale of the lowlands, they will work with the Company in an effort to resolve the remaining issues of their lawsuit. The Company believes that the remaining litigation issues which challenge development of the Bolsa Chica mesa are without merit. Furthermore, the Company does not believe that these lawsuits will be successful in permanently preventing the Company from completing the Bolsa Chica project, however, there can be no assurance in this regard or that these suits will not result in delays. In 1995, in accordance with Statement of Financial Accounting Standard No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects" ("SFAS 67"), the Company carried real estate properties, including Bolsa Chica, at the lower of cost or net realizable value, with net realizable value defined as the undiscounted estimated future cash flows from the project. As of December 31, 1995, the Company's review of the current estimated cash flows for Bolsa Chica indicated that a reserve of approximately $113.6 million was required to adjust the carrying value of Bolsa Chica to its then estimated net realizable value of $220 million pursuant to SFAS 67. The valuation reserve primarily reflects management's decision in the fourth quarter of 1995 (following the approval of additional funding by the Ports) to make completing the sale of the lowlands to a government agency a strategic goal of the Company, along with updated estimates of future cash flows for the mesa portion of the project reflecting recent market conditions. During 1995, the Southern California residential real estate market continued to F-12 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5--LAND HELD FOR DEVELOPMENT (CONTINUED) decline, affecting estimated sale pricing, housing mix and number of units planned. The Company's decision in 1995 to pursue a sale of the lowlands was expected to, and subsequently has, resulted in the elimination of up to 900 units previously planned in the lowlands, which, in turn, resulted in a significant reduction as of December 31, 1995 in projected future cash flows previously anticipated from the Bolsa Chica project. 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. NOTE 6--DEBT SENIOR BANK DEBT In December 1994, the Company entered into a letter of credit and reimbursement agreement with Nomura Asset Capital Corporation ("Nomura") to fund payment of the settlement of the Abex litigation in excess of $7.5 million to be funded by the Company. In February 1995, the Company paid an aggregate of $22 million to settle the litigation, of which $15.5 million was funded by borrowings under the letter of credit and reimbursement agreement and the balance of $6.5 million from restricted cash. Since this financing agreement was solely for the purpose described above, no additional funds are available under this facility. The Company repaid $8.4 million of such borrowings during 1996. In December 1994, the Company also entered into a construction loan agreement with Nomura to partially fund infrastructure construction at Rancho San Pasqual, the Company's golf/residential property in San Diego County. The Company borrowed $1.3 million and $8.7 million during 1995 and 1996, respectively, under this loan agreement. As required under the construction loan agreement, the Company deposited $5 million into an escrow account in January 1995 to be used solely for the funding of infrastructure construction costs at Rancho San Pasqual, of which $2.5 million was included in restricted cash on December 31, 1995. The Company repaid $.2 million and $9.8 million of borrowings under the construction loan agreement during 1995 and 1996, respectively. The remaining borrowings outstanding as of December 31, 1996 under the letter of credit and reimbursement agreement were principally secured by a deed of trust on Rancho San Pasqual and a pledge and security interest in the Company's interest in Fairbanks Highlands, LLC, a joint venture with Taylor Woodrow Homes, Inc. formed on December 6, 1996, along with a pledge of the stock of Signal Bolsa Corporation. Amounts outstanding under the letter of credit and reimbursement agreement bear interest at 30 Day LIBOR plus 4%, which was 9.69% as of December 31, 1996. The agreements initially required principal prepayments equal to 80% of the net proceeds from any sales at Rancho San Pasqual, Fairbanks Highlands, and principal prepayments equal to 50% of the net proceeds from Rancho San Pasqual assessment district reimbursements. After March 12, 1996, the agreements require principal repayments equal to 90% of the net proceeds from any sales at Rancho San Pasqual, Fairbanks Highlands and Bolsa Chica. The agreements contain certain restrictive covenants that limit, among other things, (i) the incurrence of indebtedness, (ii) the making of investments and (iii) the creation or incurrence of liens on existing and future assets of the Company. The agreements also contain various financial covenants and events of default customary for such agreements. In December 1996, the Company exercised its option to extend the initial maturity date under the loans from December 20, 1996 to December 22, 1997. On February 18, 1997 the outstanding Nomura loan balance was fully repaid with a portion of the proceeds from the sale of the Bolsa Chica lowlands and the loan agreements were terminated. In December 1994, the Company entered into a $6.5 million construction loan agreement with the Bank of Boston, principally secured by resort and residential property in New Hampshire ("Wentworth"). F-13 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6--DEBT (CONTINUED) The Company borrowed $4.8 million under this loan agreement and applied $4.2 million in proceeds from sales of residential homes from Wentworth to satisfy required prepayments, resulting in an outstanding balance of $.6 million on November 2, 1995, when the Company sold all of its interest in the Wentworth residential land to its development manager for $4.1 million in cash plus the buyer's prepayment of the outstanding balance under the Bank of Boston credit agreement, which terminated this credit facility. PROJECT DEBT During 1996, the Company entered into several contracts to develop and construct commercial properties on a build-to-suit basis. Subsidiaries of the Company have entered into three construction loan agreements aggregating $31.9 million, which have been guaranteed by the parent, to finance these projects. As of December 31, 1996, a total of $12.5 million was drawn and $19.4 million was available under these construction loan agreements. The loans bear interest at prime plus .75% or 30-day LIBOR +2% and have maturity dates between June and August 1997. In addition, as of December 31, 1996, one development project is owned by an unconsolidated partnership in which a subsidiary of the Company is the general partner. The partnership has entered into a construction loan agreement for $3.5 million, which has also been guaranteed by the parent. Under this construction loan agreement, $1.3 million was drawn and $2.2 million was available as of December 31, 1996. SUBORDINATED DEBENTURES Immediately prior to the July 1992 Merger, Henley Group distributed to its stockholders among other consideration (the "Distribution"), in respect of each share of its outstanding common stock (the "Henley Group Common Stock"): (i) $6.00 aggregate principal amount of the Company's 12% Senior Subordinated Pay-In-Kind Debentures due March 15, 2002 (the "Senior Subordinated Debentures"); and (ii) $1.50 aggregate principal amount of the 12% Subordinated Pay-In-Kind Debentures due March 15, 2002 (the "Subordinated Debentures", and together with the Senior Subordinated Debentures, the "Debentures"). Approximately $159.4 million aggregate principal amount of the Debentures were distributed in the Distribution and approximately $43.8 million aggregate principal amount of the Debentures were retained by the Company's Henley Group subsidiary in the Merger. The Debentures were comprised of the following as of December 31 (in millions):
1995 1996 --------- --------- Senior Subordinated Debentures............................................. $ 138.2 $ 155.3 Subordinated Debentures.................................................... 34.6 38.8 --------- --------- Total face amount........................................................ 172.8 194.1 Less unamortized discount.................................................. (5.6) (5.0) Plus accrued interest...................................................... 6.0 6.8 --------- --------- $ 173.2 $ 195.9 --------- --------- --------- ---------
The Debentures give the Company the right to pay interest in-kind, in cash or, subject to certain conditions, in the Company's common stock. It is currently anticipated that interest on the Debentures will be paid in-kind. The Debentures, which are due March 15, 2002, do not require any sinking fund payments and may be redeemed by the Company at any time in cash only, or at maturity in cash or stock, subject to F-14 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6--DEBT (CONTINUED) certain conditions. The Debentures prohibit the payment of any dividends or other distributions on the Company's equity securities. In November 1996, representatives of certain holders of the Debentures indicated to the Company that they intend to support a de-leveraging of the Company's capital structure through a voluntary exchange of the Debentures for equity (the "Exchange Offer"). Under the proposed Exchange Offer, Senior-Subordinated holders and Subordinated holders would, subject to the successful completion of the Exchange Offer, receive 56 shares and 28 shares, respectively, (after consolidation of the preferred and common stock and the proposed reverse split discussed below) for each $1,000 of principal amount outstanding as of March 15, 1997, after taking into account the next scheduled "in-kind" interest payment. The solicitation of Debentureholders, as well as stockholder approval, will not commence until the Securities and Exchange Commission ("SEC") completes its review of a registration statement to be filed by the Company with the SEC in February 1997, and the entire solicitation/exchange offer process is not expected to be completed prior to June 1997. A 100% acceptance rate for the Exchange Offer would result in 90% of the Company's equity, in the form of newly issued shares of common stock, being held by the Debentureholders (approximately 80% by Senior-Subordinated and 10% by Subordinated). The remaining 10% of the Company's equity would be owned, in the aggregate, by current preferred and common stockholders (approximately 5.8% by preferred stockholders and 4.2% by common stockholders). A condition to closing the Exchange Offer will be that a minimum of 90% of the of the face amount outstanding of the Debentures are tendered to the Company. The Company expects to solicit the consent of its common and preferred stockholders to the Exchange Offer and to the consolidation of the preferred and common stock into a single class of common stock, through the issuance of 1.75 shares of Common Stock for each outstanding share of Preferred Stock. In addition, all stockholders will be asked to approve a one for one hundred (1:100) reverse stock split, and the common stockholders will be asked to elect six new directors who have been nominated by a committee of the Debentureholders and to elect four of the Company's existing directors to be nominated by the Company. At December 31, 1996 the estimated aggregate fair value of the Company's Debentures was within a range of approximately $105 million to $115 million based on quotes from certain bond traders making a market in the Debentures. However, due to the low trading volume and illiquid market for the Debentures, such quotes may not be meaningful indications of value. The carrying amount for all other debt of the Company approximates market primarily as a result of floating interest rates. INTEREST The Company made cash payments for interest on senior bank debt of $1.4 million, $1.4 million and $1.5 million for the years ended December 31, 1994, 1995 and 1996, respectively. F-15 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--OTHER LIABILITIES Other liabilities were comprised of the following as of December 31 (in millions):
1995 1996 --------- --------- Net deferred tax liabilities (Note 8)........................................ $ 10.0 $ 10.0 Other tax liabilities (Note 8)............................................... 4.5 4.5 Accrued pensions and benefits................................................ 10.7 5.6 Guaranty of capital contribution notes....................................... 4.8 6.0 Accrued indemnity obligations................................................ 18.7 17.8 Majority interest and other liabilities of consolidated partnership.......... 4.2 -- --------- --------- $ 52.9 $ 43.9 --------- --------- --------- ---------
During 1996, the Company terminated certain group annuity contracts for the pension plan of a discontinued operation, and experienced favorable investment returns on pension assets, resulting in a significant decrease in accrued pensions and benefits. NOTE 8--INCOME TAXES The tax effects of items that gave rise to significant portions of the deferred tax accounts are as follows for the years ended December 31 (in millions):
1995 1996 --------- --------- Deferred tax assets: Real estate held for development or sale and operating properties (due to asset revaluations and interest capitalized for tax purposes).......................................................... $ 33.4 $ 13.8 Accruals not deductible until paid................................... 6.6 6.1 Net operating loss carryforwards..................................... 64.7 94.1 Other................................................................ 1.7 .4 Valuation allowance.................................................. (59.2) (71.3) --------- --------- $ 47.2 $ 43.1 --------- --------- --------- --------- Deferred tax liabilities: Land held for development, (principally due to accounting for a prior business combination, partially offset by the asset revaluation in 1995)................................................................ $ 55.0 $ 51.2 Other................................................................ 2.2 1.9 --------- --------- $ 57.2 $ 53.1 --------- --------- --------- ---------
Net deferred tax liabilities at December 31, 1996 are comprised entirely of state net deferred tax liabilities. At December 31, 1996, the Company had available tax net operating loss carryforwards of approximately $282 million which expire in the years 2004 through 2011 if not utilized. The Internal Revenue Code (the "Code") imposes an annual limitation on the use of loss carryforwards upon the occurrence of an "ownership change" (as defined in Section 382 of the Code). Such an ownership change occurred in connection with the Merger in 1992. As a result, approximately $23 million of the Company's net operating F-16 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8--INCOME TAXES (CONTINUED) loss carryforwards will generally be limited to the extent that Henley Properties and its subsidiaries recognize certain gains in the five-year period following the ownership change which ends July 16, 1997. Additionally, the use of the Company's net operating loss carryforwards will be further limited if the Exchange Offer is completed. The following is a summary of the income tax provision (benefit) applicable to losses from continuing operations for the years ended December 31 (in millions):
1994 1995 1996 ------ ------ ------ Income Tax Provision (Benefit): Current................................................... $ (.3) $(10.1) $ .1 Deferred.................................................. (10.0) (25.4) -- ------ ------ ------ $(10.3) $(35.5) $ .1 ------ ------ ------ ------ ------ ------
Cash payments for federal, state and local income taxes were approximately $.6 million, $.3 million and $.2 million for the years ended December 31, 1994, 1995 and 1996, respectively. Tax refunds received for the years ended December 31, 1994, 1995 and 1996 were approximately $.8 million, $.4 million and $.2 million, respectively. The principal items accounting for the difference in taxes on income computed at the statutory rate and as recorded are as follows for the years ended December 31 (in millions):
1994 1995 1996 --------- --------- --------- Benefit for income taxes at statutory rate........................ $ (10.2) $ (53.3) $ (10.1) State income taxes, net........................................... (.1) .6 (.1) Increase in valuation allowance................................... -- 28.3 12.1 Reduction in other tax liabilities................................ -- (10.0) -- All other items, net.............................................. -- (1.1) (1.8) --------- --------- --------- $ (10.3) $ (35.5) $ .1 --------- --------- --------- --------- --------- ---------
TAX SHARING AGREEMENTS Henley Group and Abex, a former subsidiary of Henley Group whose stock was distributed to stockholders of Henley Group in July 1992, entered into a tax sharing agreement in 1992 prior to the Distribution to provide for the payment of taxes for periods during which Henley Group and Abex were included in the same consolidated group for federal income tax purposes, the allocation of responsibility for the filing of tax returns, the cooperation of the parties in realizing certain tax benefits, the conduct of tax audits and various related matters. 1989-1992 INCOME TAXES. The Company is generally charged with responsibility for all of its federal, state, local or foreign income taxes for this period and, pursuant to the tax sharing agreement with Abex, all such taxes attributable to Henley Group and their consolidated subsidiaries, including any additional liability resulting from adjustments on audit (and any interest or penalties payable with respect thereto), except that Abex is generally charged with responsibility for all such taxes attributable to it and its subsidiaries for 1990-1992. In addition, under a separate tax sharing agreement between Henley Group and a former subsidiary of Henley Group, Fisher Scientific International Inc. ("Fisher"), Fisher is generally charged with responsibility for its own income tax liabilities for this period. F-17 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8--INCOME TAXES (CONTINUED) The Internal Revenue Service ("IRS") has completed its examinations of the tax returns of the Company and its consolidated subsidiaries, including formerly affiliated entities, for the years ended December 31, 1989, 1990 and 1991. With respect to each examination, the IRS has proposed material audit adjustments. The Company disagrees with the positions taken by the IRS and has filed a protest with the IRS to vigorously contest the proposed adjustments. After review of the IRS's proposed adjustments, the Company estimates that, if upheld, the adjustments could result in Federal tax liability, before interest, of approximately $17 million (net of amounts which may be payable by former affiliates pursuant to tax sharing agreements). The IRS proposed adjustments, if upheld, could also result in a disallowance of up to $147 million of available net operating loss carryforwards, of which none are recognized, after consideration of the valuation allowance, as of December 31, 1996. The Company has not determined the extent of potential accompanying state tax liability adjustments should the proposed IRS adjustments be upheld. The Company's protest was filed in August 1995 and is still being considered by the IRS Appeals Division. Management currently believes that the IRS's positions will not ultimately result in any material adjustments to the Company's financial statements. The Company is prepared to pursue all available administrative and judicial appeal procedures with regard to this matter and the Company is advised that its dispute with the IRS could take up to five years to resolve. PRE-1989 INCOME TAXES. Under tax sharing agreements with WTI and Abex, the parties are charged with sharing responsibility for paying any increase in the federal, state or local income tax liabilities (including any interest or penalties payable with respect thereto) for any consolidated, combined or unitary tax group which included WTI, Henley Group or any of their subsidiaries for tax periods ending on or before December 31, 1988. Under the agreements, the Company was charged with the responsibility for paying $25 million, plus amounts payable with respect to liabilities which are attributable to certain of the Company's subsidiaries. The Company's $25 million limitation amount was accrued in the Company's financial statements in December 1989, and following payments made in the first quarter of 1993, $22 million remained as of December 31, 1994. In January 1993, the IRS completed its examination of the Federal tax returns of WTI for the periods May 1986 through December 1988 and asserted a material deficiency relating to the tax basis of a former subsidiary of WTI. WTI, Abex and the Company disagreed with the position taken by the IRS and WTI filed a petition with the U.S. Tax Court. In March 1994, prior to the June 1994 trial date, WTI and the IRS entered into a Stipulation of Settlement that resulted in a tax payable together with interest of approximately $72 million. In April 1994, the Company contested the alleged obligation and asserted various defenses to making any payment under these agreements and Abex and WTI filed suit in Delaware Chancery Court ("the Court") against the Company seeking, among other things, declaratory relief, specific performance, and monetary damages for the Company's alleged failure to pay approximately $21 million claimed to be owed pursuant to tax sharing agreements entered into in 1988 and 1989, plus pre-judgment interest and attorneys' fees. The Company vigorously defended its position with respect to the nonpayment of the alleged tax sharing obligation, filing suit in the Supreme Court of the state of New York against WTI and Abex. In December 1994, the Court decided against the Company, prompting the Company to file an appeal in January 1995. In February 1995, the Company entered into an agreement with WTI and Abex to settle both state actions in order to avoid the ongoing cost of litigation. Under the terms of the settlement, the Company paid an aggregate of $22 million, of which $15.5 million was funded by borrowings under a financing agreement with a major financial institution (Note 6) and $6.5 million was funded by the Company's restricted cash. The Company also settled other disputes with Abex as described in Note 9. F-18 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--COMMITMENTS AND CONTINGENCIES Pursuant to a 1992 transition agreement, amended in March 1993, each of Abex and the Company provided to the other certain administrative support services until March 31, 1994. The amendment provided for the Company to pay $.5 million quarterly for such services and for the termination of the New Hampshire facilities lease on March 31, 1993. Accordingly, the Company reimbursed Abex approximately $1.8 million for the year ended December 31, 1993. Fees accrued but not paid in the fourth quarter of 1993 and the first quarter of 1994 totaling $1.0 million were waived by Abex in connection with the February 1995 settlement with Abex described in Note 8. LEGAL PROCEEDINGS See Note 5 for a discussion of certain litigation relating to the Orange County Board of Supervisors' and California Coastal Commission's approvals of the Bolsa Chica project. There are various other lawsuits and claims pending against the Company and certain subsidiaries. In the opinion of the Company's management, ultimate liability, if any, will not have a material adverse effect on the Company's financial condition or results of operations. CORPORATE INDEMNIFICATION MATTERS The Company and its predecessors have, through a variety of transactions effected since 1986, disposed of several assets and businesses, many of which are unrelated to the Company's current operations. By operation of law or contractual indemnity provisions, the Company has retained liabilities relating to certain of these assets and businesses. Many of such liabilities are supported by insurance or by indemnities from certain of the Company's predecessor and currently or previously affiliated companies. The Company believes its balance sheet reflects adequate reserves for these matters. The United States Environmental Protection Agency ("EPA") has designated Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party ("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch Lake Site") under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor in interest to one of the companies that conducted mining operations in the Torch Lake area and an affiliate of Allied Signal Inc., a predecessor of the Company. The Company has not been named as a PRP at the site. However, Allied Signal has, through UOP, asserted a contractual indemnification claim against the Company for all claims that may be asserted against UOP by EPA or other parties with respect to the site. EPA has proposed a clean-up plan which would involve covering certain real property both contiguous and non-contiguous to Torch Lake with soil and vegetation in order to address alleged risks posed by copper tailings and slag at an estimated cost of $6.2 million. EPA estimates that it has spent approximately $3.9 million to date in performing studies of the site. Under CERCLA, EPA could assert claims against the Torch Lake PRPs, including UOP, to recover the cost of these studies, the cost of all remedial action required at the site, and natural resources damages. In June 1995, EPA proposed a CERCLA settlement pursuant to which UOP pay approximately between $2.6 and $3.3 million in exchange for a limited covenant by EPA not to sue UOP in the future. The Company, without admission of any obligation to UOP, has determined to vigorously defend UOP's position that the EPA's proposed cleanup plan is unnecessary and inconsistent with the requirements of CERCLA given that the EPA's own Site Assessment and Record of Decision found no immediate threat to human health. In the Company's view the proposed remediation costs would be in excess of any resulting benefits. F-19 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10--RELATED PARTY TRANSACTIONS CONSTRUCTION MANAGEMENT AGREEMENTS In 1993, the Company entered into a construction management agreement with Koll Construction, a wholly owned subsidiary of The Koll Company, for demolition of bunkers at Bolsa Chica. In 1995, the Company also entered into a construction management agreement with Koll Construction for infrastructure construction at Rancho San Pasqual. In 1996, the Company entered into a general contractor agreement with Koll Construction in conjunction with a build-to-suit project for a third-party corporate office building in Nevada. During 1994, 1995 and 1996 the Company incurred fees aggregating approximately $100 thousand, $500 thousand and $1.7 million, respectively, to Koll Construction in consideration for these services and related reimbursements. SERVICE AGREEMENTS In September 1993, the Company entered into a Financing and Accounting Services Agreement to provide The Koll Company with financing, accounting, billing, collections and other related services until 30 days' prior written notice of termination is given by one company to the other. Fees earned for the years ended December 31, 1994, 1995 and 1996 were approximately $400 thousand, $100 thousand and $100 thousand, respectively. The Company also entered into a Management Information Systems and Human Resources Services Agreement in September 1993 with Koll Management Services, Inc., also known as Koll Real Estate Services ("KRES"), a company approximately 14% owned by a subsidiary of The Koll Company. Under this agreement, KRES provides computer programming, data organization and retention, record keeping, payroll and other related services until 30 days' prior written notice of termination is given by one company to the other. Fees and related reimbursements incurred were approximately $200 thousand for each of the years ended December 31, 1994, 1995 and 1996. SUBLEASE AGREEMENTS In September 1993, the Company entered into an annual Sublease Agreement with The Koll Company to sublease a portion of The Koll Company affiliate's office building located in Newport Beach, California. The Company also entered into lease agreements on a month-to-month basis, which were terminated in 1996, for office space in Northern California and San Diego, California with KRES. Combined lease costs on these leases were approximately $400 thousand for each of the years ended December 31, 1994, 1995, and 1996, respectively. DEVELOPMENT FEES For the years ended December 31, 1994, 1995, and 1996 the Company earned fees of approximately $3.5 million, $2.7 million, and $1.9 million respectively, for real estate development and disposition services provided to partnerships in which The Koll Company and certain directors and officers of the Company have an ownership interest. In addition, the Company paid approximately $300 thousand to, and received $100 thousand from Koll Construction for services provided to each other in conjunction with two separate development service transactions for the year ended December 31, 1994. The Company paid $100 thousand and $400 thousand to Koll Construction for construction services in the years ended December 31, 1995 and 1996, respectively. F-20 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED) JOINT BUSINESS OPPORTUNITY AGREEMENT The Company and The Koll Company entered into an agreement to jointly develop business opportunities in the Pacific Rim effective February 1, 1994. Effective February 1, 1995 The Koll Company assigned its interests under this agreement to KRES. Under the terms of the agreement, the Company and KRES share on a 50%-50% basis all costs and expenses incurred in connection with identifying and obtaining business opportunities and will share in all revenues generated from any such opportunities on a 50%-50% basis. The Company's share of net loss was approximately $200 thousand, $300 thousand and $100 thousand for the years ended December 31, 1994, 1995 and 1996, respectively. Service contracts entered into under this agreement in 1995 included construction services from Koll Construction, for which the venture paid approximately $100 thousand to Koll Construction for services rendered for each of the years ended December 31, 1995 and 1996. In February 1997, KRES notified the Company that it plans to terminate the venture effective March 5, 1997, and its interest will be adjusted accordingly. In March 1995, the Company and The Koll Company entered into an agreement to jointly develop commercial development business opportunities in Mexico. Under the terms of the agreement, the Company and The Koll Company share on a 50%-50% basis all costs and expenses incurred in connection with identifying and obtaining business opportunities and will share in all revenues generated from such opportunities on a 50%-50% basis. The Company's share of such net costs and expenses was approximately $300 thousand and $100 thousand for the ten months ended December 31, 1995, and for year ended December 31, 1996, respectively. During the first quarter of 1996, the Company determined that, given current economic conditions in Mexico, it could more efficiently service opportunities in Mexico from its offices in California and Dallas and closed its Mexico City office. The Koll Company informed the Company that effective March 1, 1996 it would no longer fund costs and expenses related to the pursuit of commercial development opportunities in Mexico, and The Koll's Company interest was diluted accordingly. Effective April 1, 1994, the Company and KRES entered into an agreement to combine operations in the Northwest Region in order to become a full service real estate company in that region. This agreement was terminated effective June 30, 1996. Operating profits and losses were split on a 50%-50% basis at the end of each calendar year or portion thereof. The Company's share of profits was approximately $500 thousand, $600 thousand and $200 thousand for the nine months ended December 31, 1994, the year ended December 31, 1995, and the six months ended June 30, 1996, respectively. STOCK PLEDGE BY DIRECTOR In December of 1995, the Company accepted pledges of all of the common stock and warrants convertible into the common stock of the Company owned by Ms. Kathryn G. Thompson as security against any potential construction liability which could be asserted against the Company as a result of the 1994 acquisition by the Company of KGTC and in exchange for the Company releasing Ms. Thompson from a covenant to maintain insurance with respect to such potential liability. Ms. Thompson resigned as a director of the Company and as an officer of certain wholly-owned subsidiaries of the Company effective November 1, 1996. Ms. Thompson received compensation of $300,000 during each of the years ended December 31, 1995 and 1996 for her services rendered as an officer of these subsidiaries. In connection with her resignation, Ms. Thompson received a release from certain non-competition covenants and a release of the stock pledge described above. F-21 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED) OTHER TRANSACTIONS See Notes 3, 8 and 9 for descriptions of other transactions and agreements with Koll, Libra, Abex and WTI. NOTE 11--RETIREMENT PLANS The Company has noncontributory defined benefit retirement plans covering substantially all employees of the Company prior to September 30, 1993 who had completed one year of continuous employment. The benefit accrual for all participants was terminated on December 31, 1993. In November 1996, the assets held in trust under the Company's supplemental and executive retirement plan were paid to participants in exchange for each participant's release of any future benefit claims under this plan, resulting in termination of the executive plan and the curtailment gain recorded in 1996. Net periodic pension cost for the years ended December 31 consisted of the following (in millions):
1994 1995 1996 ------ ------ ------ Service cost................................................ $ -- $ -- $ -- Interest cost............................................... .5 .5 .5 Actual return on assets..................................... .1 (1.4) (.8) Net amortization and deferral............................... (.5) 1.0 .4 Gain on curtailment......................................... -- -- (.3) ------ ------ ------ Net periodic pension cost (income).......................... $ .1 $ .1 $ (.2) ------ ------ ------ ------ ------ ------
The funded status and accrued pension cost at December 31, 1995 and 1996 for defined benefit plans were as follows (in millions):
1995 1996 --------- --------- Actuarial present value of benefit obligations: Vested...................................................................... $ (6.9) $ (5.3) Nonvested................................................................... -- -- --------- --------- Accumulated benefit obligation................................................ $ (6.9) $ (5.3) --------- --------- --------- --------- Projected benefit obligation.................................................. $ (6.9) $ (5.3) Plan assets at fair value..................................................... 5.9 5.0 --------- --------- Projected benefit obligation in excess of plan assets......................... (1.0) (.3) Unrecognized net loss......................................................... 1.0 .7 Adjustment required to recognize additional minimum liability................. (1.0) (.7) --------- --------- Accrued pension cost.......................................................... $ (1.0) $ (.3) --------- --------- --------- ---------
The development of the projected benefit obligation for the plans at December 31, 1994, 1995, and 1996 is based on the following assumptions: a discount rate of 7%, and an expected long-term rate of return on assets of 9%. Assets of the plans are invested primarily in stocks, bonds, short-term securities and cash equivalents. F-22 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--CAPITAL STOCK COMMON STOCK Under its restated certificate of incorporation, the Company has authority to issue up to 750 million shares of common stock, par value $.05 per share, subject to approval of the Board of Directors (the "Board"), of which 625 million shares of Class A Common Stock and 25 million shares of Class B Common Stock are initially authorized for issuance and an additional 100 million shares may be issued in one or more series, and have such voting powers or other rights and limitations as the Board may authorize. During 1994, 1995 and 1996, 1.2 million, an additional 1.0 million, and an additional 1.4 million shares, respectively, of Series A Preferred Stock were converted into an equal number of shares of Class A Common Stock. In December 1993 the Company issued 3.4 million shares of its Class A Common Stock in exchange for all of Libra's approximately $10.6 million in aggregate principal amount of Subordinated Debentures plus accrued interest. In connection with the Company's sale of Lake Superior Land Company to Libra, the net cash proceeds from the sale of 3.4 million shares of Class A Common Stock held by Libra will be forwarded to the Company. The estimated amount of proceeds to be received from such sale is reflected in the equity section of the balance sheet as deferred proceeds from stock issuance. In November 1994 the Company issued 2 million shares of its Class A Common Stock and warrants for the purchase of an additional 2 million shares in connection with the acquisition of the Kathryn G. Thompson Company. The warrants have an exercise price of $.25, are exercisable over a ten year period, vest in equal installments over five years and are subject to certain cancellation rights of the Company. Under the Company's Indentures for the Debentures (Note 6), the Company is prohibited from purchasing shares of its common stock. PREFERRED STOCK Under its restated certificate of incorporation, the Company has authority to issue 150 million shares of preferred stock, par value $.01 per share, in one or more series, with such voting powers and other rights as authorized by the Board. Effective July 16, 1992, in connection with the Merger, the Board authorized approximately 42.5 million shares of Series A Preferred Stock, which have a liquidation preference of $.75 per share, participate in any dividend or distribution paid on the Class A Common Stock on a share for share basis, and have no voting rights, except as required by law (Notes 1 and 2). The Series A Preferred Stock is redeemable at the Company's option, on 30 days' notice given at any time after the second anniversary of issuance, at the liquidation preference of $.75 per share, in cash or generally in shares of Class A Common Stock. Each share of the Series A Preferred Stock is convertible at the holder's option, at any time after the second anniversary of issuance, generally into one share of Class A Common Stock. Since the Series A Preferred Stock became convertible in July 1994, approximately 3.6 million shares have been converted into an equal number of shares of Class A Common Stock. NOTE 13--STOCK PLANS 1993 STOCK OPTION/STOCK ISSUANCE PLAN The 1993 Stock Option/Stock Issuance Plan ("1993 Stock Option Plan") was approved at the 1994 Annual Meeting of Stockholders as the successor equity incentive program to the Company's 1988 Stock Plan. Outstanding options under the 1988 Stock Plan were incorporated into the 1993 Stock Option Plan F-23 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13--STOCK PLANS (CONTINUED) upon its approval. Under the 1993 Stock Option Plan, 7.5 million shares each (including 3 million shares each originally authorized under the 1988 Stock Plan) of Series A Preferred Stock and Class A Common Stock were reserved for issuance to officers, key employees and consultants of the Company and its subsidiaries and the non-employee members of the Board. Options generally become exercisable for 40% of the option shares upon completion of one year of service and become exercisable for the balance in two equal annual installments thereafter. The 1993 Stock Option Plan includes an automatic option grant program, pursuant to which each individual serving as a non-employee Board member on the November 29, 1993 effective date of the 1993 Stock Option Plan received an option grant for 125,000 shares each of Series A Preferred Stock and Class A Common Stock with an exercise price of $.4063 per share, equal to the fair market value of the underlying securities on the grant date. Each individual who first joins the Board as a non-employee director after such effective date will receive a similar option grant. Of the shares subject to each option, 40% will vest upon completion of one year of Board service measured from the grant date, and the balance will vest in two equal annual installments thereafter. Each automatic grant will have a maximum term of 10 years, subject to earlier termination upon the optionee's cessation of Board service. Each non-employee Board member may also elect to apply all or any portion of his or her annual retainer fee to the acquisition of shares of Series A Preferred Stock or Class A Common Stock which vest incrementally over the individual's period of Board service during the year for which the election is in effect. During the year ended December 31, 1994, 126,856 shares were issued under this provision. No shares were issued under this provision during 1995 or 1996. F-24 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13--STOCK PLANS (CONTINUED) A summary of the status of the Company's stock option plans for the three years ended December 31, 1996, follows:
NUMBER OF SHARES PRICE PER SHARE ---------------------- ------------------------ CLASS A SERIES A CLASS A SERIES A COMMON PREFERRED COMMON PREFERRED OPTIONS OUTSTANDING STOCK STOCK STOCK STOCK - ------------------------------------------ ---------- ---------- ----------- ----------- December 31, 1993......................... 6,350,000 6,350,000 .23 - .41 .14 - .41 Granted................................. -- -- -- -- Exercised............................... -- -- -- -- Cancelled............................... -- -- -- -- ---------- ---------- ----------- ----------- December 31, 1994......................... 6,350,000 6,350,000 .23 - .41 .14 - .41 Granted................................. -- -- -- -- Exercised............................... -- -- -- -- Cancelled............................... (75,000) (75,000) .41 .41 ---------- ---------- ----------- ----------- December 31, 1995......................... 6,275,000 6,275,000 $ .23 - .41 $ .14 - .41 Granted................................. -- -- -- -- Exercised............................... -- -- -- -- Cancelled............................... -- -- -- -- ---------- ---------- ----------- ----------- December 31, 1996......................... 6,275,000 6,275,000 $ .23 - 41 $ .14 - 41 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Options exercisable at December 31, 1996.................................... 6,275,000 6,275,000 $ .23 - 41 $ .14 - 41 Options available at December 31, 1996.... 1,098,144 1,225,000
In connection with the Exchange Offer, the outstanding options set forth above will be cancelled and new options comprising 6% of the Company's fully diluted equity will be granted based on the average trading price for 20-days following completion of the Exchange Offer. F-25 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of quarterly financial information for 1995 and 1996 (in millions, except per share amounts):
FIRST SECOND THIRD FOURTH FULL YEAR --------- ----------- --------- --------- ----------- 1996 Revenues (a)................................. $ 2.7 $ 16.0 $ 6.4 $ 19.7 $ 44.8 Cost of sales (a)............................ 2.5 14.3 5.2 18.2 40.2 Loss from continuing operations.............. (7.9) (6.7) (7.6) (6.7) (28.9) Net loss..................................... (7.9) (6.7) (7.6) (6.7) (28.9) Loss per common share........................ (.17) (.14) (.16) (.14) (.60) Weighted average common shares outstanding (b)............................ 47.7 48.0 48.5 48.9 48.3 1995 Revenues (c)................................. $ 6.4 $ 5.7 $ 6.8 $ 15.1 $ 34.0 Cost of sales (c)............................ 7.3 5.2 5.9 13.5 31.9 Loss from continuing operations (d).......... (5.7) (2.6) (8.5) (100.1) (116.9) Net loss (d)................................. (5.7) (2.6) (8.5) (100.1) (116.9) Loss per common share........................ (.12) (.06) (.18) (2.11) (2.48) Weighted average common shares outstanding (b)............................ 46.6 47.0 47.3 47.5 47.1
- ------------------------ (a) The Company recorded revenues and cost of sales of approximately $10.1 million from residential lot sales at Rancho San Pasqual primarily during the second and fourth quarters. In addition, the second quarter includes the sale of the Eagle Crest golf course at Rancho San Pasqual, and the fourth quarter includes the sale of Fairbanks Highlands as a result of the formation of a joint venture in which the Company has a continuing interest. (b) The Series A Preferred Stock is not included in the calculation of weighted average shares outstanding because the effect is antidilutive. (c) The Company recorded revenues and cost of sales of approximately $8.0 million and $8.1 million, respectively, in the fourth quarter of 1995 from the sale of residential land and the marina at its Wentworth By The Sea project in New Hampshire. (d) The Company recorded asset revaluations of $7.5 million and $116.6 million, which were partially offset by income tax benefits of $2.6 million and $24.0 million, respectively, in the third and fourth quarters of 1995. F-26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 1, 1997 KOLL REAL ESTATE GROUP, INC. By: /s/ Raymond J. Pacini ----------------------------------- Raymond J. Pacini EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities 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 date indicated.
SIGNATURE TITLE DATE - -------------------------------------------------------------- ------------------------------ -------------- /s/ Donald M. Koll Chairman of the Board and ------------------------------------- Chief Executive Officer May 1, 1997 (Donald M. Koll) (Principal Executive Officer) Executive Vice President and /s/ Raymond J. Pacini Chief Financial Officer ------------------------------------- (Principal Financial May 1, 1997 (Raymond J. Pacini) and Accounting Officer) /s/ Ray Wirta ------------------------------------- Director May 1, 1997 (Ray Wirta) /s/ Harold A. Ellis, Jr. ------------------------------------- Director May 1, 1997 (Harold A. Ellis, Jr.) /s/ Paul C. Hegness ------------------------------------- Director May 1, 1997 (Paul C. Hegness) /s/ J. Thomas Talbot ------------------------------------- Director May 1, 1997 (J. Thomas Talbot) /s/ Marco F. Vitulli ------------------------------------- Director May 1, 1997 (Marco F. Vitulli)
-----END PRIVACY-ENHANCED MESSAGE-----