-----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, VIQ7NyvbKjCm9d0sZ3AiXEuv8sU0kZCkihmmM6eKwXM8SO8PTBrzBSPraFESeEgI utku9R9V9tmDkrVIBHlIHQ== 0001047469-98-013052.txt : 19980401 0001047469-98-013052.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013052 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 000-17189 FILM NUMBER: 98582900 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-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 1997 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 of (I.R.S. Employer Identification incorporation or organization) No.) 4343 VON KARMAN AVENUE 92660 NEWPORT BEACH, CALIFORNIA (Zip Code) (Address of principal executive offices) 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: COMMON STOCK, PAR VALUE $.05 PER SHARE (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. YES /X/ NO / / The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 1998 was $111,944,017. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES /X/ NO / / The number of shares of Common Stock outstanding as of March 2, 1998, including the shares to be delivered to former debenture holders upon surrender of their debenture certificates, was 11,906,378. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS The Company is a residential land development and homebuilding company with properties located primarily in Southern California. The principal activities of the Company and its consolidated subsidiaries include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; (ii) single-family residential construction in Southern California; and (iii) providing residential real estate development services to third parties. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or homebuilders; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. On March 30, 1998, the Company executed an agreement to sell its commercial development business as further described in Note 4 to the Company's Financial Statements included in this Annual Report. The transaction is scheduled to close, subject to various conditions, on April 30, 1998 unless extended by agreement of the parties. The Company's immediate strategic goals are to (i) successfully appeal the February 20, 1998 court decision which ordered a third hearing before the California Coastal Commission (the "Coastal Commission") to approve the Warner Mesa (formerly known as the Bolsa Chica mesa) project; (ii) complete the permitting for development of Warner Mesa; and (iii) commence infrastructure construction on Warner Mesa as soon as possible; however, the Company may also consider other strategic and joint venture opportunities. There can be no assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals. The Company's executive offices are located at 4343 Von Karman Avenue, Newport Beach, California 92660 (telephone: (714) 833-3030). PRINCIPAL PROPERTIES The following sections describe the Company's principal properties. WARNER MESA. The Warner Mesa property is the principal property in the Company's portfolio, located within the land area collectively known as Bolsa Chica. Warner Mesa is one of the last large undeveloped coastal properties in Southern California, and is located in Orange County, approximately 35 miles south of downtown Los Angeles. Following the Company's February 1997 sale of its approximately 880-acre Bolsa Chica lowlands property to the State of California, as described below, and the September 1997 acquisition of 40 acres of lowlands, the Company owns approximately 340 acres of the 1,600 acres of undeveloped land at Bolsa Chica. The Company's holdings include approximately 200 acres to be developed on the Warner Mesa, approximately 100 acres on, or adjacent to, the Huntington mesa and approximately 40 acres of lowlands which were acquired in September 1997. Warner Mesa is bordered on the north and east by residential development, to the south by open space and the Bolsa Chica lowlands, and to the west by the Pacific Coast Highway, the Bolsa Chica State Beach, and the Pacific Ocean. The planned community at Warner Mesa is expected to offer a broad mix of home choices, including primarily single-family homes, as well as townhomes, at a wide range of prices. A Local Coastal Program ("LCP") for development of up to 3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica lowlands, which were subsequently sold as discussed below) was approved by the Orange County Board of Supervisors in December 1994 and by the Coastal Commission in January 1996. A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of Supervisors was filed in January 1995. After remanding the matter to the Board of Supervisors for additional processing and findings, in January 1997 the court entered a judgment in favor of the Company. Plaintiffs in the CEQA Lawsuit have appealed the court's decision and the appeal is pending. In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging the approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit was entered by the court in August 1997, and required the Coastal Commission to reconsider the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") and development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in response to the court's decision, the Coastal Commission approved modifications to the LCP which 2 eliminated the filling of Warner Pond and thereby reduced the maximum density from 2,500 homes to no more than 1,235 homes on Warner Mesa. On November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors approved the Coastal Commission's suggested modifications. On February 20, 1998, the court ruled that the Coastal Commission should not have narrowed the scope of public comments during the Coastal Commission's October 1997 hearing, and ordered the Coastal Commission to hold a third hearing on the LCP. The Company intends to appeal the court's latest decision, as well as pursue all other available legal and administrative options. The court's ruling will delay the previously planned start of infrastructure construction beyond December 31, 1998; however, the Company is unable to predict the length of such delay at this time. The Company does not believe that the recent court decision will permanently prevent the Company from completing the Warner Mesa project; however, there can be no assurance in that regard or that further delays will not result. See "Item 3 - Legal Proceedings" for a further discussion of pending litigation. On February 14, 1997, the Company completed the sale of its approximately 880-acre Bolsa Chica lowlands, which had previously been planned for the development of up to 900 homes, to the California State Lands Commission for $25 million. Under an interagency agreement among various state and federal agencies, these agencies have agreed to restore the Bolsa Chica wetlands habitat utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve of $1.5 million was included in the Company's Balance Sheet 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. See Note 5 to the Company's Financial Statements included in this Annual Report. In connection with the sale of the Bolsa Chica lowlands, the Company paid $833,333 of these costs at closing, leaving a reserve balance of $700,000 on its balance sheet as of December 31, 1997 for potential additional clean-up costs. Upon completion of the recapitalization of the Company on September 2, 1997, as discussed in Note 3 to the Company's Financial Statements included in this Annual Report, the Company applied the principles required by Fresh-Start Reporting and the carrying value of land held for development (Warner Mesa) was adjusted to fair value as of September 2, 1997, after consideration of the October 9, 1997 Coastal Commission action discussed above. The estimation process involved in the determination of fair value is inherently uncertain since it requires estimates as to future 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. The Company has considered the reduction in density from a maximum of up to 2,500 homes on the Warner Mesa to no more than 1,235 homes in its determination of the Warner Mesa project's fair value as of September 2, 1997 and as reflected in the Company's balance sheet as of December 31, 1997. The Company has received analysis and advice from its residential real estate market consultants and advisors which indicates that the fair value to be realized by the Company from the Warner Mesa development should not be materially lessened by the reduction in developable units as compared to previous estimates, since residential land value is not exclusively driven by unit count. Rather, the following factors are also highly determinative of such value: (i) the location and quality of the master planned community; (ii) the competitive condition of the real estate market at the time of development and sale; (iii) the demand for various residential product types; (iv) the product mix, segmentation and absorption rate; 3 (v) the number of acres available for development; and (vi) the project development costs. The Company believes that the lower number of residential units will not materially reduce the Warner Mesa project's fair value; however, there can be no assurance in this regard. RANCHO SAN PASQUAL (FORMERLY EAGLE CREST). In the City of Escondido in San Diego County, approximately 30 miles north of downtown San Diego, the Company is developing an 850-acre, gated community consisting of 580 residential lots surrounding an 18-hole championship golf course which the Company operated from May 1993 to June 1996. The Company sold its Eagle Crest Golf Course at Rancho San Pasqual in June 1996, to a nationally recognized owner/operator of high-end daily fee golf courses and private country clubs for $6.1 million. Infrastructure construction was partially financed in 1995 and 1996 by a major financial institution which provided a total of $10 million in construction loans for the project. During the years ended 1996 and 1997, the Company sold 218 and 215 residential lots, respectively, at Rancho San Pasqual to four homebuilders for gross proceeds aggregating approximately $10.1 million and $9.8 million, respectively. The remaining 35 phase I residential lots are scheduled to be sold in April 1998 to a homebuilder for approximately $1.6 million. The Company is evaluating its alternatives with respect to the 112 lots remaining in phase II and expects to either build such homes or sell these lots to another homebuilder. FAIRBANKS HIGHLANDS. This property consists of approximately 390 acres near the communities of Fairbanks Ranch and Rancho Santa Fe in the northern part of the City of San Diego. The approved vesting tentative map includes 93 single-family residential lots averaging 1.34 acres each and approximately 215 acres of open space. In December 1996, the Company formed a joint venture with a major homebuilder to develop this 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 is managing the day-to-day operations of the venture, providing all construction financing and expects to build all of the homes at the site. Infrastructure construction is scheduled to begin in mid-1998, homebuilding in October 1998 and home sales are expected to commence in February 1999. ALISO VIEJO. Through a subsidiary, the Company owns a 49% general partnership interest in a 230-acre project, planned for approximately 1,200 single-family residential units in southern Orange County. The property is well located, within close proximity to transportation infrastructure, employment centers and other attractions, including the Orange County (John Wayne) Airport (approximately 15 miles), the San Joaquin Hills Transportation Corridor (a quarter mile) and Laguna Beach (approximately 10 minutes). Homes are now offered for sale at all twelve planned communities, and a total of 665 homes have been sold and 189 homes were in escrow as of March 2, 1998. However, due to a significant shortfall in sales during 1995 (following the Orange County bankruptcy) versus forecast, the highly leveraged capital 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 established a reserve in 1995 as discussed in Note 4 to the Company's Financial Statements included in this Annual Report. OTHER PROPERTIES. The Company owns land zoned for commercial/industrial use in Signal Hill, California, and resort/residential property in Michigan. These properties are currently held for sale, subject to market conditions. PROPERTY DISPOSITIONS. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of the Company's property dispositions during 1995, 1996 and 1997. ENVIRONMENTAL AND REGULATORY MATTERS. Before the Company can develop a property, it must obtain a variety of discretionary approvals from local and state governments, as well as the federal government in 4 certain circumstances, with respect to such matters as zoning, subdivision, grading, architecture and environmental matters. The entitlement approval process is often a lengthy and complex procedure requiring, among other things, the submission of development plans and reports and presentations at public hearings. Because of the provisional nature of these approvals and the concerns of various environmental and public interest groups, the approval process can be delayed by withdrawals or modifications of preliminary approvals and by litigation and appeals challenging development rights. Accordingly, the ability of the Company to develop properties and realize income from such projects could be delayed or prevented due to litigation challenging recently obtained governmental approvals. As more fully described above, in October 1997, the Coastal Commission approved Orange County's residential development plan for Warner Mesa with suggested modifications, in response to an August 1997 trial court order in connection with the Coastal Act Lawsuit. As further described above, in February 1998, the trial court decided that the Coastal Commission should hold a third hearing on the LCP. Therefore, the approval process for the Warner Mesa property remains subject to the litigation described above, and there can be no assurance that further delays will not result. The Company has expended and will continue to expend significant financial and managerial resources to comply with environmental regulations and local permitting requirements. Although the Company believes that its operations are in general compliance with applicable environmental regulations, certain risks of unknown costs and liabilities are inherent in developing and owning real estate. However, the Company does not believe that such costs will have a material adverse effect on its business, financial condition or results of operations, including the potential remediation expenditures proposed in connection with certain indemnity obligations discussed below in "Corporate Indemnification Matters." 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 may have retained liabilities relating to certain of these assets and businesses, including certain tax liabilities. See Notes to the Company's Financial Statements included in this Annual Report. Many of such liabilities are supported by insurance or by indemnities from certain of the Company's predecessors 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 AlliedSignal Inc., a predecessor of the Company. The Company has not been named as a PRP at the site. However, AlliedSignal 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 would pay 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. 5 In June 1997, the Company entered into an agreement with The Charter Township of Calumet (the "Township"), whereby the Company has agreed to sell approximately 160 acres of its land in Michigan to the Township in exchange for the Township obtaining an agreement from EPA to release the Company, its predecessors and affiliates from any environmental liability associated with the Torch Lake Site. There can be no assurances that the Township will be successful in obtaining such a release of the Company from EPA. EMPLOYEES. As of March 2, 1998 the Company and its subsidiaries had approximately 172 employees, approximately 89 of which are engaged in the commercial development business which is scheduled to be sold as discussed in Note 4 to the Company's Financial Statements included in this Annual Report. YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. In 1998, the Company will initiate a conversion from existing accounting software to programs that are Year 2000 compliant. Management believes that the Year 2000 issue will not pose significant operational problems for its computer systems. The Company will also conduct formal communications with all of its significant suppliers to determine the extent to which those third parties' failure to remediate their own Year 2000 issue may pose problems for the Company. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company anticipates completing the Year 2000 project within one year but not later than October 31, 1999, which is prior to any anticipated impact on its operating systems. The total cost of the Year 2000 project will be expensed as incurred and is not expected to have a material effect on the Company's results of operations. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Certain of the foregoing information as well as certain information set forth in "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 appeals of the trial court decisions in the CEQA Lawsuit and the Coastal Act Lawsuit related to the Company's principal asset, Warner Mesa), injunctions prohibiting implementation of approved development plans pending the outcome of litigation, 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. 6 EXECUTIVE OFFICERS OF THE COMPANY Mr. Donald M. Koll is also an executive officer of The Koll Company ("Koll") and its affiliates. Accordingly, Mr. Koll devotes less than all of his working time to the businesses of the Company. Set forth below is information with respect to each executive officer.
NAME AND TITLE AGE* BUSINESS EXPERIENCE - ------------------------------------------------ ----- -------------------------------------------------------- Donald M. Koll 64 Chairman of the Board of the Company since March 1993 Chairman of the Board and Chief Executive and Chief Executive Officer since October 1996. Managing Officer Director - President and Director of the Company since prior to 1993. Chairman of the Board and Chief Executive Officer of Koll (general contracting and international real estate development since prior to 1993) and a director of CB Commercial Real Estate Services Group, Inc. ("CB") which acquired Koll Management Services, Inc., also known as Koll Real Estate Services ("KRES") (real estate management), in August 1997. Also a Director of Fidelity National Financial, Inc. since March 1995. Richard M. Ortwein 56 President of the Company since October 1993. President President of the Southern California Division of Koll and Executive Vice President of KRES prior to 1993. Director of KRES from prior to 1993 to March 1994. Raymond J. Pacini 42 Executive Vice President and Secretary of the Company Executive Vice President, since 1993. Chief Financial Officer and Treasurer of the Chief Financial Officer, Company since prior to 1993. Executive Vice President Treasurer and Secretary and Chief Financial Officer of KRES from March to November 1993. Sandra G. Sciutto 37 Senior Vice President of the Company since February 1996 Senior Vice President and and Controller of the Company since March 1993. Group Controller Controller of KRES from prior to 1993 until October 1993.
- ------------------------ * As of March 2, 1998 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. 7 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 Warner Mesa and other holdings at Huntington Beach, CA 340 Oceanfront residential community Bolsa Chica Rancho San Pasqual Escondido, CA 475 Residential community Fairbanks Highlands** San Diego, CA 390 Residential community Aliso Viejo** Aliso Viejo, CA 60 Residential community Michigan Land Upper Peninsula, MI 450 Resort/residential lots Signal Hill Signal Hill, CA 2 Industrial land
- ------------------------ * Leased ** Minority interest in partnership or limited liability company ITEM 3. LEGAL PROCEEDINGS In January 1995, the CEQA Lawsuit challenging the December 1994 approvals of the Orange County Board of Supervisors was filed in the Orange County Superior Court by the Bolsa Chica Land Trust, et al. After remanding the matter to the Board of Supervisors for additional processing and findings, in January 1997 the Superior Court entered a judgment in favor of the Company. Plaintiffs have appealed the Superior Court decision and the matter is pending in the California Court of Appeal. In March 1996, the Coastal Act Lawsuit was filed in the San Francisco County Superior Court (and later removed to San Diego Superior Court) by the Bolsa Chica Land Trust, et al. 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 in January 1996 was not in compliance with the Coastal Act and other statutory requirements. The Coastal Act Lawsuit sought to set aside the approval of the Warner Mesa project. In August 1997, the San Diego Superior Court rendered a judgment that returned the LCP to the Coastal Commission for further consideration in the context of two issues. The court's decision that the Coastal Commission reconsider the LCP was based on the court's determination (i) that development of homes in the lowlands is not in compliance with the Coastal Act, and (ii) that the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") is not in compliance with the Coastal Act. With respect to the Warner Mesa, the court determined in August 1997 that the Coastal Commission failed to weigh and resolve a conflict in Coastal Act policies related to the proposed filling of Warner Pond. The court's August 1997 decision required the Coastal Commission to reconsider its treatment of Warner Pond. In every other respect, the court denied challenges to the Coastal Commission's approval of the LCP for development of the mesa. The court specifically approved the Coastal Commission's findings with regard to (i) the relocation of raptor habitat, (ii) the adequacy of a buffer between the new residential development and the lowlands, and (iii) treatment of archeological resources. On October 9, 1997, in response to the court's decision, the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby reduced the maximum density from 2,500 homes to no more than 1,235 homes on the mesa. On November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors accepted the Coastal Commission's suggested modifications without change. On February 20, 1998, the court ruled that the Coastal Commission should not have narrowed the scope of public comments during the Coastal Commission's October 1997 hearing, and ordered the Coastal Commission to hold a third hearing on the LCP. The Company intends to appeal the court's latest decision, as well as pursue all other available legal and administrative options. The court's ruling will delay the previously planned start of infrastructure construction beyond December 31, 1998; however, the 8 Company is unable to predict the length of such delay at this time. The Company does not believe that the recent court decision will permanently prevent the Company from completing the Warner Mesa project; however, there can be no assurance in that regard or that further delays will not result. In October 1997, the Company entered into a mutual settlement and release agreement with Svedala Industries, Inc. ("Svedala") to settle the Svedala litigation, in which Svedala filed a lawsuit naming as defendants the Company and Nichols Engineering & Research Corporation ("Nichols"), an indirect wholly-owned subsidiary of the Company, as well as several other unrelated companies. The settlement agreement remains subject to court approval and will provide the Company and its subsidiaries with a complete release of Svedala's claims for any liability arising from the facts of the lawsuit in consideration for the payment of $200,000 by the Company. The lawsuit was filed on March 31, 1994, 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 costs of clean-up of a property in Mt. Olive, New Jersey and asserted that the clean-up costs totaled 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 New Henley Holdings Inc. and 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. In April 1997, The Henley Group, Inc. was merged into the Company. 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. Attorneys for both Svedala and the Company have agreed to suspend discovery pending action by the court on the proposed bar order required under the settlement agreement. On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division, naming, among others, the Company and WT/ HRC Corporation, a direct subsidiary of the Company, as defendants in a complaint for declaratory relief and breach of contract and indemnification. The complaint alleges that WT/HRC owes Whiting a defense and indemnity for several hundred asbestos cases pending in several states, as well as for similar asbestos claims which may be filed in the future. The complaint states no specified amount of damages. All claims against the Company were dismissed in early 1998, and WT/HRC is now the only named defendant. The lawsuit is based on a 1983 Asset Purchase Agreement in which the seller, Whiting-Illinois (now named WT/HRC), sold assets and the business of its "Whiting Engineered Products Group" to plaintiff's predecessor in interest. Whiting contends that the seller agreed in the Asset Purchase Agreement to indemnify Whiting for personal injury, sickness, death or property damages claims which arise from occurrences predating the closing date (December 30, 1983). The Company has denied the allegations in the complaint and has vigorously defended the action. At present, no claims are asserted against the Company itself; instead, the only remaining claims are directed against its subsidiary, WT/HRC. On July 14, 1995, the Grandview/Crest Homeowners Association, representing owners of 341 condominium units, filed a lawsuit in the Orange County Superior Court naming as defendants Lake Forest Properties, Signal Landmark, Inc., now known as Signal Landmark ("Signal"), and Onyx Land Company, as well as various unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a California joint venture which was the developer of the subject 341-unit condominium project. Lake Forest 9 Properties had two joint venture partners, Signal, an indirect subsidiary of the Company, and Onyx Land Company which was a wholly-owned subsidiary of Signal, which was dissolved and its assets transferred to Signal on December 31, 1988. Lake Forest Properties also was dissolved effective December 31, 1988. The original complaint for construction defects alleges warranty, liability, negligence and breaches of covenants, conditions and restrictions, and of fiduciary duties. On June 25, 1996, the Plaintiff filed a First Amended Complaint alleging that structural distress, life-safety hazards, and extensive water intrusion have resulted from the alleged defects in construction estimated in September 1997 at a preliminary cost of approximately $20.4 million. On March 23, 1998 the Company entered into a mutual settlement agreement with the plaintiff as well as with the Company's insurance carriers which have responsibility for the claims. The Company and its insurance carriers have agreed that the insurance carriers will bear primary responsibility for the $4.6 million settlement and related legal and other costs of defense, subject to the Company's approximately $.6 million contribution for deductibles, which does not exceed previously established reserves in the Company's balance sheet. On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class action complaint in San Diego Superior Court for breach of warranties, strict liability, negligence, breach of contract, products liability, intentional misrepresentation, fraud and deceit, and negligent representation against Signal, and a former subsidiary of Signal, for damages allegedly arising out of construction deficiencies at the plaintiffs' homes in Coronado, California (the "Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al., filed a first amended complaint against Signal and its former subsidiary for the same causes of action. On September 17, 1997, plaintiffs filed a second amended complaint for construction deficiencies in the names of 126 of the homeowners in Coronado, California, as well as the Homeowners Association. On March 3, 1998 the plaintiffs asserted a claim of $13.0 million. The Company is vigorously contesting this lawsuit and is holding discussions with its insurance carriers with responsibility for the claims. The Company expects its insurance carriers to bear primary responsibility for such claims, subject to deductibles; however, there can be no assurances in that regard. The Company believes that any liability not covered by insurance for the Coronado Lawsuit will not exceed previously established reserves with respect to such uninsured liability which is reflected in the Company's balance sheet. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following tables set forth information with respect to bid quotations for the Common Stock of the Company for the periods indicated as reported by NASDAQ. These quotations are interdealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. The new Common Stock began trading on September 2, 1997 concurrent with the Recapitalization and the one for one hundred (1:100) reverse stock split. Accordingly, prices for the old common shares have been restated to reflect the 1:100 reverse stock split.
HIGH LOW --------- --------- 1997 First Quarter.............................................................. $ 18.75 $ 12.50 Second Quarter............................................................. $ 18.75 $ 9.38 Third Quarter.............................................................. $ 14.00 $ 9.38 Fourth Quarter............................................................. $ 12.50 $ 11.50 1996 First Quarter.............................................................. $ 53.13 $ 25.00 Second Quarter............................................................. $ 31.25 $ 15.63 Third Quarter.............................................................. $ 25.00 $ 15.63 Fourth Quarter............................................................. $ 25.06 $ 12.50 1995 First Quarter.............................................................. $ 50.00 $ 34.40 Second Quarter............................................................. $ 46.90 $ 31.30 Third Quarter.............................................................. $ 59.40 $ 34.40 Fourth Quarter............................................................. $ 46.90 $ 25.00
The number of holders of record of the Company's Common Stock as of December 31, 1997 was approximately 12,000. The Company has not paid any cash dividends on its Common Stock to date, nor does the Company currently intend to pay regular cash dividends on the Common Stock. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data with respect to the Company and its subsidiaries are set forth on pages F-1 to F-2 of this Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth beginning on page F-3 of this Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements, schedules and supplementary data of the Company and its subsidiaries, listed under Item 14, are submitted as a separate section of this Annual Report, commencing on page F-10. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS. The information appearing under the caption "Election of Directors" of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in this Annual Report. EXECUTIVE OFFICERS. Information with respect to executive officers appears under the caption "Executive Officers of the Company" in Item 1 of this Annual Report. ITEM 11. EXECUTIVE COMPENSATION Information in answer to this Item appears under the caption "Compensation of Directors and Executive Officers" of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders and is incorporated herein by reference in this Annual Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in answer to this Item appears under the captions "Voting Securities and Principal Holders Thereof" and "Election of Directors" of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, and is incorporated herein by reference in this Annual Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in answer to this Item appears under the captions "Certain Transactions" and "Compensation of Directors and Executive Officers" of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, and is incorporated herein by reference 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 --------- Selected Financial Data.......................................................................... F-1 Management's Discussion and Analysis of Financial Condition and Results of Operations............ F-3 Independent Auditors' Report..................................................................... F-9 Balance Sheets as of December 31, 1996 and 1997.................................................. F-10 Statements of Operations for the Years Ended December 31, 1995, 1996, the Eight-Month Period Ended September 2, 1997 and the Four-Month Period ended December 31, 1997.... F-11 Statements of Cash Flows for the Years Ended December 31, 1995, 1996, the Eight-Month Period Ended September 2, 1997 and the Four-Month Period ended December 31, 1997.... F-12 Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997........ F-13 Notes to Financial Statements.................................................................... F-14
12 (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 4.02 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997. 3.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997. 4.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.02 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997. 4.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997. 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.
13 10.08 Restated Environmental Matters Agreement dated as of July 28, 1989, among a predecessor to the Registrant, AlliedSignal, 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 AlliedSignal, 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 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. 10.11 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. 10.12 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. 10.13 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. 10.13A Amendment No. 1 to the License Agreement, incorporated by reference to Exhibit 10.19A to Amendment No. 2 to the Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.14 Asset Purchase Agreement ("Asset Agreement") dated as of September 30, 1993 between the Registrant and The Koll Company, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.14A Amendment No. 1 to the Asset Agreement dated as of December 20, 1993, incorporated by reference to Exhibit 10.18A to the Registrant's Annual Report on Form 10-K for 1993. 10.14B Amendment No. 2 to the Asset Agreement, incorporated by reference to Exhibit 10.20B to Amendment No. 2 to the Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.15 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. 10.16 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.
14 10.17 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. 10.18 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. 10.19 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. 10.20 Bargain Purchase and Sale Agreement and Escrow Instructions dated as of February 14, 1997 between a subsidiary of the Registrant and the State of California, acting by and through the State Lands Commission, incorporated by reference to Exhibit 10.26 to Registrant's Annual Report on Form 10-K for 1996. 10.21 Employment Agreement between the Registrant and Mr. Donald M. Koll, incorporated by reference to Exhibit 10.28 to Amendment No. 2 to the Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.22 Employment Agreement between the Registrant and Mr. Richard M. Ortwein, incorporated by reference to Exhibit 10.29 to Amendment No. 2 to the Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.23 Employment Agreement between the Registrant and Mr. Raymond J. Pacini, incorporated by reference to Exhibit 10.30 to Amendment No. 2 to the Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.24 Consulting Agreement between the Registrant and Mr. Ray Wirta, incorporated by reference to Exhibit 10.31 to Amendment No. 2 to Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997. 10.25 KREG Operating Co. Stock Purchase Agreement dated as of March 30, 1998 between the Registrant and Koll Development Company LLC and certain affiliates.* 21.01 Subsidiaries of the Registrant.* 27.01 Financial Data Schedule.*
- ------------------------ * Filed herewith. (b) Reports on Form 8-K: Current Report on Form 8-K dated October 9, 1997 attaching a press release announcing the approval of a modified Local Coastal Program for the Registrant's Bolsa Chica property by the California Coastal Commission and noting that the Registrant was notified that opponents of the Bolsa Chica project filed an appeal of the August 1997 San Diego Superior Court judgment. 15 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: March 30, 1998 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. NAME TITLE DATE - ------------------------------ ------------------------------ --------------- Chairman of the Board and /s/ DONALD M. KOLL Chief Executive Officer - ------------------------------ (Principal Executive March 30, 1998 Donald M. Koll Officer) Executive Vice President and /s/ RAYMOND J. PACINI Chief Financial Officer - ------------------------------ (Principal Financial and March 30, 1998 Raymond J. Pacini Accounting Officer) /s/ PHILIP R. BURNAMAN II - ------------------------------ Director March 30, 1998 Philip R. Burnaman II /s/ JAMES J. GAFFNEY - ------------------------------ Director March 30, 1998 James J. Gaffney /s/ ROBERT J. GAGALIS - ------------------------------ Director March 30, 1998 Robert J. Gagalis /s/ THOMAS W. SABIN, JR. - ------------------------------ Director March 30, 1998 Thomas W. Sabin, Jr. /s/ J. THOMAS TALBOT - ------------------------------ Director March 30, 1998 J. Thomas Talbot /s/ MARCO F. VITULLI - ------------------------------ Director March 30, 1998 Marco F. Vitulli /s/ JOHN WICKSER II - ------------------------------ Director March 30, 1998 John Wickser II /s/ RAY WIRTA - ------------------------------ Director March 30, 1998 Ray Wirta /s/ PAUL M. ZELLER - ------------------------------ Director March 30, 1998 Paul M. Zeller 16 KOLL REAL ESTATE GROUP, INC. SELECTED FINANCIAL DATA Set forth below is selected financial data of the Company and its consolidated subsidiaries, which has been reclassified for prior periods to present the commercial development business as discontinued operations (see Note 4 to the Company's Financial Statements). On September 2, 1997, the Company completed a recapitalization under chapter 11 of the bankruptcy code (see Note 3 to the Company's Financial Statements). The following information should be read in conjunction with the financial statements beginning on page F-10 of this Form 10-K.
PREDECESSOR CO. SUCCESSOR CO. --------------------------------------------------------- ------------- EIGHT-MONTH FOUR-MONTH PERIOD PERIOD YEARS ENDED DECEMBER 31, ENDED ENDED ------------------------------------------ SEPTEMBER 2, DECEMBER 31, 1993 1994 1995 1996 1997 1997(H) --------- --------- --------- --------- ------------- ------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(a)........................... $ 43.5 $ 13.0 $ 4.8 $ 2.1 $ 7.2 Total assets(a)............................ 435.6 413.3 276.1 256.6 173.3 Bank debt(b)............................... 7.0 -- 16.6 8.2 -- Subordinated debentures and other liabilities subject to compromise(b)..... 139.3 157.3 177.6 200.3 -- Total stockholders' equity(c).............. $ 163.5 $ 145.5 $ 29.6 $ 1.1 $ 140.1 Weighted average shares outstanding at end of period(g)............................. N/A N/A N/A N/A N/A 11.9 Book value per common share-- basic(g)..... N/A N/A N/A N/A N/A $ 11.77 STATEMENT OF OPERATIONS DATA: Revenues(d),(e)............................ $ 15.2 $ 15.5 $ 26.5 $ 34.5 $ 33.9 4.3 Loss from continuing operations(c),(f)..... (19.8) (17.5) (116.0) (29.3) (85.5) (1.3) Net income (loss)(f)....................... 14.3 (18.0) (116.9) (28.9) 9.6 (.5) PER COMMON SHARE--BASIC AND DILUTED: Loss from continuing operations(g)......... N/A N/A N/A N/A N/A $ (.11) Net loss(g)................................ N/A N/A N/A N/A N/A $ (.04) WEIGHTED AVERAGE SHARES OUTSTANDING(G) N/A N/A N/A N/A N/A 11.9
- ------------------------ (a) The decrease in total assets and cash, cash equivalents and short-term investments at December 31, 1994 is primarily attributable to the funding of project development costs and general and administrative expenses, as well as funds deposited into a restricted cash account to secure a $25 million letter of credit facility related to litigation with former affiliates regarding tax sharing agreements. The decreases in cash, cash equivalents and short-term investments at December 31, 1995 and 1996 are primarily attributable to the funding of project development and infrastructure costs and general and administrative expenses, partially offset by sales of real estate held for development or sale. The decrease in total assets at December 31, 1995 is primarily due to the asset revaluation of the Bolsa Chica lowlands and Warner Mesa properties (see Note 5 to the Company's Financial Statements) and the decrease in cash described above. The increase in cash, cash equivalents and short-term investments at December 31, 1997 primarily reflects the February 1997 sale of the Bolsa Chica lowlands partially offset by repayments of bank debt and other 1997 costs. The decrease in total assets at December 31, 1997 primarily reflects Fresh-Start Reporting adjustments recorded in connection with the Recapitalization on September 2, 1997 (see Note 3 to the Company's Financial Statements). F-1 (b) The increase in bank debt at December 31, 1995 reflects borrowings under credit agreements to settle litigation with former affiliates regarding tax sharing agreements and construct infrastructure improvements at Rancho San Pasqual. The decrease in bank debt at December 31, 1996 reflects principal repayments in excess of borrowings for construction of infrastructure improvements at Rancho San Pasqual partially offset by borrowings from a bank for a Signal Landmark build-to-suit project. The decrease in bank debt at December 31, 1997 reflects the repayment of the outstanding loan balances in the first quarter of 1997. The decrease in subordinated debentures and other liabilities subject to compromise reflects the Recapitalization on September 2, 1997. (c) The decrease in equity at December 31, 1995 reflects the net loss for the year then ended, including the asset revaluation of the Bolsa Chica lowlands and Warner Mesa properties. The decrease in equity at December 31, 1996 reflects the net loss for the year then ended, primarily due to interest expense on the subordinated debentures. The increase in equity at December 31, 1997 reflects the issuance of new Common Stock in exchange for the subordinated debentures and other liabilities subject to compromise upon completion of the Recapitalization, partially offset by Fresh-Start Reporting adjustments. (d) The increase in 1995 revenues is due to an increase in land sales and residential and marina sales at Wentworth By The Sea. The increase in 1996 revenues reflects the sale of residential lots and the Eagle Crest Golf Course at Rancho San Pasqual, the formation of the Fairbanks Highlands joint venture and the sale of resort/residential lots in Michigan. The increase in 1997 revenues primarily reflects the sale of the Bolsa Chica lowlands, partially offset by the absence of the Eagle Crest Golf course sale and the formation of the Fairbanks Highlands joint venture. (e) Amounts have been reclassified to present the commercial development business as discontinued operations (see Note 4 to the Company's Financial Statements). Amounts for 1993 have also been reclassified to present Lake Superior and Deltec as discontinued operations. (f) The loss from continuing operations and net loss for the year ended December 31, 1995 reflect approximately $121.1 million of charges related to write-downs of real estate properties, including the Bolsa Chica lowlands and Warner Mesa properties. The loss from continuing operations and net loss for the year ended December 31, 1996 are primarily the result of non-cash interest charged on the subordinated debentures. The net income for the year ended December 31, 1993 reflects an extraordinary gain on extinguishment of debt. The net income for the eight-month period ended September 2, 1997 reflects the extraordinary gain on extinguishment of debt as a result of the Recapitalization, partially offset primarily by Fresh-Start Reporting adjustments, Reorganization costs and non-cash interest charged on the subordinated debentures. (g) The new Common Stock began trading on September 2, 1997 concurrent with the Recapitalization and the one for one hundred (1:100) reverse stock split. Accordingly, per share information for the old common shares is not shown as it would not be comparable. (h) See page F-4 for the pro forma impact of the pending sale of the commercial development business, which is further described in Note 4 to the Company's Financial Statements. F-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a residential land development and homebuilding company with properties located primarily in Southern California. The principal activities of the Company and its consolidated subsidiaries include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; (ii) single-family residential construction in Southern California; and (iii) providing residential real estate development services to third parties. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or homebuilders; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. On March 30, 1998, the Company executed an agreement to sell its commercial development business as further described in Note 4 to the Company's Financial Statements. The transaction is scheduled to close, subject to various conditions, on April 30, 1998 unless extended by agreement of the parties, and accordingly the Financial Statements have been reclassified to present the commercial development business as discontinued operations. The Company's immediate strategic goals are to (i) successfully appeal the February 20, 1998 court decision which ordered a third hearing before the California Coastal Commission (the "Coastal Commission") to approve the Warner Mesa (formerly known as the Bolsa Chica mesa) project; (ii) complete the permitting for development of Warner Mesa; and (iii) commence infrastructure construction on Warner Mesa as soon as possible; however, the Company may also consider other strategic and joint venture opportunities. There can be no assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals. The Company was over-leveraged from its December 1989 spin-off from The Henley Group, Inc., when it had $290 million of debt (including $144 million of subordinated debentures 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, until completion of the Recapitalization on September 2, 1997. This excessive leverage was exacerbated by continual delays between 1990 and 1997 in obtaining the governmental approvals necessary to develop the Company's principal asset, the Warner Mesa property. At the time of the 1989 spin-off from The Henley Group, Inc., the Company expected that the Warner Mesa property would be fully entitled and under construction as early as 1991. During the last seven years, the Company has generated over $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 Warner Mesa. With the February 1998 court decision which ordered a third hearing before the Coastal Commission to approve the LCP, the Company is faced with further delays in implementing its plans for residential development on Warner Mesa. Furthermore, due to the uncertainties associated with the appeals process, the Company is unable to predict the length of such delays at this time. Historically, 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 is 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. Pursuant to Fresh-Start Reporting, implementation of the Recapitalization through the prepackaged plan resulted in a write-down of Warner Mesa to fair value (which will reduce future costs of sales) and therefore, once the litigation delays are overcome and the entitlement process is completed, the Company expects to begin generating profits from the Warner Mesa project. Real estate held for development or sale and land held for development (real estate properties) are carried at fair value as of September 2, 1997, following adoption of Fresh-Start Reporting as discussed in Note 3, as adjusted by subsequent activity. The Company's real estate properties are subject to a number of uncertainties which can affect the fair values of those assets. These uncertainties include litigation or F-3 appeals of regulatory approvals (as discussed above) 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. Recently, the strengthened economy of California has resulted in improvement in the residential real estate market, and the number of potential purchasers and capital sources interested in Southern California residential properties appears to have increased, resulting in improving prices. However, there can be no assurance regarding the continued health of the California economy and the strength and longevity of current conditions affecting the residential real estate market. 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. 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 1997 results which included an extraordinary gain on extinguishment of debt, and expects to report losses until such time as sales can commence at Warner Mesa. In addition, the Company's capital expenditures for project development and infrastructure are significant. If the Company completes the sale of the commercial development business, which is scheduled to close, subject to various conditions, on April 30, 1998 unless extended by agreement of the parties, as further described in Note 4 to the Company's Financial Statements, the Company expects to have a cash balance in excess of $35.0 million to provide substantial liquidity. If the sale does not occur, the Company will continue to be dependent primarily on real estate asset sales (including sales of assets being developed by the commercial development business), and cash and cash equivalents on-hand to fund project development costs for Warner Mesa and general and administrative expenses during 1998. The Company's unrestricted cash and cash equivalents aggregated $7.2 million at December 31, 1997 and $4.4 million at February 28, 1998. The following pro forma financial data as of December 31, 1997 gives effect to the pending sale of the commercial development business, including accruals for estimated fees of the Company's investment bankers and legal counsel, and estimated taxes payable as if the transaction occurred on December 31, 1997 (in millions):
HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ----------- Assets: Cash............................................................. $ 7.2 $ 30.0 $ 37.2 Discontinued operations.......................................... 19.3 (19.3) -- All other assets................................................. 146.8 -- 146.8 ----------- ------ ----------- $ 173.3 $ 10.7 $ 184.0 ----------- ------ ----------- ----------- ------ ----------- Total liabilities.................................................. $ 33.2 $ 1.0 $ 34.2 Stockholders' equity............................................... 140.1 9.7 149.8 ----------- ------ ----------- $ 173.3 $ 10.7 $ 184.0 ----------- ------ ----------- ----------- ------ -----------
The remaining 35 phase I residential lots at Rancho San Pasqual in Escondido, California are scheduled to be sold in April, 1998 to a homebuilder for approximately $1.6 million. During the year ended F-4 December 31, 1997, the Company completed sales of 215 residential lots at Rancho San Pasqual to homebuilders for approximately $9.8 million. The Company is evaluating its alternatives with respect to the 112 lots remaining in phase II at Rancho San Pasqual and expects either to build such homes or sell these lots to another homebuilder. FINANCIAL CONDITION DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996. The $5.1 million increase in cash and cash equivalents primarily reflects the sale of the Bolsa Chica lowlands in February 1997 for $25.0 million, partially offset by repayments of $7.1 million to Nomura Asset Capital Corporation, payments of certain liabilities, spending for project development costs primarily at Warner Mesa, general and administrative expenses, and reorganization costs during the year ended December 31, 1997, as well as other activity presented in the Statements of Cash Flows. The $9.8 million decrease in real estate held for development or sale primarily reflects the sales of residential lots at Rancho San Pasqual. The $90.3 million decrease in land held for development (Warner Mesa) reflects the February 1997 sale of the Bolsa Chica lowlands for $25.0 million and a write-down under Fresh-Start Reporting of $72.7 million to reflect the fair value of Warner Mesa of $130 million as of September 2, 1997. These decreases were partially offset by investments in the Warner Mesa project during the year ended December 31, 1997, including the acquisition of an adjacent 40-acre parcel. The $3.1 million of Reorganization Value in Excess of Amounts Allocated to Net Assets of continuing operations arose from the adoption of Fresh-Start Reporting upon completion of the Company's recapitalization on September 2, 1997, as discussed in Note 3. The $9.7 million increase in discontinued operations primarily reflects the effects of Fresh-Start Reporting adjustments recorded as of September 2, 1997, with an increase in Reorganization Value in Excess of Amounts Allocated to Net Assets, partially offset by the write-off of remaining Goodwill recorded upon the Company's acquisition of the commercial development business in 1993. The $2.8 million decrease in accounts payable and accrued liabilities primarily reflects payments of accrued expenses during 1997 related to the sale of the Bolsa Chica lowlands and reorganization costs incurred during 1996. The $8.2 million decrease in bank debt primarily reflects the repayment of the outstanding loan balance due to Nomura Asset Capital Corporation, as well as repayment of a $2.0 million construction loan upon the sale of Signal Landmark's build-to-suit project in Signal Hill, California, partially offset by borrowings prior to the sale. The $200.3 million decrease in subordinated debentures and other liabilities subject to compromise reflects cancellation of such obligations and the issuance of common stock to the holders of such claims in accordance with the Recapitalization as further discussed in Note 3. The $11.0 million decrease in other liabilities primarily reflects a $5.8 million Fresh-Start adjustment to discount the carrying value of such liabilities to fair value upon completion of the Recapitalization, and payments of $3.4 million in connection with the settlement of certain claims during the second quarter of 1997. The $139.0 million increase in stockholders' equity primarily reflects the exchange of equity for subordinated debentures and other liabilities subject to compromise upon completion of the Recapitalization discussed above, partially offset by the $57.1 million net write-down of assets and liabilities to fair value under Fresh-Start Reporting as discussed in Note 3, as well as other activity presented in the Statements of Operations. F-5 DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995. The $3.9 million decrease in cash and cash equivalents primarily reflects spending for Warner Mesa 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. The $14.3 million decrease in real estate held for development or sale primarily reflects 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 a Signal Landmark build-to-suit project in Signal Hill, California. The Company sold this building upon completion of construction in the first quarter 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 $2.1 million increase in other assets primarily reflects the Company's $3.6 million joint venture interest in Fairbanks Highlands, offset by collections of receivables, recovery of deposits and reduced prepaid insurance. The $2.8 million increase in accounts payable and accrued liabilities in 1996 primarily reflects accruals related to the sale of the Bolsa Chica lowlands and the Recapitalization. The $10.6 million decrease in bank debt primarily 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 for Rancho San Pasqual and a Signal Landmark build-to-suit project during the year ended December 31, 1996. The $8.1 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. RESULTS OF OPERATIONS The nature of the Company's business is such that individual transactions often cause significant fluctuations in operating results from quarter to quarter and year to year. In addition, the Company's completion of the Recapitalization has significantly deleveraged its capital structure. Furthermore, the restatement of assets and liabilities to reflect fair value as of September 2, 1997 under Fresh-Start Reporting will reduce future cost of sales for Warner Mesa, while increasing amortization expense related to discounted liabilities and Reorganization Value in Excess of Amounts Allocated to Net Assets. 1997 COMPARED WITH 1996. The increase in revenues from asset sales of $33.6 million in 1996 to $38.2 million in 1997 and the increase in the related costs of sales from $30.2 million to $37.9 million primarily reflect the 1997 sale of the Bolsa Chica lowlands for $25.0 million, partially offset by the absence in 1997 of 1996 sales of the Fairbanks Highlands residential land for $7.6 million, the Eagle Crest Golf Course at Rancho San Pasqual for $6.1 million, and homes at Oceanside Hills for $4.9 million, as well as a $3.3 million decrease in sales of Michigan residential land. The $.9 million decrease in revenues from operations during the year ended December 31, 1997 as compared with the same period of 1996 reflects the absence in 1997 of 1996 revenues from golf course operations at Eagle Crest. F-6 The $3.0 million decrease in gross operating margins from the 1996 to 1997 period primarily reflects a $2.9 million decrease in margins on sales of Michigan residential land. The $1.5 million decrease in general and administrative expenses from 1996 to 1997 primarily reflects reduced costs of liability insurance premiums, reduced overhead expense related to residential operations, and the absence in 1997 of bonus amounts charged in 1996 related to the sale of the Bolsa Chica lowlands, partially offset by a $2.0 million increase in costs incurred in connection with the exchange offer for the Company's subordinated debentures. The $7.7 million decrease in interest expense reflects the absence of interest on the subordinated debentures after they were cancelled on September 2, 1997, the effective date of the Recapitalization, and lower interest on senior bank debt which was repaid in February 1997. The $3.9 million in other income, net for the year ended December 31, 1997 primarily reflects an aggregate of $3.1 million of nonrecurring income from (i) the sale of a minority interest in a privately held company and (ii) gains recognized in connection with the settlement of certain claims. The benefits for deferred income taxes for the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997 have been offset by corresponding valuation allowances. The Company adopted Fresh-Start Reporting upon completion of its Recapitalization on September 2, 1997 resulting in $(57.1) million of net Fresh-Start adjustments. Approximately $(63.8) million, resulting primarily from a write-down in the value of Warner Mesa partially offset by the discount on liabilities, is reflected in continuing operations. In addition, $13.6 million of Reorganization Value in Excess of Amounts Allocated to Net Assets, partially offset by the write-off of Goodwill, resulted in $6.7 million of net Fresh-Start adjustments included in discontinued operations. The $89.5 million extraordinary gain on extinguishment of debt represents the difference between the book value of subordinated debentures and other liabilities subject to compromise, which were cancelled in the Recapitalization, and the fair market value of the Company's Common Stock which was issued to the holders of such claims. 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 residential lots and the 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 a leasehold interest in 1995. The $2.1 million and $1.7 million decreases in revenues and gross margin, respectively, from operations primarily reflect the absence of Wentworth marina revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June 1996. The $1.4 million increase in general and administrative expenses in 1996 primarily reflects costs incurred in connection with the sale of the Bolsa Chica lowlands and the exchange offer for the Company's subordinated debentures. The $2.3 million increase in interest expense from $22.6 million in 1995 to $24.9 million in 1996 principally reflects compounded non-cash interest on the Company's subordinated debentures. F-7 The $4.0 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 $11.0 million increase in revenues from $15.5 in 1994 to $26.5 in 1995 and the increase in cost of sales from $14.3 million in 1994 to $24.3 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 estimates of net realizable value for the Company's Bolsa Chica lowlands and Warner Mesa properties (see Note 5 of Notes to Financial Statements) as well as the Wentworth project and the golf course at Rancho San Pasqual. The change in other expense (income), net from $1.2 million of expense in 1994 to $2.6 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 4 of Notes to Financial Statements). The improvement in provision (benefit) for income taxes of $25.2 million in 1995 primarily reflects the benefit related to the write-down of real estate properties (see Note 9 of Notes to 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 appeals of the trial court decisions in the CEQA Lawsuit and the Coastal Act Lawsuit related to the Company's principal asset, Warner Mesa), injunctions prohibiting implementation of approved development plans pending the outcome of litigation, 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements, schedules and supplementary data of the Company and its subsidiaries, listed under Item 14, are submitted as a separate section of this Annual Report, commencing on page F-10. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. F-8 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. (the Company) as of December 31, 1997 (Successor Company) and December 31, 1996 (Predecessor Company) and the related statements of operations, cash flows and changes in stockholders' equity for the four-month period ended December 31, 1997 (Successor Company), the eight-month period ended September 2, 1997 and the years ended December 31, 1996 and 1995 (Predecessor Company). 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. As discussed in Note 3 to the financial statements, on August 19, 1997, the Bankruptcy Court confirmed the Plan of Reorganization which became effective on September 2, 1997. Accordingly, the accompanying financial statements have been prepared in conformity with AICPA Statement of Position 90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods, as described in Note 3. In our opinion, the Successor Company financial statements present fairly, in all material respects, the financial position of Koll Real Estate Group, Inc. as of December 31, 1997 and the results of its operations and its cash flows for the four-month period ended December 31, 1997, in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Company financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor Company as of December 31, 1996, and the results of its operations and its cash flows for the eight-month period ended September 2, 1997 and the years ended December 31, 1996 and 1995 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 Warner Mesa 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 24, 1998 (except for Note 10 as to which this date is March 23, 1998 and except for Note 4 as to which the date is March 30, 1998) F-9 KOLL REAL ESTATE GROUP, INC. BALANCE SHEETS
PREDECESSOR SUCCESSOR COMPANY COMPANY ----------- ----------- DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- (IN MILLIONS) ASSETS Cash and cash equivalents................................................................. $ 2.1 $ 7.2 Restricted cash........................................................................... .2 -- Real estate held for development or sale.................................................. 13.8 4.0 Land held for development................................................................. 223.5 133.2 Reorganization value in excess of amounts allocated to net assets......................... -- 3.1 Discontinued operations................................................................... 9.6 19.3 Other assets.............................................................................. 7.4 6.5 ----------- ----------- $ 256.6 $ 173.3 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities................................................ $ 6.3 $ 3.5 Bank debt............................................................................... 8.2 -- Subordinated debentures and other liabilities subject to compromise under reorganization proceedings........................................................................... 200.3 -- Other liabilities....................................................................... 40.7 29.7 ----------- ----------- Total liabilities..................................................................... 255.5 33.2 ----------- ----------- Commitments and Contingencies Stockholders' equity: Common Stock--$.05 par value; 18,000,000 shares authorized; no shares and 11,906,378 shares outstanding, respectively...................................................... -- .6 Series A (convertible redeemable nonvoting) Preferred Stock--$.01 par value; 42,505,504 shares authorized; 38,886,626 and no shares outstanding, respectively................. .4 -- Class A (voting) Common Stock--$.05 par value; 625,000,000 shares authorized; 48,938,543 and no shares outstanding, respectively............................................... 2.4 -- Class B (convertible nonvoting) Common Stock--$.05 par value; 25,000,000 shares authorized and no shares outstanding................................ -- -- Capital in excess of par value............................................................ 229.2 140.0 Deferred proceeds from stock issuance..................................................... (.4) -- Minimum pension liability................................................................. (.6) -- Accumulated deficit....................................................................... (229.9) (.5) ----------- ----------- Total stockholders' equity............................................................ 1.1 140.1 ----------- ----------- $ 256.6 $ 173.3 ----------- ----------- ----------- -----------
See independent auditors' report and the accompanying notes to financial statements. F-10 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY SUCCESSOR ------------------------------------------ COMPANY --------------- FOR THE YEARS ENDED EIGHT-MONTH FOUR-MONTH --------------------------- PERIOD ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 2, DECEMBER 31, 1995 1996 1997 1997 ------------ ------------- ------------- --------------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenues: Asset sales........................................... $ 23.5 $ 33.6 $ 33.9 $ 4.3 Operations............................................ 3.0 .9 -- -- ------------ ------ ------ ----- 26.5 34.5 33.9 4.3 ------------ ------ ------ ----- Costs of: Asset sales........................................... 21.6 30.2 33.6 4.3 Operations............................................ 2.7 1.0 -- -- ------------ ------ ------ ----- 24.3 31.2 33.6 4.3 ------------ ------ ------ ----- Gross operating margin.................................. 2.2 3.3 .3 -- General and administrative expenses..................... 7.0 8.4 5.5 1.4 Interest expense........................................ 22.6 24.9 17.1 .1 Write-down of real estate properties.................... 121.1 -- -- -- Other expense (income), net............................. 2.6 (1.4) (3.7) (.2) ------------ ------ ------ ----- Loss from continuing operations before reorganization items and income taxes................................. (151.1) (28.6) (18.6) (1.3) Reorganization items: Fresh-start adjustments............................... -- -- 63.8 -- Reorganization costs.................................. -- .6 2.8 -- ------------ ------ ------ ----- Loss from continuing operations before income taxes..... (151.1) (29.2) (85.2) (1.3) Provision (benefit) for income taxes.................... (35.1) .1 .3 -- ------------ ------ ------ ----- Loss from continuing operations......................... (116.0) (29.3) (85.5) (1.3) Income (loss) from discontinued operations, net of income tax benefit of $.4, $0, $0 and $0, respectively........................................... (.9) .4 5.6 .8 ------------ ------ ------ ----- Loss before extraordinary gain.......................... (116.9) (28.9) (79.9) (.5) Extraordinary gain on extinguishment of debt, net of income taxes of $0..................................... -- -- 89.5 -- ------------ ------ ------ ----- Net income (loss)....................................... $ (116.9) $ (28.9) $ 9.6 $ (.5) ------------ ------ ------ ----- ------------ ------ ------ ----- Earnings (loss) per common share--basic and diluted: Continuing operations................................. N/A N/A N/A $ (.11) Discontinued operations............................... N/A N/A N/A .07 Extraordinary gain.................................... N/A N/A N/A -- ----- Net loss per common share--basic and diluted............ N/A N/A N/A $ (.04) ----- -----
See independent auditors' report and accompanying notes to financial statements. F-11 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY SUCCESSOR ------------------------------------------ COMPANY --------------- FOR THE YEARS ENDED EIGHT-MONTH FOUR-MONTH --------------------------- PERIOD ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 2, DECEMBER 31, 1995 1996 1997 1997 ------------ ------------- ------------- --------------- (IN MILLIONS) Cash flows from operating activities: Net income (loss)..................................... $ (116.9) $ (28.9) $ 9.6 $ (.5) Adjustments to reconcile to cash provided (used) by operating activities: Fresh-start adjustments............................. -- -- 63.8 -- Extraordinary gain on extinguishment of debt........ -- -- (89.5) -- Non-cash reorganization costs....................... -- -- 1.9 -- Depreciation and amortization....................... .5 .2 .1 .1 Non-cash interest expense........................... 20.5 23.2 17.1 .1 Write-down of real estate properties................ 121.1 -- -- -- Gains on asset sales................................ (1.9) (3.4) (.3) -- Proceeds from asset sales, net...................... 22.5 31.5 33.5 4.2 Investments in real estate held for development or sale.............................................. (18.2) (9.0) (2.4) (.2) Investment in land held for development............. (7.8) (3.5) (4.2) (3.2) Decrease (increase) in other assets................. 7.9 (2.8) .9 (.2) Decrease in accounts payable, accrued and other liabilities....................................... (58.2) (5.3) (6.8) (1.7) Other, net.......................................... 1.0 .4 -- .5 ------------ ------ ------ ----- Cash provided (used) by operating activities of continuing operations........................... (29.5) 2.4 23.7 (.9) ------------ ------ ------ ----- Cash provided (used) by operating activities of discontinued operations......................... .1 (10.5) (37.6) (35.4) ------------ ------ ------ ----- Cash flows from investing activities: Acquisitions.......................................... (.3) -- -- -- ------------ ------ ------ ----- Cash used by investing activities................... (.3) -- -- -- ------------ ------ ------ ----- Cash flows from financing activities: Borrowings of bank debt............................... 21.6 9.8 .9 -- Repayments of bank debt............................... (5.0) (18.2) (9.1) -- Use of restricted cash................................ 10.0 2.3 .2 -- Deposits of restricted cash........................... (5.0) -- -- -- ------------ ------ ------ ----- Cash provided (used) by financing activities of continuing operations............................. 21.6 (6.1) (8.0) -- ------------ ------ ------ ----- Cash provided by financing activities of discontinued operations........................... -- 11.4 27.1 36.2 ------------ ------ ------ ----- Net increase (decrease) in cash and cash equivalents (8.1) (2.8) 5.2 (.1) Cash and cash equivalents--beginning of period.......... 13.0 4.9 2.1 7.3 ------------ ------ ------ ----- Cash and cash equivalents--end of period................ $ 4.9 $ 2.1 $ 7.3 $ 7.2 ------------ ------ ------ ----- ------------ ------ ------ -----
See independent auditors' report and accompanying notes to financial statements. F-12 KOLL REAL ESTATE GROUP, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DEFERRED RETAINED SERIES A CLASS A CAPITAL IN PROCEEDS FROM MINIMUM EARNINGS PREFERRED COMMON EXCESS OF STOCK PENSION (ACCUMULATED STOCK STOCK COMMON STOCK PAR VALUE ISSUANCE LIABILITY DEFICIT) ------------- ----------- ------------- ----------- ------------- ------------- ------------- (IN MILLIONS) Balance December 31, 1994.... $ .4 $ 2.3 -- $ 230.5 $ (1.6) $ (2.0) $ (84.1) Net loss................... -- -- -- -- -- -- (116.9) Minimum pension liability................ -- -- -- -- -- 1.0 -- Valuation adjustment to deferred proceeds from stock issuance........... -- -- -- (.5) .5 -- -- Conversion of preferred to common stock............. -- .1 -- (.1) -- -- -- -- --- ----- ----------- ----- ----- ------------- Balance December 31, 1995.... .4 2.4 -- 229.9 (1.1) (1.0) (201.0) Net loss................... -- -- -- -- -- -- (28.9) Minimum pension liability................ -- -- -- -- -- .4 -- Valuation adjustment to deferred proceeds from stock issuance........... -- -- -- (.7) .7 -- -- -- --- ----- ----------- ----- ----- ------------- Balance December 31, 1996.... .4 2.4 -- 229.2 (.4) (.6) (229.9) Net income (Eight-month period--Predecessor Company)................. -- -- -- -- -- -- 9.6 -- --- ----- ----------- ----- ----- ------------- Predecessor Company Balance at September 2, 1997........ .4 2.4 -- 229.2 (.4) (.6) (220.3) Recapitalization and Fresh-Start Adjustments: Cancel Class A Common and Series A Preferred Shares................... (.4) (2.4) -- -- -- -- -- Issue New Common Shares.... -- -- $ .6 -- .4 -- -- Fresh-Start Adjustments.... -- -- -- (89.2) -- -- 220.3 -- --- ----- ----------- ----- ----- ------------- Successor Company Balance at September 3, 1997........... -- -- .6 140.0 -- (.6) -- Net loss (Four-month period-- Successor Company).......... -- -- -- -- -- -- (.5) Minimum pension liability.... -- -- -- -- -- .6 -- -- --- ----- ----------- ----- ----- ------------- Successor Company Balance at December 31, 1997........... $ -- $ -- $ .6 $ 140.0 $ -- $ -- $ (.5) -- -- --- ----- ----------- ----- ----- ------------- --- ----- ----------- ----- ----- ------------- TOTAL --------- Balance December 31, 1994.... $ 145.5 Net loss................... (116.9) Minimum pension liability................ 1.0 Valuation adjustment to deferred proceeds from stock issuance........... -- Conversion of preferred to common stock............. -- --------- Balance December 31, 1995.... 29.6 Net loss................... (28.9) Minimum pension liability................ .4 Valuation adjustment to deferred proceeds from stock issuance........... -- --------- Balance December 31, 1996.... 1.1 Net income (Eight-month period--Predecessor Company)................. 9.6 --------- Predecessor Company Balance at September 2, 1997........ 10.7 Recapitalization and Fresh-Start Adjustments: Cancel Class A Common and Series A Preferred Shares................... (2.8) Issue New Common Shares.... 1.0 Fresh-Start Adjustments.... 131.1 --------- Successor Company Balance at September 3, 1997........... 140.0 Net loss (Four-month period-- Successor Company).......... (.5) Minimum pension liability.... .6 --------- Successor Company Balance at December 31, 1997........... $ 140.1 --------- ---------
See independent auditors' report and accompanying notes to financial statements. F-13 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-family residential construction in Southern California; and (iii) providing residential real estate development services to third parties. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or homebuilders; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. On September 2, 1997, the Company completed a recapitalization under Chapter 11 of the bankruptcy code (see Note 3). On March 30, 1998, the Company executed an agreement to sell its commercial development business as further described in Note 4. The transaction is scheduled to close, subject to various conditions, on April 30, 1998, unless extended by agreement of the parties. Accordingly, the financial results of the commercial development business have been treated as discontinued operations in the accompanying financial statements. 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 principal 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-14 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (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. On September 2, 1997, the Company completed its recapitalization pursuant to court confirmation of a Prepackaged Plan of Reorganization, and the Company applied 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 was adjusted to fair value (Note 3). 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. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO NET ASSETS Reorganization Value in Excess of Amounts Allocated to Net Assets arose from the adoption of Fresh-Start Reporting upon completion of the Company's recapitalization on September 2, 1997 (Note 3) and is being amortized on a straight-line basis over 15 years. The Company evaluates the recoverability of this intangible asset at each balance sheet date. The recoverability of this intangible is determined by comparing the carrying value of the intangible to the estimated income of the Company on an undiscounted cash flow basis. Any impairment is recorded at the date of determination. Approximately $13.6 million of such value has been allocated to the commercial development business, which has been reflected in discontinued operations as of December 31, 1997, net of related amortization (Note 4). 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, 1996 and 1997 the accrued unfunded costs totaled $.9 million and $.4 million, respectively. 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. F-15 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. EARNINGS (LOSS) PER COMMON SHARE The Company computes earnings per share in accordance with SFAS No. 128, "Earnings per Share". Earnings per share is computed using the weighted average number of outstanding shares of the Successor Company's (defined in Note 3 below) Common Stock, including the conversion rights of all Debenture holders, which expire on September 2, 1998, for periods commencing September 2, 1997. For the period ended December 31, 1997 the weighted average common shares outstanding was 11.9 million shares. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. Diluted earnings per share is not presented for the period ended December 31, 1997 due to the antidilutive effect on earnings per share. Per share data for periods prior to September 2, 1997 have been omitted as these amounts are not comparable to the Successor Company's current capital structure. NEW ACCOUNTING PRONOUNCEMENTS In 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", were issued and are effective for fiscal years beginning after December 15, 1997. The Company is reviewing the impact of these statements on its financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 -- RECAPITALIZATION On September 2, 1997, the Company completed its recapitalization (the "Recapitalization") which became effective pursuant to a prepackaged plan of reorganization that was confirmed by the U.S. Bankruptcy Court for the District of Delaware on August 19, 1997. The prepackaged plan was filed by the Company, excluding all of its subsidiaries and affiliates, contemporaneously with a voluntary petition for relief under Chapter 11 of the bankruptcy code on July 14, 1997. The Recapitalization had previously received over 95% approval of each class of stock and bondholders that voted through a public solicitation process in June 1997. On September 2, 1997, the effective date of the Recapitalization, the Company (referred to as "Successor Company" for periods after September 2, 1997) adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as promulgated by the American Institute of Certified Public Accountants in November 1990. Accordingly, all assets and liabilities were revalued to reflect their reorganization value, approximating their fair value at the effective date of the Recapitalization. In addition, the accumulated deficit of the Company was eliminated and its capital structure recast in conformity with the Recapitalization, and as such, the Company has recorded the effects of the Recapitalization and Fresh-Start Reporting as of the effective date. F-16 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Recapitalization provided for a restructuring of the Company's capital structure. The only impaired parties under the Recapitalization were the holders of (a) the Company's 12% Senior Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Senior Debentures"), (b) the Company's 12% Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Subordinated Debentures") (collectively, the "Debentures"), (c) liquidated, non-contingent claims, and (d) equity securities of the Company. The prepackaged plan did not alter the Company's obligations to its other creditors, including its trade creditors, customers, employees, holders of contingent and unliquidated claims, holders of guaranty claims, and parties to contracts with the Company. Under the Recapitalization, Senior Debenture holders and Subordinated Debenture holders are entitled to receive 56 shares and 28 shares, respectively, for each $1,000 of principal amount of their Debentures outstanding as of March 15, 1997, and holders of liquidated, non-contingent claims received 56 shares for each $1,000 of their claims (all after consolidation of all outstanding shares of preferred and common stock into a single class of newly issued common stock and the reverse split described below). Upon completion of the Recapitalization, approximately 90.1% of the Company's equity, in the form of newly issued shares of common stock, excluding shares of common stock underlying certain options and warrants, is now owned by former holders of the Debentures and liquidated, non-contingent claims (approximately 80.3% by former holders of Senior Debentures and liquidated, non-contingent claims and 9.8% by former holders of Subordinated Debentures). The remaining 9.9% of the Company's equity is now owned, in the aggregate, by former holders of the Company's Class A Common Stock (the "Class A Common Stock") and Series A Preferred Stock (the "Preferred Stock") (approximately 5.8% by former holders of Preferred Stock and 4.1% by former holders of Class A Common Stock). Pursuant to approvals received at its 1997 Annual Meeting of Stockholders, the Company consolidated its Class A Common Stock and Preferred Stock into a single class of stock, through the issuance of 1.75 shares of new common stock (the "Common Stock") for each outstanding share of Preferred Stock and one share of Common Stock for each outstanding share of Class A Common Stock and effected a one for one hundred (1:100) reverse stock split of each outstanding share of the Company's capital stock on September 2, 1997, the effective date of the Recapitalization. Upon implementation of the Recapitalization, $216.9 million book value of Debentures and other liabilities subject to compromise were cancelled in exchange for equity, resulting in an $89.5 million extraordinary gain on extinguishment of debt. This gain was partially offset by $(57.1) million of net adjustments to revalue all assets and liabilities to reflect fair value as of September 2, 1997 as required by Fresh-Start Reporting. Approximately $(63.8) million of such adjustments relate to continuing operations and are partially offset by $6.7 million related to discontinued operations. The results of operations and cash flows for the eight-month period ended September 2, 1997 include operations prior to completion of the Recapitalization (referred to as "Predecessor Company"). The results of operations and cash flows for the four-month period ended December 31, 1997 include operations subsequent to the Company's Recapitalization and reflect the effects of Fresh-Start Reporting. Operations for the four-month period ended December 31, 1997 and the balance sheet as of December 31, 1997 are not comparable with prior periods for the reasons discussed above. The reorganization value of the Company's common equity was determined by the Company with the assistance of financial advisors after consideration of several factors and by reliance on various valuation methods, including discounted projected cash flows, and other economic and industry information relevant to the operations of the Company. The reorganization value of the Company was allocated to specific asset categories pursuant to Fresh-Start Reporting. Reorganization Value in Excess of Amounts Allocated to Net Assets, which represents the difference in the Company's estimated valuation and the Company's net assets at fair value, of $3.1 million is amortized on a straight-line basis over 15 years. In connection with the pending sale of the commercial development business, $13.6 million of Reorganization Value in Excess of F-17 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Amounts Allocated to Net Assets has been allocated to such business, which is reflected in discontinued operations as of December 31, 1997 net of related amortization. Professional fees and expenditures directly related to the Company's Recapitalization are classified as reorganization costs and were expensed as incurred. Reorganization costs during the periods ended September 2, 1997 consisted primarily of legal, financial advisors and other professional fees, incentive compensation to directors and officers of the Company and costs related to the solicitation of security holder acceptances of the Recapitalization. The Company's Class A Common Stock and Preferred Stock were delisted from the Nasdaq National Market on July 14, 1997 pending completion of the Recapitalization. The Nasdaq Stock Market, Inc. listed the post-Recapitalization Common Stock of the Company on the National Market effective September 4, 1997, following completion of the Recapitalization. NOTE 4 -- ACQUISITIONS AND DISPOSITIONS On March 30, 1998 the Company executed a definitive agreement with Koll Development Company LLC ("KDC") and an affiliate regarding the sale of the Company's commercial development business for (1) $30 million in cash plus adjustments for 1998 activity; and (2) the assumption by KDC of all liabilities related to the business. KDC is a newly formed limited liability company, whose members include the Company's current Chairman and Chief Executive Officer, Donald M. Koll and its President, Richard M. Ortwein, along with an affiliate of NorthStar Capital Investment Corp. Upon completion of the transaction, Messrs. Koll and Ortwein will resign from their current positions with the Company, and the Company will change its name to discontinue use of the "Koll" name. The Company also announced that, effective upon completion of the transaction, Raymond J. Pacini, its Chief Financial Officer since 1992, will be appointed as the Company's new President and Chief Executive Officer. The Company received a deposit of $1 million from KDC upon execution of the stock purchase agreement, which is nonrefundable except under limited circumstances, including if a higher offer for the commercial development business ultimately is accepted by the Company, in which case KDC also would be paid a break-up fee of $2 million plus up to $500,000 for legal and other advisory fees. The transaction is scheduled to close, subject to various conditions, on April 30, 1998, unless extended by agreement of the parties. The Company expects to realize a gain on this transaction of approximately $9.5 million; however, there can be no assurance that the transaction with KDC will ultimately be completed or close on schedule. The following pro forma financial data as of December 31, 1997 gives effect to the pending sale of the commercial development business, including accruals for estimated fees of the Company's investment bankers and legal counsel, and estimated taxes payable, as if the transaction occurred on December 31, 1997 (in millions):
HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ----------- Assets: Cash............................................................. $ 7.2 $ 30.0 $ 37.2 Discontinued operations.......................................... 19.3 (19.3) -- All other assets................................................. 146.8 -- 146.8 ----------- ------ ----------- $ 173.3 $ 10.7 $ 184.0 ----------- ------ ----------- ----------- ------ ----------- Total liabilities.................................................. $ 33.2 $ 1.0 $ 34.2 Stockholders' equity............................................... 140.1 9.7 149.8 ----------- ------ ----------- $ 173.3 $ 10.7 $ 184.0 ----------- ------ ----------- ----------- ------ -----------
F-18 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Discontinued operations is comprised of the following at December 31, 1996 and 1997 (in millions):
1996 1997 --------- --------- Restricted cash............................................................ $ -- $ .2 Real estate held for development or sale................................... 11.4 82.1 Reorganization value in excess of amounts allocated to net assets.......... -- 13.3 Other assets............................................................... 13.8 7.4 Accounts payable and other liabilities..................................... (4.2) (6.2) Bank debt.................................................................. (11.4) (74.6) Minority interest.......................................................... -- (2.9) --------- --------- Net assets......................................................... $ 9.6 $ 19.3 --------- --------- --------- ---------
Revenues related to discontinued operations were $7.5 million, $10.3 million, $26.9 million and $17.3 million for the years ended December 31, 1995, 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997, respectively. The net loss from discontinued operations for the year ended December 31, 1995 was $.9 million. Net income from discontinued operations for the year ended December 31, 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997 was $.4 million, $5.6 million and $.8 million, respectively. The net income for the eight-month period ended September 2, 1997 reflects the recording of $13.6 million in Reorganization Value in Excess of Amounts Allocated to Net Assets, partially offset by a $6.9 million write-off of goodwill as required by Fresh-Start Reporting. 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 land 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 million shares (pre-reverse split) of Class A Common Stock and warrants to purchase an additional 2 million shares (pre-reverse split). 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. Due to a significant shortfall in sales during 1995 (following the Orange County bankruptcy) versus forecast, the highly leveraged capital 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 guaranty, the Company intends to dispute the enforceability of the guaranty. Nevertheless, a reserve relating to the guaranteed capital contribution notes, including accrued interest thereon, of $6.0 million and $6.5 million at December 31, 1996 and 1997, respectively, for this partnership is included in other liabilities. 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. The warrants issued in 1994 were cancelled upon completion of the Company's Recapitalization in September 1997. F-19 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Summarized financial information of AV Partnership is presented below at December 31, 1996 and 1997 and for the years then ended (in millions):
1996 1997 --------- --------- Balance Sheet Data: Total assets....................................................................... $ 101.5 $ 83.1 Total project debt and other liabilities........................................... 109.7 101.8 --------- --------- Partners' capital (deficit)........................................................ $ (8.2) $ (18.7) --------- --------- --------- --------- Statement of Operations Data: Revenues........................................................................... $ 44.3 $ 85.3 Expenses........................................................................... (55.5) (95.9) --------- --------- Net loss........................................................................... $ (11.2) $ (10.6) --------- --------- --------- ---------
The Company uses the equity method to account for its investment in AV Partnership and accordingly, the statement of operations includes losses of $2.0 million and $1.2 million, respectively, for the years ended December 31, 1995 and 1996. The losses recorded in 1996 and 1997 reflect accrued interest on guaranteed capital contribution notes, 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 above. NOTE 5 -- LAND HELD FOR DEVELOPMENT The Company owns approximately 340 acres located in Orange County, California, adjacent to the Pacific Ocean and the Bolsa Chica lowlands (which were sold by the Company to the State of California as described below), surrounded by the City of Huntington Beach and approximately 35 miles south of downtown Los Angeles. The Company's holdings include approximately 200 acres to be developed on a mesa north of the Bolsa Chica lowlands ("Warner Mesa"), approximately 100 acres on, or adjacent to, the Huntington mesa and approximately 40 acres of lowlands which were acquired in September 1997. The planned community at Warner Mesa is expected to offer a broad mix of home choices, including primarily single-family homes, as well as townhomes, at a wide range of prices. A Local Coastal Program ("LCP") for development of up to 3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica lowlands, which were subsequently sold as discussed below) was approved by the Orange County Board of Supervisors in December 1994 and by the California Coastal Commission (the "Coastal Commission") in January 1996. A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of Supervisors was filed in January 1995. After remanding the matter to the Board of Supervisors for additional processing and findings, in January 1997 the court entered a judgment in favor of the Company. Plaintiffs in the CEQA Lawsuit have appealed the court's decision and the appeal is pending. F-20 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging the approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit was entered by the court in August 1997, and required the Coastal Commission to reconsider the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") and development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in response to the court's decision, the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby reduced the maximum density from 2,500 homes to no more than 1,235 homes on the mesa. On November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors accepted the Coastal Commission's suggested modifications. On February 20, 1998, the court ruled that the Coastal Commission should not have narrowed the scope of public comments during the Coastal Commission's October 1997 hearing, and ordered the Coastal Commission to hold a third hearing on the LCP. The Company intends to appeal the court's latest decision, as well as pursue all other available legal and administrative options. The court's ruling will delay the previously planned start of infrastructure construction beyond December 31, 1998; however, the Company is unable to predict the length of such delay at this time. The Company does not believe that the recent court decision will permanently prevent the Company from completing the Warner Mesa project; however, there can be no assurance in that regard or that further delays will not result. On February 14, 1997, the Company completed the sale of its approximately 880-acre Bolsa Chica lowlands, which had previously been planned for the development of up to 900 homes, to the California State Lands Commission for $25 million. Under an interagency agreement among various state and federal agencies, these agencies have agreed to restore the Bolsa Chica wetlands habitat utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve of $1.5 million was included in the Company's Balance Sheet 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 sale of the Bolsa Chica lowlands, the Company paid $833,333 of these costs at closing, leaving a reserve balance of $700,000 on its December 31, 1997 balance sheet for potential additional clean-up costs. Upon completion of the Company's Recapitalization as discussed in Note 3, the Company applied the principles required by Fresh-Start Reporting and the carrying value of land held for development (Warner Mesa) was adjusted to fair value as of September 2, 1997, after consideration of the October 9, 1997 Coastal Commission action discussed above. The estimation process involved in the determination of fair value is inherently uncertain since it requires estimates as to future 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. The Company has considered the reduction in density from a maximum of up to 2,500 homes on the Warner Mesa to no more than 1,235 homes in its determination of the Warner Mesa project's fair value as of September 2, 1997 and as reflected in the Company's balance sheet as of December 31, 1997. The Company has received analysis and advice from its residential real estate market consultants and advisors which indicates that the fair value to be realized by the Company from the Warner Mesa development should not be materially lessened by the reduction in developable units as compared to previous estimates, F-21 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) since residential land value is not exclusively driven by unit count. Rather, the following factors are also highly determinative of such value: (i) the location and quality of the master planned community; (ii) the competitive condition of the real estate market at the time of development and sale; (iii) the demand for various residential product types; (iv) the product mix, segmentation and absorption rate; (v) the number of acres available for development; and (vi) the project development costs. The Company believes that the lower number of residential units will not materially reduce the Warner Mesa project's fair value; however, there can be no assurance in this regard. 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. In the event of an impairment, 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. 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 the Bolsa Chica lowlands and Warner Mesa, 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 estimated cash flows for the Bolsa Chica lowlands and Warner Mesa indicated that a reserve of approximately $113.6 million was required to adjust the carrying value of these properties to their 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 Bolsa Chica lowlands to a government agency a strategic goal of the Company, along with updated estimates of future cash flows reflecting market conditions for the Warner Mesa portion of the project. During 1995, the Southern California residential real estate market continued to decline, affecting estimated sales pricing, housing mix and number of units planned. The Company's decision in 1995 to pursue a sale of the Bolsa Chica 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 project. NOTE 6 -- BANK DEBT In August 1996, Signal Landmark, a subsidiary of the Company, entered into a construction loan agreement, guaranteed by the parent, to fund $2.0 million for construction of a build-to-suit project in Signal Hill, California. As of December 31, 1996, $1.1 million was drawn and $.9 million was available under this agreement. The loan was repaid in March 1997 upon sale of the project. 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 litigation with former affiliates regarding tax sharing agreements in excess of $7.5 million to be funded by the Company. F-22 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. The Company repaid $8.4 million and $7.1 million of such borrowings during 1996 and 1997, respectively. 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 and repaid an aggregate of $10.0 million during 1995 and 1996, under this loan agreement. On February 18, 1997 the outstanding Nomura loan balance was fully repaid with a portion of the proceeds from a sale of Rancho San Pasqual lots and 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"). 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 this credit facility was terminated in conjunction with the Company's sale of all of its interest in the Wentworth residential land. The Company made cash payments for interest on bank debt of $1.4 million, $1.5 million and $.2 million for the years ended December 31, 1995, 1996 and the eight-month period ended September 2, 1997, respectively. NOTE 7 -- LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise represent liabilities which were exchanged for equity upon completion of the Recapitalization (as discussed in Note 3) and consisted of the following as of December 31, 1996 (in millions): Subordinated debt: Senior Debentures......................................................... $ 155.3 Subordinated Debentures................................................... 38.8 --------- Total face amount....................................................... 194.1 Liquidated, non-contingent claims........................................... 4.4 --------- Subtotal.................................................................. 198.5 Less unamortized discount................................................... (5.0) Plus accrued interest....................................................... 6.8 --------- $ 200.3 --------- ---------
The Debentures gave the Company the right to pay interest in-kind, in cash or, subject to certain conditions, in Class A Common Stock. Historically, interest on the Debentures was paid in-kind. During the second quarter of 1997, the Company entered into mutual settlement and release agreements with the three holders of liquidated, non-contingent claims: AlliedSignal Inc. ("Allied"), The General Chemical Group Inc. ("General Chemical"), and Wolverine Tube, Inc. ("Wolverine"). These agreements provided, among other things, for the issuance of 168,000 shares, 53,760 shares and 25,200 shares of Common Stock in settlement of $3,000,000, $960,000 and $450,000 of liquidated, non-contingent claims (56 shares per $1,000) held by Allied, General Chemical and Wolverine, respectively. It is currently expected that these holders will sell all of such shares within two years following their issuance in F-23 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) connection with the completion of the Recapitalization. Neither Allied, General Chemical nor Wolverine was a record or beneficial owner of any shares of the Company's capital stock prior to the Recapitalization. NOTE 8 -- OTHER LIABILITIES Other liabilities were comprised of the following as of December 31 (in millions):
1996 1997 --------- --------- Net deferred taxes and other tax liabilities........................................... $ 14.5 $ 14.5 Accrued pensions and benefits.......................................................... 5.6 3.0 Guaranty of capital contribution notes................................................. 6.0 6.5 Accrued indemnity obligations.......................................................... 14.6 11.3 Unamortized discount................................................................... -- (5.6) --------- --------- $ 40.7 $ 29.7 --------- --------- --------- ---------
NOTE 9 -- INCOME TAXES Upon completion of the Recapitalization, the Company experienced an "ownership change" under Section 382 of the Internal Revenue Code (the "Code") as a result of the increase in the percentage of the Company's stock by value held by certain persons (including creditors who exchange debt for stock) of more than 50 percentage points at any time during a three-year period. Subsequent to an ownership change, the Company's annual use of its net operating losses ("NOLs") is generally limited to the value of the Company's equity immediately before the ownership change multiplied by the long-term tax-exempt rate, which for September 1997 was 5.45%. Section 382(l)(5) of the Code, the "bankruptcy exception", provides that if the ownership change occurs through a bankruptcy, such as the Company's Recapitalization which utilized a prepackaged plan, and if the continuing shareholders and "qualifying creditors" before the ownership change own at least 50% of the Company's stock after the ownership change, the general limitations of Section 382 will not apply. "Qualifying creditors" generally must have held their debt at least 18 months before the prepackaged plan was filed on July 14, 1997, or the debt must have arisen in the ordinary course of the Company's business. The Company believes that it qualifies for the "bankruptcy exception" of Section 382(l)(5). Under this exception, the Company is required to reduce its NOLs by (i) the amount of interest accrued on any debt exchanged for stock in the bankruptcy proceeding during the year of the proceeding and the three prior taxable years and (ii) an additional amount required to make the total reduction equal to the amount of cancellation of indebtedness income realized. Accordingly, the Company's NOLs of approximately $286 million as of September 2, 1997 will be reduced by approximately $81 million, resulting in remaining NOLs available of approximately $205 million. As reduced, and subject to any disallowance resulting from the proposed IRS adjustments discussed below, the Company's NOL carryovers will be fully deductible against post-reorganization income provided there is not a second ownership change as discussed below, and subject to the general rules regarding expiration of NOLs. Assuming Section 382(1)(5) applies, the NOLs available as of December 31, 1997 would be approximately $219 million. If the Company were to experience another ownership change within two years of the September 2, 1997 effective date of the Recapitalization, as the result of a 50 percentage point change in ownership, the second ownership change would not qualify for Section 382(l)(5) treatment and the use of all remaining NOLs would be disallowed. Pursuant to Section 382(l)(5)(D), the Section 382 Limitation from and after the second ownership change would be zero, and thus would eliminate the availability of any remaining unused portion of the $205 million of NOLs which existed as of September 2, 1997. F-24 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) If the Company experiences or expects a successive ownership change prior to the filing of its 1997 tax return, a determination could be made to elect out of Section 382(l)(5), which would preserve some of the NOL carryovers. The election out of Section 382(l)(5) would be irrevocable and must be made by the due date (including any extensions of time) of the Company's 1997 tax return and would bind the Company without regard to whether or not subsequent ownership changes (expected or not) occur. If the Company elects out of Section 382(l)(5) or if the requirements of such section are not met, the general rules of Section 382 would apply. However, in determining the limitation placed on the Company's annual use of its net operating losses under those general rules, Section 382(l)(6) provides that the value of the equity of the Company immediately before the ownership change would be deemed to include the increase in the value of the Company's equity resulting from any surrender or cancellation of creditors' claims due to implementation of the Recapitalization. Accordingly, assuming the Company's post-Recapitalization equity market value of approximately $140 million, and the long-term tax exempt rate for September 1997 of 5.45%, Section 382(l)(6) would limit the Company's utilization of its NOLs to approximately $7.6 million per year, plus any built-in gains recognized during the five year period following the ownership change. In summary, under Section 382(l)(5), the Company would have approximately $205 million of NOLs available as of September 2, 1997, which the Company has estimated could be fully utilized over the next ten years (1998-2007), whereas under Section 382(l)(6) only approximately $76 million of NOLs would be available to the Company during that time frame, due to the annual limitation described above. 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):
1996 1997 --------- --------- Deferred tax assets: Real estate held for development or sale and operating properties (due to asset revaluations and interest capitalized for tax purposes).......................... $ 13.8 $ 7.5 Accruals/reserves not deductible until paid........................................ 6.1 5.7 Net operating loss carryforwards................................................... 94.1 78.8 Other.............................................................................. .4 3.8 Valuation allowance................................................................ (71.3) (71.2) --------- --------- $ 43.1 $ 24.6 --------- --------- --------- ---------
1996 1997 --------- --------- Deferred tax liabilities: Land held for development (principally due to accounting for a prior business combination, partially offset by the asset revaluations in 1995 and 1997)........ $ 51.2 $ 19.2 Other.............................................................................. 1.9 9.4 --------- --------- $ 53.1 $ 28.6 --------- --------- --------- ---------
Net deferred tax liabilities at December 31, 1997 are comprised entirely of state net deferred tax liabilities. F-25 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the income tax provision (benefit) applicable to losses from continuing operations (in millions):
YEAR ENDED DECEMBER 31, EIGHT-MONTH FOUR-MONTH ---------------------- PERIOD ENDED PERIOD ENDED 1995 1996 SEPT. 2, 1997 DEC. 31, 1997 --------- ----- ------------- --------------- Income tax provision (benefit): Current................................................... $ (10.1) $ .1 $ 6.3 $ -- Deferred.................................................. (25.4) -- (6.0) -- -- --------- ----- --- $ (35.5) $ .1 $ .3 $ -- -- -- --------- ----- --- --------- ----- ---
Cash payments for federal, state and local income taxes were approximately $.3 million, $.2 million, $.2 million and $.1 million for the years ended December 31, 1995 and 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997, respectively. Tax refunds received for the years ended December 31, 1995 and 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997 were approximately $.4 million, $.2 million, $0 and $.1 million, respectively. The principal items accounting for the difference in taxes on income computed at the statutory rate and as recorded are as follows (in millions):
YEAR ENDED DECEMBER 31, EIGHT-MONTH FOUR-MONTH -------------------- PERIOD ENDED PERIOD ENDED 1995 1996 SEPT. 2, 1997 DEC. 31, 1997 --------- --------- ------------- --------------- (Provision) benefit for income taxes at statutory rate... $ (53.3) $ (10.1) $ 3.4 $ (.2) State income taxes, net.................................. .6 (.1) (5.7) -- Increase (decrease) in valuation allowance............... 28.3 12.1 (.3) .1 (Reduction) increase in other tax liabilities............ (10.0) -- 6.0 -- All other items, net..................................... (1.1) (1.8) (3.1) .1 --------- --------- ----- --- $ (35.5) $ .1 $ .3 $ -- --------- --------- ----- --- --------- --------- ----- ---
TAX SHARING AGREEMENTS Henley Group and MAFCO Consolidated Group Inc. ("MAFCO"; formerly known as Abex Inc.), 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 MAFCO 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 MAFCO, 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 MAFCO 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-26 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (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 result in a disallowance of up to $132 million of available NOL carryforwards, of which none are recognized after consideration of the valuation allowance, as of December 31, 1997. 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. NOTE 10 -- COMMITMENTS AND CONTINGENCIES 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 LCP. 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. In October 1997, the Company entered into a mutual settlement and release agreement with Svedala Industries, Inc. ("Svedala") to settle the Svedala litigation, in which Svedala filed a lawsuit naming as defendants the Company and Nichols Engineering & Research Corporation ("Nichols"), an indirect wholly-owned subsidiary of the Company, as well as several other unrelated companies. The settlement agreement remains subject to court approval and will provide the Company and its subsidiaries with a complete release of Svedala's claims for any liability arising from the facts of the lawsuit in consideration for the payment of $200,000 by the Company. The lawsuit was filed on March 31, 1994, 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 costs of clean-up of a property in Mt. Olive, New Jersey and asserted that the clean-up costs totaled 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 New Henley Holdings Inc. and 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. In April 1997, The Henley Group, Inc. was merged into the Company. Neither the Company, The Henley Group, Inc. nor New F-27 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. Attorneys for both Svedala and the Company have agreed to suspend discovery pending action by the court on the proposed bar order required under the settlement agreement. On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division, naming, among others, the Company and WT/ HRC Corporation, a direct subsidiary of the Company, as defendants in a complaint for declaratory relief and breach of contract and indemnification. The complaint alleges that WT/HRC owes Whiting a defense and indemnity for several hundred asbestos cases pending in several states, as well as for similar asbestos claims which may be filed in the future. The complaint states no specified amount of damages. All claims against the Company were dismissed in early 1998, and WT/HRC is now the only named defendant. The lawsuit is based on a 1983 Asset Purchase Agreement in which the seller, Whiting-Illinois (now named WT/HRC), sold assets and the business of its "Whiting Engineered Products Group" to plaintiff's predecessor in interest. Whiting contends that the seller agreed in the Asset Purchase Agreement to indemnify Whiting for personal injury, sickness, death or property damages claims which arise from occurrences predating the closing date (December 30, 1983). The Company has denied the allegations in the complaint and has vigorously defended the action. At present, no claims are asserted against the Company itself; instead, the only remaining claims are directed against its subsidiary, WT/HRC. On July 14, 1995, the Grandview/Crest Homeowners Association, representing owners of 341 condominium units, filed a lawsuit in the Orange County Superior Court naming as defendants Lake Forest Properties, Signal Landmark, Inc., now known as Signal Landmark ("Signal"), and Onyx Land Company, as well as various unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a California joint venture which was the developer of the subject 341-unit condominium project. Lake Forest Properties had two joint venture partners, Signal, an indirect subsidiary of the Company, and Onyx Land Company which was a wholly-owned subsidiary of Signal, which was dissolved and its assets transferred to Signal on December 31, 1988. Lake Forest Properties also was dissolved effective December 31, 1988. The original complaint for construction defects alleges warranty, liability, negligence and breaches of covenants, conditions and restrictions, and of fiduciary duties. On June 25, 1996, the Plaintiff filed a First Amended Complaint alleging that structural distress, life-safety hazards, and extensive water intrusion have resulted from the alleged defects in construction estimated in September 1997 at a preliminary cost of approximately $20.4 million. On March 23, 1998 the Company entered into a mutual settlement agreement with the plaintiff as well as with the Company's insurance carriers which have responsibility for the claims. The Company and its insurance carriers have agreed that the insurance carriers will bear primary responsibility for the $4.6 million settlement and related legal and other costs of defense, subject to the Company's approximately $.6 million contribution for deductibles, which does not exceed previously established reserves in the Company's balance sheet. On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class action complaint in San Diego Superior Court for breach of warranties, strict liability, negligence, breach of contract, products liability, intentional misrepresentation, fraud and deceit, and negligent representation against Signal, and a former subsidiary of Signal, for damages allegedly arising out of construction deficiencies at the plaintiffs' homes in Coronado, California (the "Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al., filed a first amended complaint against Signal and its former subsidiary for the same causes of action. On September 17, 1997, plaintiffs filed a second amended complaint for construction deficiencies in the names of 126 of the homeowners in Coronado, California, as well as the Homeowners Association. On F-28 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) March 3, 1998 the plaintiffs asserted a claim of $13.0 million. The Company is vigorously contesting this lawsuit and is holding discussions with its insurance carriers with responsibility for the claims. The Company expects its insurance carriers to bear primary responsibility for such claims, subject to deductibles; however, there can be no assurances in that regard. The Company believes that any liability not covered by insurance for the Coronado Lawsuit will not exceed previously established reserves with respect to such uninsured liability which is reflected in the Company's balance sheet. GUARANTEES OF COMMERCIAL PROJECT DEBT As of December 31, 1997, the Company has guaranteed approximately $288.9 million of the commercial development business' project loans from various banks for construction of commercial projects. If the sale of the commercial development business is completed as described in Note 4, these guarantees would be assumed by the purchaser, subject to approval by the banks. To the extent the Company is not released by certain banks from such guarantees upon completion of the transaction, the purchaser will fully indemnify the Company against any and all liability with respect to these guarantees. 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 AlliedSignal Inc., ("Allied") a predecessor of the Company. The Company has not been named as a PRP at the site. However, Allied 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. In June 1997, the Company entered into an agreement with The Charter Township of Calumet (the "Township"), whereby the Company has agreed to sell approximately 160 acres of its land in Michigan to the Township in exchange for the Township obtaining an agreement from EPA to release the Company, its F-29 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) predecessors and affiliates from any environmental liability associated with the Torch Lake Site. There can be no assurances that the Township will be successful in obtaining such a release of the Company from EPA. NOTE 11 -- RELATED PARTY TRANSACTIONS Related party transactions reflected in continuing operations are as follows: 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. During 1995, 1996 and the eight-month period ended September 2, 1997 the Company incurred fees aggregating approximately $500 thousand, $400 thousand and $100 thousand, respectively, to Koll Construction for these services and related reimbursements. SERVICE AGREEMENTS 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 formerly owned by a subsidiary of The Koll Company, and acquired by CB Commercial Real Estate Services Group Inc. ("CB") on August 31, 1997. Under this agreement, KRES provides computer programming, data processing organization and retention and other related services until 30 days' prior written notice of termination is given by one company to the other. Also under this agreement, KRES provided payroll, human resources and other related services through August 31, 1997. Fees and related reimbursements incurred were approximately $200 thousand for each of the years ended December 31, 1995, 1996 and the eight-month period ended September 2, 1997. 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. Lease costs were approximately $100 thousand for each of the years ended December 31, 1995, 1996, the eight-month period ended September 2, 1997 and four-month period ended December 31, 1997, respectively, under this lease. 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-30 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Related party transactions reflected in discontinued operations are as follows: SALE OF COMMERCIAL DEVELOPMENT BUSINESS See Note 4 for a description of this related party transaction. GENERAL CONTRACTOR AGREEMENTS In 1996 and 1997, the Company entered into general contractor agreements with Koll Construction in conjunction with a build-to-suit project for a third-party corporate office building in Nevada and four build-to-suit projects in California owned by the Company. During 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997 the Company incurred fees aggregating approximately $1.7 million, $9.6 million and $5.1 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, 1995, 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997, were approximately $100 thousand, $100 thousand, $21 thousand and $11 thousand, respectively. In addition, under the Service Agreement for Management Information Services and Human Resource Services described above, fees and related reimbursements incurred by discontinuing operations were approximately $100 thousand for each of the years ended December 31, 1995, 1996 and the eight-month period ended September 2, 1997. SUBLEASE AGREEMENTS Under the Sublease Agreement with The Koll Company described above, as well as under month-to-month lease agreements which were terminated in 1996, for office space in Northern California and San Diego, California with KRES, combined lease costs were approximately $300 thousand, $300 thousand, $100 thousand and $100 thousand for the years ended December 31, 1995, 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997. DEVELOPMENT FEES For the years ended December 31, 1995, 1996, the eight-month period ended September 2, 1997 and the four-month period ended December 31, 1997, the Company earned fees of approximately $2.7 million, $1.9 million, $2.3 million and $3.1 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. JOINT BUSINESS OPPORTUNITY AGREEMENTS 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 shared on a 50%-50% basis all income and loss from the venture. The Company's share of net loss F-31 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) was approximately $300 thousand, $100 thousand and less than $100 thousand for the years ended December 31, 1995 and 1996, and the period ended April 5, 1997, at which date the venture terminated, 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 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 the 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 Company's 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 $600 thousand and $200 thousand for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. NOTE 12 -- RETIREMENT PLAN The Company has a noncontributory defined benefit retirement plan 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 was as follows (in millions):
YEAR ENDED DECEMBER 31, EIGHT-MONTH FOUR-MONTH -------------------- PERIOD ENDED PERIOD ENDED 1995 1996 SEPT. 2, 1997 DEC. 31, 1997 --------- --------- --------------- --------------- Service cost............................................... $ -- $ -- $ -- $ -- Interest cost.............................................. .5 .5 .2 .1 Actual return on assets.................................... (1.4) (.8) (.8) (.4) Net amortization and deferral.............................. 1.0 .4 .5 .3 Gain on curtailment........................................ -- (.3) -- --------- --- --- --- Net periodic pension cost (income)......................... $ .1 $ (.2) $ (.1) $ -- --------- --- --- --- --------- --- --- ---
F-32 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The funded status and accrued pension cost at December 31, 1996 and 1997 for defined benefit plans were as follows (in millions):
1996 1997 --------- --------- Actuarial present value of benefit obligations: Vested................................................................................ $ (5.3) $ (5.4) Nonvested............................................................................. -- -- --------- --------- Accumulated benefit obligation.......................................................... $ (5.3) $ (5.4) --------- --------- --------- --------- Projected benefit obligation............................................................ $ (5.3) $ (5.4) Plan assets at fair value............................................................... 5.0 5.7 --------- --------- Projected benefit obligation (in excess of) less than plan assets....................... (.3) .3 Unrecognized net loss................................................................... .7 -- Adjustment required to recognize additional minimum liability........................... (.7) -- --------- --------- (Accrued) prepaid pension cost.......................................................... $ (.3) $ .3 --------- --------- --------- ---------
The development of the projected benefit obligation for the plans at December 31, 1996 and 1997 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. NOTE 13 -- CAPITAL STOCK COMMON STOCK Upon completion of the Recapitalization, approximately 90.1% of the Company's equity, in the form of newly issued shares of common stock, excluding shares of common stock underlying certain options and warrants, is now owned by former holders of the Debentures and liquidated, non-contingent claims (approximately 80.3% by former holders of Senior Debentures and liquidated, non-contingent claims and 9.8% by former holders of Subordinated Debentures). The remaining 9.9% of the Company's equity is now owned, in the aggregate, by former holders of the Company's Class A Common Stock (the "Class A Common Stock" ) and Series A Preferred Stock (the "Preferred Stock") (approximately 5.8% by former holders of Preferred Stock and 4.1% by former holders of Class A Common Stock). Pursuant to approvals received at its 1997 Annual Meeting of Stockholders, the Company consolidated its Class A Common Stock and Preferred Stock into a single class of stock, through the issuance of 1.75 shares of new common stock (the "Common Stock" ) for each outstanding share of Preferred Stock and one share of Common Stock for each outstanding share of Class A Common Stock and effected a one for one hundred (1:100) reverse stock split of each outstanding share of the Company's capital stock on September 2, 1997, the effective date of the Recapitalization. The Company's Class A Common Stock and Preferred Stock were delisted from the Nasdaq National Market on July 14, 1997 pending completion of the Recapitalization. The Nasdaq Stock Market, Inc. listed the post-Recapitalization Common Stock of the Company on the National Market effective September 4, 1997, following completion of the Recapitalization. F-33 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- STOCK PLANS 1993 STOCK OPTION/STOCK ISSUANCE PLAN The 1993 Stock Option/Stock Issuance Plan ("1993 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 Plan upon its approval. Under the 1993 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. No options have been exercised, and all options outstanding at December 31, 1996 were canceled during 1997 in connection with the Recapitalization. On April 28, 1997, in connection with the Recapitalization, the Compensation Committee of the Company's Board of Directors approved the grant of stock options equivalent to 6% of the Company's fully diluted equity for certain directors and officers to be issued upon completion of the Recapitalization. The options have a term of ten years and vest 40% after one year, an additional 30% after two years and the final 30% after three years. Stock option grants of 759,984 shares were issued at a price of $11.99 per share based on the 20-day average closing price following completion of the Recapitalization. In connection with the pending sale of the commercial development business described in Note 4, options for an aggregate of 569,988 shares will be terminated upon completion of such sale. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its plan. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards. The fair value of the options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, volatility of 17%, risk-free interest rate of 5.75% and an expected life of 4 years. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Successor Company's 1997 net loss would have been as follows:
AS REPORTED PRO FORMA ------------- ----------- Net income (loss) from: Continuing operations.................................................................. $ (1.3) $ (1.5) Discontinued operations................................................................ .8 .4 ----- ----- Net loss $ (.5) $ (1.1) ----- ----- ----- ----- Earnings (loss) per share-basic and diluted: Continuing operations.................................................................. $ (.11) $ (.12) Discontinued operations................................................................ .07 .03 ----- ----- Net loss per common share-basic and diluted.......................................... $ (.04) $ (.09) ----- ----- ----- -----
F-34 KOLL REAL ESTATE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of quarterly financial information for 1996 and 1997 (in millions, except per share amounts):
PREDECESSOR COMPANY --------------------------------------------------------- SUCCESSOR COMPANY FULL ------------------------ FIRST SECOND THIRD FOURTH PERIOD THIRD FOURTH --------- ----------- --------- ----------- --------- ----- ----------- (JULY 1- (SEPT. 3- SEPT. 2) SEPT. 30) 1997 Revenues (a),(d)............................ $ 28.9 $ 4.5 $ .5 -- $ 33.9 $ 1.6 $ 2.7 Cost of sales (a),(d)....................... 28.6 4.5 .5 -- 33.6 1.6 2.7 Loss from continuing operations (a),(d)..... (4.1) (9.5) (71.9) -- (85.5) (.3) (1.0) Net income (loss) (a)....................... (4.9) (9.5) 24.0 -- 9.6 .2 (.7) Income (loss) per common share (b).......... N/A N/A N/A N/A N/A $ .02 $ (.06) Weighted average common shares outstanding (b)........................................ N/A N/A N/A N/A N/A 11.9 11.9 FULL PERIOD ----------- 1997 Revenues (a),(d)............................ $ 4.3 Cost of sales (a),(d)....................... 4.3 Loss from continuing operations (a),(d)..... (1.3) Net income (loss) (a)....................... (.5) Income (loss) per common share (b).......... $ (.04) Weighted average common shares outstanding (b)........................................ 11.9
PREDECESSOR COMPANY --------------------------------------------------------- FULL FIRST SECOND THIRD FOURTH PERIOD --------- ----------- --------- ----------- --------- 1996 Revenues (c),(d)............................ $ .8 $ 14.1 $ 3.6 $ 16.0 $ 34.5 Cost of sales (c),(d)....................... .5 13.1 2.3 15.3 31.2 Loss from continuing operations (c),(d)..... (7.6) (7.0) (7.1) (7.6) (29.3) Net loss (c)................................ (7.9) (6.7) (7.6) (6.7) (28.9) Loss per common share (b)................... N/A N/A N/A N/A N/A Weighted average common shares outstanding (b)........................................ N/A N/A N/A N/A N/A 1996 Revenues (c),(d)............................ Cost of sales (c),(d)....................... Loss from continuing operations (c),(d)..... Net loss (c)................................ Loss per common share (b)................... Weighted average common shares outstanding (b)........................................
- ------------------------ (a) The Company recorded revenues and cost of sales of $25.0 million from the sale of approximately 880 lowland acres at Bolsa Chica during the first quarter. Revenues and cost of sales of approximately $9.8 million were recorded from residential lot sales at Rancho San Pasqual, primarily in the last three quarters of the year. (b) Per share and weighted average common shares outstanding data for periods prior to September 2, 1997 have been omitted as these amounts do not reflect the Successor Company's current capital structure. (c) 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. (d) Amounts have been reclassified to present the commercial development business as a discontinued operation. F-35 EX-10.25 2 EXHIBIT 10.25 EXHIBIT 10.25 KREG OPERATING CO. STOCK PURCHASE AGREEMENT BETWEEN AND AMONG KOLL REAL ESTATE GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARY, KREG HOLDINGS INC., AND KN HOLDING CORP. AND KOLL DEVELOPMENT COMPANY LLC AND DONALD M. KOLL AND RICHARD M. ORTWEIN MARCH 30, 1998 TABLE OF CONTENTS
PAGE I. SALE AND PURCHASE OF STOCK . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 AGREEMENT TO SELL AND PURCHASE STOCK . . . . . . . . . . . . . . 1 1.2 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 II. REPRESENTATIONS AND WARRANTIES OF KREG AND KHI . . . . . . . . . . . . . 3 2.1 CAPITALIZATION; OWNERSHIP OF KOC SHARES. . . . . . . . . . . . . 3 2.2 SUBSIDIARIES AND OTHER INVESTMENTS . . . . . . . . . . . . . . . 3 2.3 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . . . 4 2.4 AUTHORIZATION AND VALIDITY . . . . . . . . . . . . . . . . . . . 4 2.5 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS . . . . . 4 2.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 5 2.7 EMPLOYEE BENEFIT PLANS; ERISA. . . . . . . . . . . . . . . . . . 6 2.8 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.9 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . 9 2.10 ENVIRONMENTAL LIABILITY. . . . . . . . . . . . . . . . . . . . . 9 2.11 COMPLIANCE WITH APPLICABLE LAWS. . . . . . . . . . . . . . . . . 10 2.12 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.13 STATEMENTS TRUE AND CORRECT. . . . . . . . . . . . . . . . . . . 10 2.14 FINDERS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . . 11 III. REPRESENTATIONS AND WARRANTIES OF KNHC AND KDC. . . . . . . . . . . . 11 3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. . . . . . . . . . 11 3.2 AUTHORIZATION AND VALIDITY . . . . . . . . . . . . . . . . . . . 11 3.3 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS . . . . . 11 3.4 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5 NO CONTINUING INTEREST . . . . . . . . . . . . . . . . . . . . . 12 3.6 STATEMENTS TRUE AND CORRECT. . . . . . . . . . . . . . . . . . . 12 3.7 FINDER'S FEES. . . . . . . . . . . . . . . . . . . . . . . . . . 12 IV. COVENANTS OF KREG AND KHI. . . . . . . . . . . . . . . . . . . . . . . 13 4.1 OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.2 CONDUCT OF BUSINESS BY KOC . . . . . . . . . . . . . . . . . . . 14 4.3 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . . 15 4.4 CONSUMMATION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . 16 V. COVENANTS OF KNHC AND KDC. . . . . . . . . . . . . . . . . . . . . . . 16 5.1 CONSUMMATION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . 16 5.2 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . . 16 5.3 RESPONSIBILITY FOR ACCRUED EMPLOYEE BENEFITS . . . . . . . . . . 16 5.4 MEDICAL PREMIUMS AND COSTS . . . . . . . . . . . . . . . . . . . 17 5.5 RELEASE OF GUARANTEES. . . . . . . . . . . . . . . . . . . . . . 17 i VI. CONDITIONS TO OBLIGATIONS OF KREG AND KHI . . . . . . . . . . . . . . . 17 6.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 17 6.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.3 PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.4 GOVERNMENT APPROVALS . . . . . . . . . . . . . . . . . . . . . . 17 6.5 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . 17 6.6 OTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 18 VII. CONDITIONS TO OBLIGATIONS OF KNHC. . . . . . . . . . . . . . . . . . . 18 7.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 18 7.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.3 PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.4 GOVERNMENT APPROVALS AND REQUIRED CONSENTS . . . . . . . . . . . 18 7.5 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . 18 7.6 OTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 18 VIII. CLOSING DELIVERIES BY THE PARTIES . . . . . . . . . . . . . . . . . . 19 8.1 DELIVERIES OF KREG AND KHI . . . . . . . . . . . . . . . . . . . 19 8.2 DELIVERIES OF KNHC. . . . . . . . . . . . . . . . . . . . . . . 20 IX. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.1 INDEMNIFICATION BY KDC . . . . . . . . . . . . . . . . . . . . . 21 9.2 INDEMNIFICATION BY KREG. . . . . . . . . . . . . . . . . . . . . 22 9.3 CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.4 TAX INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . 25 9.5 PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS . . . . . . 26 X. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . 27 10.1 NON -DISCLOSURE COVENANT OF KDC AND THE INDIVIDUAL PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.2 NON-DISCLOSURE COVENANT OF KREG AND KHI. . . . . . . . . . . . . 28 10.3 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 XI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.1 AMENDMENT; WAIVERS . . . . . . . . . . . . . . . . . . . . . . . 28 11.2 ASSIGNMENT; CONTRIBUTION AND SUBSEQUENT TRANSFERS. . . . . . . . 28 11.3 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. . . . . . . . 29 11.4 SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 11.5 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 29 11.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 29 11.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. . . . . . 29 11.8 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 30 11.9 CAPTIONS AND REFERENCES. . . . . . . . . . . . . . . . . . . . . 30 11.10 GENDER AND NUMBER. . . . . . . . . . . . . . . . . . . . . . . . 30 11.11 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 30 11.12 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES . . . . . . . . . . . 30 ii 11.13 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.14 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 11.15 TERMINATION PRIOR TO CLOSING . . . . . . . . . . . . . . . . . . 32 11.16 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . . 33 11.17 REMEDIES NOT EXCLUSIVE . . . . . . . . . . . . . . . . . . . . . 33 11.18 COSTS, EXPENSES AND LEGAL FEES . . . . . . . . . . . . . . . . . 33 11.19 EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11.20 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11.21 SECTION 338(h)(10) ELECTION. . . . . . . . . . . . . . . . . . . 33 11.22 SURVIVAL OF TAX PROVISIONS . . . . . . . . . . . . . . . . . . . 34 11.23 REAL AND PERSONAL PROPERTY TAXES . . . . . . . . . . . . . . . . 34 11.24 TRANSFER TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 34 11.25 RETURN FILINGS, REFUNDS AND CREDITS. . . . . . . . . . . . . . . 34 11.26 CONSISTENT TAX POSITIONS . . . . . . . . . . . . . . . . . . . . 36 11.27 TERMINATION OF TAX SHARING AGREEMENTS. . . . . . . . . . . . . . 36 XII. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
EXHIBITS EXHIBIT A EXHIBIT B SCHEDULES SCHEDULE 1.2 SCHEDULE 2.2 SCHEDULE 2.5 SCHEDULE 2.7A SCHEDULE 2.7B SCHEDULE 2.8 SCHEDULE 2.9 SCHEDULE 2.12 SCHEDULE 5.5 SCHEDULE 8.1(h) iii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("AGREEMENT") is entered into as of this 30th day of March, 1998 between and among Koll Real Estate Group, Inc., a Delaware corporation ("KREG"), KREG Holdings Inc., a Delaware corporation which is a wholly -owned subsidiary of KREG ("KHI"), KN Holding Corp., a New York corporation ("KNHC"), Koll Development Company LLC, a Delaware limited liability company ("KDC"), and, solely for purposes of SECTION 10.1, Donald M. Koll and Richard M. Ortwein (collectively , the "INDIVIDUAL PARTIES") and solely for the purpose of SECTION 4.1, Donald M. Koll. Capitalized terms not otherwise defined when first used herein shall have the meaning assigned to them in ARTICLE XII of this Agreement. R E C I T A L S WHEREAS, KHI owns all 1,000 shares of Common Stock (the "STOCK") of KREG Operating Co., a Delaware corporation ("KOC"); WHEREAS, KREG desires to cause KHI to sell to KNHC, and KNHC desires to purchase from KHI, the Stock; and WHEREAS, KNHC desires to cause KOC to be liquidated and its assets and liabilities to be contributed to KDC (such liquidation and contribution, collectively, the "Contribution"); following which KNHC shall be relieved of any further obligation under this Agreement, provided that all of its assets and obligations hereunder have been transferred to and assumed by KDC, pursuant to the Contribution, to the same extent as if KDC had originally purchased the Stock pursuant to this Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the preceding recitals and the representations, warranties, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: I. SALE AND PURCHASE OF STOCK 1.1 AGREEMENT TO SELL AND PURCHASE STOCK. For the consideration hereinafter provided and subject to the terms and conditions of this Agreement, at the Closing (as defined in SECTION 1.3), KHI shall sell, assign, transfer, convey and deliver to KNHC, free and clear of all liens, charges, claims or encumbrances, and KNHC shall purchase and acquire from KHI, the Stock. At the Closing, KHI shall cause to be delivered to KNHC 1 a certificate representing the Stock, together with an accompanying signed stock power or instrument of assignment, duly endorsed in blank for the transfer of the Stock to KNHC. 1.2 PURCHASE PRICE. Subject to the terms and conditions of this Agreement and in addition to the other deliverables of KNHC as set forth in SECTION 8.2, KNHC agrees to pay to KHI the collective purchase price (the "PURCHASE PRICE") for the Stock as follows: (a) $1 million of the Purchase Price shall be delivered to KHI in immediately available funds upon the execution of this Agreement (the "INITIAL CONSIDERATION"), which shall not be subject to return to KNHC except to the extent provided for in accordance with the provisions of SECTION 4.1 or SECTION 11.15; (b) $29 million of the Purchase Price shall be delivered to KHI in immediately available funds at the Closing (the "CLOSING CONSIDERATION"); and (c) such additional amount shall be delivered to KHI in immediately available funds at the Closing as is determined no later than one (1) day prior to the Closing in accordance with the methodology set forth on SCHEDULE 1.2 (the "1998 ACTIVITY CONSIDERATION"). As a clarification to the methodology set forth on SCHEDULE 1.2, it is the intention of the parties hereto that all 1998 revenue through and including the Closing Date received by KOC shall decrease the Purchase Price and all 1998 expenses through, and including the Closing Date paid by KOC shall increase the Purchase Price. The dollar amounts set forth on SCHEDULE 1.2 are based upon reasonably available information as of the date of this Agreement, however, such amounts shall be updated on the basis of the best available information prior to the Closing and the amount of the 1998 Activity Consideration shall then be recalculated for the purpose of determining the amount to be paid on the Closing Date. Within thirty (30) days after the Closing Date, a final accounting of KOC's consolidated financial activity from January 1, 1998 through the Closing Date shall be completed and reviewed by the accounting staffs of KDC and KREG. Thereafter, the amount of the 1998 Activity Consideration shall be calculated for the final time and (i) if the amount paid on the Closing Date is determined to be less than the amount of the final calculation then KNHC shall pay the incremental amount to KREG in immediately available funds within five (5) days of such determination, or (ii) if the amount paid on the Closing Date is determined to be more than the amount of the final calculation then KREG shall repay the incremental amount to KNHC in immediately available funds within five (5) days of such determination. The amount of all cash balances in the various bank accounts of KOC and the Investments, as reflected on the books and records of KOC and the Investments, but subject to adjustment for month-end bank account reconciliations to the book balance, shall be delivered to KREG on the Closing Date as a partial repayment of intercompany debt owed to KREG by KOC and its Affiliates. Following the final calculation and payment in full of the 1998 Activity Consideration, the balance of the amount of intercompany debt of 2 KOC and the Investments that is reflected as being outstanding on the books of KREG shall be deemed a capital contribution made as of the Closing Date. 1.3 CLOSING. The closing of the sale and purchase of the Stock under and in accordance with this Agreement (the "CLOSING") shall take place at the offices of McDermott, Will & Emery, 1301 Dove Street, Suite 500, Newport Beach, California, on (a) April 30, 1998, (b) such later date determined in accordance with the provisions of SECTION 4.1, (c) such later date determined by KNHC pursuant to the proviso in SECTION 7.4, or (d) such earlier or later date as may be mutually agreed to in writing by the parties hereto (the "CLOSING DATE"). II. REPRESENTATIONS AND WARRANTIES OF KREG AND KHI As an inducement to KNHC and KDC to enter into this Agreement and to purchase the Stock, KREG and KHI jointly and severally represent and warrant to KNHC and KDC as set forth below in this ARTICLE II; provided, however, that no such representation or warranty which is qualified as being subject to the Knowledge of the Individual Parties shall be deemed to have been made in the event that such representation or warranty was not, to the Knowledge of the Individual Parties, true and correct at the time(s) made: 2.1 CAPITALIZATION; OWNERSHIP OF KOC SHARES. The authorized capital stock of KOC consists of the Stock, all of which shares are issued and outstanding and owned beneficially and of record by KHI. Subject to the Knowledge of the Individual Parties, there are no securities convertible into or exchangeable or exercisable for shares of capital stock of KOC and no warrants, calls, options or other rights to acquire from KOC or KHI, or any obligation of KOC or KHI to issue, any securities of KOC. 2.2 SUBSIDIARIES AND OTHER INVESTMENTS. SCHEDULE 2.2 identifies KOC's equity or other interests in all of its direct and indirect subsidiaries and the KOC Employee Affiliates (collectively, the "INVESTMENTS") as of the date of this Agreement, but no representation or warranty is made as to any of the assets held by any of the KOC Employee Affiliates or Project Partnerships, including any of their respective equity or other interests in any other entity, joint venture or project. All the outstanding shares of capital stock of, or other equity interests in, each Investment are: duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights; are (subject to the Knowledge of the Individual Parties) owned directly or indirectly by KOC free and clear of all pledges, claims, liens, charges, encumbrances and security interests securing indebtedness or similar obligations (collectively "Liens"); and are (subject to the Knowledge of the Individual Parties) free of any other restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests that would prevent the operation by KOC of such Investment's business as currently conducted, provided that although the partnership agreements of each KOC Employee Affiliate do not contain any restrictions on transfer, the organizational documents of certain Project Partnerships may contain restrictions on transfer of KOC's interests in the KOC Employee Affiliates. Other than as 3 set forth on SCHEDULE 2.2, there are no securities convertible into or exchangeable or exercisable for shares of capital stock of, or other interests in, any Investment and (subject to the Knowledge of the Individual Parties) no warrants, calls, options or other rights to acquire from KOC or any Investment, or (subject to the Knowledge of the Individual Parties) any obligation of KOC or any Investment to issue, any securities of any Investment. There are no agreements, commitments, understandings, arrangements, facts or circumstances which create or would give rise to the creation of any direct, contingent or other economic or beneficial interest being held by KREG or KHI or their respective lower tier Affiliates after the Closing which relates directly or indirectly to any of the Investments or their assets including, without limitation, the Project Partnerships (collectively the "Interests") and to the extent any such Interests exist, KREG disclaims any legal or beneficial interest in the Project Partnerships and agrees that if it receives any proceeds with respect thereto to promptly remit such proceeds to KDC. 2.3 ORGANIZATION AND GOOD STANDING. Each of KREG, KHI, KOC and each Investment is a corporation, or limited partnership duly organized, validly existing and in good standing under the laws of the state of its organization and has the requisite corporate or other power and authority to carry on its business as now conducted. KOC and each Investment is duly qualified or licensed to do business and is in good standing (with respect to jurisdictions which recognize such concept) in (subject to the Knowledge of the Individual Parties) each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary except where the failure to be qualified or licensed would not have a Material Adverse Effect. KREG has made available to KNHC prior to the execution of this Agreement complete and correct copies of the certificate of incorporation and by-laws of KOC and the certificates of incorporation, by-laws, partnership agreements, or similar organizational documents of each Investment, in each case as amended to date. 2.4 AUTHORIZATION AND VALIDITY. KREG and KHI have all requisite corporate power to enter into this Agreement and all other agreements entered into in connection with the transactions contemplated hereby and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by KREG and KHI of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary action on the part of the respective Board of Directors or stockholders of KREG and KHI. This Agreement has been duly executed by each of KREG and KHI, and this Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby to which KREG or KHI is a party constitute, or upon execution will constitute, valid and binding agreements of KREG or KHI, as the case may be, enforceable against it in accordance with their respective terms, except as enforceability may be limited by bankruptcy or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, or by public policy. 2.5 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS. Neither the execution, delivery and performance of this Agreement by KREG and KHI and any other 4 documents contemplated hereby (with or without the giving of notice, the lapse of time, or both): (a) requires the consent of any governmental or regulatory body or authority or any other third party except for such consents which have been identified on SCHEDULE 2.5 (the "Required Consents"), excluding the consents of (i) constituent partners or members of Project Partnerships, (ii) lenders to KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates, or (iii) any other party with respect to any act or omission by the KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates (collectively (i) through (iii) being referred to herein as the "Project Consents" a complete list of which has been prepared by the Individual Parties and is set forth on SCHEDULE 2.5); (b) will conflict with any provision of KREG's, KHI's, KOC's or any Investment's organizational documents; (c) other than with respect to the properties of the KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates, will conflict with, result in a violation of, or constitute a default under any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which KREG or KHI or (subject to the Knowledge of the Individual Parties) KOC or any Investment is a party or by which KREG or KHI or (subject to the Knowledge of the Individual Parties) KOC, any Investment or their respective properties are subject or bound; (d) other than with respect to the properties of the KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates, will conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit, material to this transaction, to which KREG or KHI or (subject to the Knowledge of the Individual Parties) KOC or any Investment is a party or by which KREG, KHI, or (subject to the Knowledge of the Individual Parties) KOC, any Investment or any of their respective properties are bound except for such conflict, termination, breach or default, the occurrence of which would not result in a Material Adverse Effect on KOC; and (e) other than with respect to the properties of the KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates, will create (subject to the Knowledge of the Individual Parties) any Encumbrance or restriction upon any of the assets or properties of KOC or any Investment. 2.6 FINANCIAL STATEMENTS. A true and complete copy of KOC's consolidated balance sheet as of December 31, 1997 and KOC's consolidated balance sheet as of February 28, 1998, each of which is attached hereto as EXHIBIT A (collectively, the "Balance Sheet") have been prepared on an accrual basis as of the dates indicated (except as may be indicated in the notes thereto) and, subject to the Knowledge of the Individual Parties, fairly present the consolidated financial position of KOC as of the dates thereof, are complete and correct and consistent with the books and records of KOC, which books and records are complete and correct, (subject to adjustments for (i) possible non-recovery of KOC's approximately $317,000 investment in C.P. Koll Investment Company, Ltd. as of December 31, 1997; (ii) possible non-collection of a $115,000 receivable as of December 31, 1997, and $155,000 as of February 28, 1998, from Lin with respect to the Mall of Taiwan Project, a $83,250 receivable from C.P. Koll Investment Company, Ltd., and a $23,000 receivable from the LAX Project, or any other non-collectible receivable not within the Knowledge of KREG; and (iii) threatened litigation regarding a commission claims dispute 5 with respect to KOC's EPA project in Kansas City, Kansas). While treatment of various Balance Sheet items for tax return purposes may differ from financial reporting, the numbers reflected in the Balance Sheet as of December 31, 1997 are consistent with data to be used in preparation of KREG's tax returns. 2.7 EMPLOYEE BENEFIT PLANS; ERISA (a) SCHEDULE 2.7A contains a true and complete list (subject to the Knowledge of the Individual Parties) of each material bonus, incentive compensation, severance, change-in-control, or termination pay, profit-sharing, pension, or retirement plan, program, agreement or arrangement and each other material employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to or required to be contributed to by KOC or any of its subsidiary corporations or KREG or any subsidiary corporations of KREG, all of which are set forth in SCHEDULE 2.7B (an "ERISA AFFILIATE"), that together with KOC would be deemed a "single employer" within the meaning of SECTION 4001(b)(1) of ERISA, for the benefit of any current or former employee or director of KOC, or any ERISA Affiliate (the "PLANS"). Included in SCHEDULE 2.7A are the Plans that are "employee welfare benefit plans," or "employee pension benefit plans" as such terms are defined in Sections 3(1) and 3(2) of ERISA (such plans being hereinafter referred to collectively as the "ERISA PLANS"). None of KOC nor any ERISA Affiliate has (subject to the Knowledge of the Individual Parties) any formal plan or commitment, whether legally binding or not, to create any additional Plan or modify or change any existing Plan that would affect any current or former employee or director of KOC or any ERISA Affiliate. (b) With respect to each of the Plans, KREG or KOC has heretofore made available to KNHC true and complete copies of (i) each of the Plan documents (including all amendments thereto) for each written Plan or a written description of any Plan that is not otherwise in writing, (ii) if the Plan is funded through a trust or any other funding vehicle, a copy of the trust or other funding agreement (including all amendments thereto) and the latest financial statements thereof, if any, and (iii) the most recent determination letter received from the IRS with respect to each Plan that is intended to be qualified under section 401(a) of the Internal Revenue Code of 1986, as amended (the "CODE"). (c) No liability under Title IV of ERISA has been incurred by KOC or any ERISA Affiliate (except for the Pullman Inc. Non-contributory Pension Plan which is the responsibility of MAFCO Consolidated Group, Inc., and the current status of which KREG is not aware) that has not been satisfied in full, and no condition exists that presents a material risk to KOC or any ERISA Affiliate of incurring any liability under such Title, other than liability for premiums due the Pension Benefit Guaranty Corporation (the "PBGC"), which payments have been or will be made when due. To the extent this representation applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made not only with respect to the ERISA Plans but also with respect to any employee benefit plan, program, agreement or arrangement subject to Title IV of ERISA to which KOC or any ERISA Affiliate made, or was required to make, contributions during the past six years. 6 (d) The PBGC has not instituted proceedings pursuant to Section 4042 of ERISA to terminate any of the ERISA Plans subject to Title IV of ERISA, and no condition exists that presents a material risk that such proceedings will be instituted by the PBGC. (e) With respect to each of the ERISA Plans that is subject to Title IV of ERISA, the present value of accumulated benefit obligations under such Plan, as determined by the Plan's actuary based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Plan's actuary with respect to such Plan, did not, as of its latest valuation date, exceed the then current value of the assets of such Plan allocable to such accumulated benefit obligations (excluding the Pullman Inc. Non-contributory Pension Plan which is the responsibility of MAFCO Consolidated Group, Inc., and the current status of which KREG is not aware). (f) None of KOC, any ERISA Affiliate, any of the ERISA Plans, any trust created thereunder, nor to the Knowledge of KREG, any trustee or administrator thereof has engaged in a transaction or has taken or failed to take any action in connection with which KOC or any ERISA Affiliate could be subject to any material liability for either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to section 4975(a) or (b), 4976 or 4980B of the Code. (g) All contributions and premiums which KOC or any ERISA Affiliate is required to pay under the terms of each of the ERISA Plans and section 412 of the Code, have, to the extent due, been paid in full or properly recorded on the financial statements or records of KOC and none of the ERISA Plans or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement. No lien has been imposed under section 412(n) of the Code or Section 302(f) of ERISA on the assets of KOC or any ERISA Affiliate, and no event or circumstance has occurred that is reasonably likely to result in the imposition of any such lien on any such assets on account of any ERISA Plan. (h) No ERISA Plan is a "multiemployer plan," as such term is defined in Section 3(37) of ERISA. (i) Each of the Plans has been operated and administered in all material respects in accordance with applicable laws, including but not limited to ERISA and the Code. (j) With regard to each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the Code, the sponsor of the Plan has applied for a currently effective determination letter from the IRS stating that it is so qualified, and to the Knowledge of KREG, no event has occurred which would affect such qualified status except for a recent amendment to The Koll Company 401(k) Plan. 7 (k) Any fund established under an ERISA Plan that is intended to satisfy the requirements of section 501(c)(9) of the Code has received an IRS letter confirming satisfaction of such requirements, and no event has occurred which, to the Knowledge of KREG, would affect such satisfaction. (l) No amounts payable under any of the Plans or any other contract, agreement or arrangement with respect to which KOC or any ERISA Affiliate may have any liability could fail to be deductible for federal income tax purposes by virtue of section 162(m) or section 280G of the Code. (m) Except for the KREG Retiree Medical Plan, no Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of KOC or any ERISA Affiliate after retirement or other termination of service (other than (i) coverage mandated by applicable laws, (ii) death benefits or retirement benefits under any "employee pension plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of KOC or an ERISA Affiliate, or (iv) benefits, the full direct cost of which is borne by the current or former employee (or beneficiary thereof)). (n) The consummation of the transactions contemplated by this Agreement (including the Contribution) will not, either alone or in combination with any other event, (i) entitle any current or former employee, officer or director of KOC or any ERISA Affiliate except for employees remaining with KREG after the Closing Date to continued participation in any ERISA Plan, to severance pay, unemployment compensation or any other similar termination payment, or (ii) accelerate the time of payment or vesting, or increase the amount of or otherwise enhance any benefit due any such employee, officer or director. 2.8 TAXES. (a) KOC and any affiliated group, within the meaning of SECTION 1504 of the Code of which KOC is or has been a member (the "KREG CONSOLIDATED GROUP"), has filed or caused to be filed in a timely manner (within any applicable extension periods) all federal and state income and other material Tax Returns required to be filed on or prior to the Closing Date, and all such Tax Returns (subject to the Knowledge of the Individual Parties with respect to the operations of KOC, KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates) are true, correct and complete in all respects and were prepared in accordance with applicable laws and regulations and properly reflect in all respects the Taxes of KOC and the KREG consolidated group; (b) all Taxes shown to be due and payable on such Tax Returns have been fully paid and discharged and all Taxes not yet due and payable by KOC with respect to all periods prior to and through the date hereof have been properly accrued on the books and records of KOC (subject to the Knowledge of the Individual Parties with respect to the operations of KOC, KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates) in accordance with generally accepted accounting principles and in amounts sufficient for the payment of all unpaid Taxes required to be paid by KOC with respect to such periods; (c) all Taxes that KOC is or was required to withhold or collect have (subject to the 8 Knowledge of the Individual Parties with respect to the operations of KOC, KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates) been duly and timely withheld or collected and, to the extent required by law, have been paid to the proper governmental body or other person or entity; (d) no liens for unpaid Taxes have been filed and no material claims are being asserted in writing by any taxing authority with respect to any Taxes, except as disclosed in SCHEDULE 2.8; (e) there are no outstanding agreements or waivers extending the statutory period of limitations applicable to any federal or state income or other material Tax Returns required to be filed with respect to KOC; (f) there is no material unpaid tax deficiency, determination or assessment currently outstanding against KOC, except as disclosed in SCHEDULE 2.8; (g) no amounts are or will be due to or from KOC, KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates under any tax sharing or tax allocation agreement; (h) none of the Tax Returns of KOC is currently being audited or examined by any taxing authority; (i) the consolidated federal income Tax Returns of the affiliated group which includes KOC have been audited by the Internal Revenue Service or are closed by the applicable statute of limitations for all taxable periods through December 31, 1993; and (j) KOC has been a member of such groups since September 30, 1993. True and complete copies of the "pro-forma" federal and state income tax returns for the last three tax-years of KOC have been provided to KNHC. For purposes of this SECTION 2.8 and SECTIONS 9.4, 9.5, 11.23, 11.24 and 11.25, references to KOC shall include KOC and any Person in which KOC has a direct or indirect ownership interest. 2.9 TRANSACTIONS WITH AFFILIATES. Other than as identified on SCHEDULE 2.9 and excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates, (a) there are no outstanding amounts payable to or receivable from, or advances by KOC or any Investment and none of KOC or any Investment is otherwise a creditor of or debtor to, KREG, KHI, any Affiliate thereof or any officer, director, employee of KREG, KHI or any Affiliate thereof, and (b) except for the partnership agreements of the KOC Employee Affiliates, the Vesting Agreements and Netting Agreements with employees (subject to the Knowledge of the Individual Parties) none of KOC or any Investment is a party to any transaction, agreement, arrangement or understanding with KREG, KHI, any Affiliate thereof or any officer, director or employee of KREG, KHI or any Affiliate thereof. Except for amounts relating to the items set forth on SCHEDULE 2.9 or as otherwise provided in this Agreement, prior to or contemporaneously with the Closing, any and all amounts owing under any agreements, arrangements or understandings between KOC, KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates, on the one hand, and KREG, KHI or any other Affiliate thereof, on the other hand, shall be deemed an additional contribution of capital and all such agreements, arrangements and understandings shall be terminated as of the Closing Date without any further liability. 2.10 ENVIRONMENTAL LIABILITY. There are no legal, administrative, arbitral or other proceedings, or, as to which KREG has received written notice, any claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose on KOC or any Investment (excluding the 9 KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates), or that could be expected to result in the imposition on KOC or any Investment (excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates) of, any liability or obligation arising under any Environmental Laws, pending or, to the Knowledge of KREG, and, subject to the Knowledge of the Individual Parties, threatened, against KOC or any Investment (excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates). Excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates, and, subject to the Knowledge of the Individual Parties, none of KOC or any Investment is subject to any agreement (including any indemnification agreement), order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any material liability or obligation pursuant to or under any Environmental Law that would reasonably be expected to have a Material Adverse Effect on KOC. 2.11 COMPLIANCE WITH APPLICABLE LAWS. KOC and the Investments (excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates) hold, subject to the Knowledge of the Individual Parties, all material permits, licenses, variances, exemptions, orders, registrations and approvals of all governmental entities which are necessary for the lawful operation of the businesses of KOC and the Investments (excluding the KOC Employee Affiliates, the Project Partnerships and their respective lower tier Affiliates) (the "Permits"), and are not, subject to the Knowledge of the Individual Parties, in material default under the Permits or under applicable statutes, laws, ordinances, rules and regulations, except where the failure to hold such Permits or to comply with such statutes, laws, ordinances, rules or regulations or Permits would not, individually or in the aggregate, have a Material Adverse Effect on KOC. 2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no claim, litigation, action, suit or proceeding, administrative or judicial, pending, or to the Knowledge of KREG and subject to the Knowledge of the Individual Parties, threatened against KOC or the Investments, at law or in equity, before any federal, state, local or foreign court or regulatory agency, or other governmental authority which could have a Material Adverse Affect on (i) the ability of KREG or KHI to perform their respective obligations under this Agreement; (ii) the assets or the condition, financial or otherwise, or operation of KOC or the Investments; or (iii) the consummation of the transactions contemplated by this Agreement. 2.13 STATEMENTS TRUE AND CORRECT. Subject to the various qualifications and exceptions made therein, no representation or warranty made herein by KHI or KREG, or any statement, certificate, information, exhibit or instrument to be furnished pursuant to this Agreement by KHI or KREG, or any of their respective representatives (other than representatives who are the Individual Parties or persons who will be employees or Affiliates of KOC, KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates after the Closing Date) contains as of the date hereof or will contain as of the Closing Date any untrue statement of material fact or omit or will omit to state 10 a material fact necessary to make the statements contained herein and therein not misleading. 2.14 FINDERS' FEES. No investment banker, broker, finder or other intermediary has been retained by or is authorized to act on behalf of KREG or KHI who is entitled to any fee or commission upon consummation of the transactions contemplated by this Agreement or referred to herein. III. REPRESENTATIONS AND WARRANTIES OF KNHC AND KDC As an inducement to KREG and KHI to enter into this Agreement and to sell the Stock, KNHC and KDC hereby jointly and severally represent and warrant as follows: 3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. KDC is a limited liability company and KNHC is a corporation, both of which are duly organized, validly existing and in good standing under the laws of their states of organization, with all requisite power and authority to own, operate and lease their assets and properties and to carry on their business as currently conducted. 3.2 AUTHORIZATION AND VALIDITY. Each of KNHC and KDC has all requisite power to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by KNHC and KDC of this Agreement and the agreements provided for herein, and the consummation by KNHC and KDC of the transactions contemplated hereby and thereby are within KNHC's and KDC's powers and have been duly authorized by all necessary action on the part of KNHC's Board of Directors and stockholders and KDC's management and its members. This Agreement has been duly executed by KNHC and KDC. This Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby and thereby to which KNHC or KDC is a party constitute, or upon execution will constitute, valid and binding agreements of each of KNHC and KDC enforceable against it in accordance with their respective terms, except as may be limited by bankruptcy or other laws affecting creditors' rights generally, or by general equity principles, or by public policy. 3.3 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS. The execution, delivery and performance of this Agreement by KNHC and KDC and any other documents contemplated hereby (with or without the giving of notice, the lapse of time, or both): (a) does not require the consent of any governmental or regulatory body or authority or any other third party ; (b) will not conflict with any provision of KNHC's or KDC's charter documents, organization or operating agreements, or any agreement or understanding among its members; (c) will not conflict with, result in a violation of, or constitute a default under any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which KNHC or KDC is a party or by which KNHC or KDC or their respective properties are subject or bound; (d) will not conflict with, 11 constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit, material to this transaction, to which KNHC or KDC is a party or by which KNHC or KDC or any of their respective properties are bound except for such conflict, termination, breach or default, the occurrence of which would not result in a Material Adverse Effect on KNHC or KDC; and (e) will not create any Encumbrance or restriction upon any of the assets or properties of KNHC or KDC. 3.4 LITIGATION. There is no claim, litigation, action, suit or proceeding, administrative or judicial, pending, or to the Knowledge of KNHC or KDC, threatened against KNHC or KDC, at law or in equity, before any federal, state, local or foreign court or regulatory agency, or other governmental authority which could have a Material Adverse Affect on (i) the ability of KNHC or KDC to perform their respective obligations under this Agreement; (ii) the assets or the condition, financial or otherwise, or operation of KNHC or KDC; or (iii) the consummation of the transactions contemplated by this Agreement. 3.5 NO CONTINUING INTEREST. There are no agreements, commitments, understandings, arrangements, facts or circumstances which create or would give rise to the creation of any direct, contingent or other economic or beneficial interest being held after the Closing by KOC, the KOC Employee Affiliates, Project Partnerships or their respective lower tier Affiliates which relates directly or indirectly to any of KREG's assets including, without limitation, the development project at Bolsa Chica (collectively, the "Continuing Interests" it being understood that interests in the Investments and interests in the Project Partnerships are not Continuing Interests) and to the extent any such Continuing Interests exist, KDC, KOC, KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates disclaim any legal or beneficial interest in such Continuing Interests and agree that if they receive any proceeds with respect thereto, to promptly remit such proceeds to KREG. 3.6 STATEMENTS TRUE AND CORRECT. No representation or warranty made herein by KNHC or KDC, or any statement, certificate, information, exhibit or instrument to be furnished pursuant to this Agreement by KNHC or KDC or any of their respective representatives, contains as of the date hereof or will contain as of the Closing Date any untrue statement of material fact or omit or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. 3.7 FINDER'S FEES. No investment banker, broker, finder or other intermediary has been retained by or is authorized to act on behalf of KNHC or KDC who is entitled to any fee or commission upon consummation of the transactions contemplated by this Agreement or referred to herein. 12 IV. COVENANTS OF KREG AND KHI 4.1 OTHER OFFERS. Neither KREG nor KHI shall directly or indirectly solicit or initiate any negotiations or discussions with respect to any offer or proposal to acquire all or a substantial portion of the business, properties or capital stock of KOC, whether by merger, consolidation, share exchange, business combination, purchase of assets, sale of capital stock or otherwise; provided, however, that the foregoing shall in no way limit KREG or KHI with regard to unsolicited offers received following the public announcement of the transactions contemplated hereby a copy of which is attached hereto as EXHIBIT B. Following the receipt of any such offer which it determines in good faith following advice from its financial and legal advisors to provide superior value to KHI to the transactions contemplated by this Agreement, KREG shall promptly provide written notice to KNHC and KDC of the terms of such offer and shall, thereafter, have the right, exercisable in its sole discretion upon two (2) days prior written notice to KNHC and KDC, to terminate this Agreement at any time prior to the expiration of thirty (30) days from the date this Agreement is executed (unless such notice is delivered on the thirteeth (30th) day in which case the termination would occur on the thirty-second (32nd) day); provided that if KNHC or KDC notifies KREG in writing prior to the date of such termination that it is interested in making a higher offer, KREG will extend the termination date for an additional fifteen (15) days and, to the extent necessary, the Closing Date would also be extended and, unless otherwise agreed to in writing by the parties hereto, at the end of such fifteen (15) day period KREG shall either close the transactions contemplated herein or terminate this Agreement. Any termination of this Agreement by KREG pursuant to this SECTION 4.1 shall be without any liability or obligation on the part of KREG or any of its Affiliates to KNHC or KDC or any of their Affiliates, subject only to the requirement that KREG deliver the following to KNHC not later than on the date of such termination: (a) the amount of the Initial Consideration in immediately available funds, plus interest thereon from the date hereof at a rate equal to 5% per annum; (b) $2 million in immediately available funds; and (c) the aggregate amount of up to $ 500,000 for the legal, accounting or consultant fees incurred by KNHC, KDC or the members thereof in connection with the transactions contemplated hereby for the services of Allen, Matkins, Leck, Gamble & Mallory, LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Ernst & Young LLP and Arthur Andersen LLP during the period of February 2, 1998 through the date of any such termination, subject to KREG's prior receipt of invoices therefor. In the event KREG terminates this Agreement pursuant to the provisions of this SECTION 4.1, Donald M. Koll shall have the immediate right, upon delivery of written notice to terminate his employment agreement and his covenant-not- to-compete with KREG, subject to the cancellation of all of his outstanding options (including vested options) for KREG common stock and the surrender of any shares (or the sales proceeds therefrom) 13 which were issued upon the exercise of any option, which termination, cancellation and surrender shall provide for a complete waiver and release of KREG with respect to the payment of any severance or other form of compensation. In addition, the license granted to KREG to use the "Koll" name shall be terminated thirty (30) days thereafter, other than with respect to the use of the "Koll" name from a historical perspective. For a period of thirty (30) days following any such termination of his employment, Donald M. Koll agrees to cooperate with KREG with respect to the orderly transition of his prior powers and responsibilities to the successor Chairman of the Board and Chief Executive Officer. 4.2 CONDUCT OF BUSINESS BY KOC. Except as otherwise expressly contemplated by this Agreement or as consented to by KNHC in writing, such consent not to be unreasonably withheld or delayed, during the period from the date of this Agreement to the Closing Date, neither KREG nor KHI shall take any action to cause KOC and the Investments to fail to carry on their respective businesses in the ordinary course consistent with past practice and in compliance in all material respects with all applicable laws and regulations and shall use reasonable efforts to preserve intact their current business organizations, use reasonable efforts to keep available the services of their current officers and other employees and use reasonable efforts to preserve their relationships with those persons having business dealings with them . Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Closing Date, neither KREG nor KHI shall cause or permit KOC or any of the Investments to: (a) declare, set aside or pay any dividends on, make any other distributions or payments in respect of, or enter into any agreement with respect to the voting of, any of its capital stock or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (b) amend its certificate of incorporation, by-laws, partnership agreement or other comparable organizational documents; (c) acquire any business (whether by merger, consolidation, purchase of assets or otherwise) or acquire any equity interest in any person not an affiliate (whether through a purchase of stock, establishment of a joint venture or otherwise), except in the ordinary course of business of establishing Project Partnerships, consistent with past practice; (d) sell, lease, joint venture, license, mortgage or otherwise encumber or subject to any Lien or otherwise dispose of any of its material properties or assets, except in the ordinary course of business of the Project Partnerships, consistent with past practice, provided that in no event shall KOC or any of the Investments enter into or modify any lease or occupancy agreement for office space occupied by KOC or any of the Investments; (e) except for borrowings under existing credit facilities or lines of credit, incur any indebtedness for borrowed money or issue any debt securities or assume, 14 guarantee or endorse, or otherwise become responsible for the obligations of any person, or make any loans, advances or capital contributions to, any person other than its wholly owned subsidiaries, except in the ordinary course of business of the Project Partnerships, consistent with past practice; (f) change its methods of accounting (or underlying assumptions) in effect at December 31, 1997, except as required by changes in GAAP or law or regulation, or change any of its methods of reporting income and deductions for federal income Tax purposes from those employed in the preparation of the federal income Tax returns of KOC for the taxable years ending December 31, 1996, except as required by changes in law or regulation; (g) create, renew, amend, terminate or cancel, or take any other action that could reasonably be expected to result in the creation, renewal, amendment, termination or cancellation, of any material contract of KOC or any Investment, except in the ordinary course of business of the Project Partnerships, consistent with past practice; (h) grant to any such current or former director, executive officer or other employee any increase in severance or termination pay, or amend or adopt any employment, deferred compensation, consulting, severance, termination or indemnification agreement with any such current or former director, executive officer or employee; (i) amend or modify any of the Netting Agreements or Vesting Agreements or waive compliance with any of the material terms of any of these agreements; or (j) authorize, or commit or agree to take, any of the foregoing actions. 4.3 NOTICE OF CERTAIN EVENTS. KREG and KHI shall promptly notify KNHC and KDC of: (a) any notice or other communication from any Person or entity alleging that the consent of such Person or entity is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; or (c) any actions, suits, claims, investigations or proceedings commenced or threatened against, relating to or involving or otherwise affecting the transactions contemplated hereby. 15 4.4 CONSUMMATION OF AGREEMENT. Subject to the terms and conditions hereof, KREG and KHI will take all action reasonably necessary to cause the consummation of the transactions contemplated by this Agreement in accordance with their terms and conditions and take all corporate and other action necessary to approve the transactions contemplated herein. V. COVENANTS OF KNHC AND KDC KNHC and KDC agree that between the date hereof and the Closing: 5.1 CONSUMMATION OF AGREEMENT. Subject to the terms and conditions hereof, KNHC and KDC will take all action reasonably necessary to cause the consummation of the transactions contemplated by this Agreement in accordance with their terms and conditions and take all corporate and other action necessary to approve the transactions contemplated herein. 5.2 NOTICE OF CERTAIN EVENTS. KNHC and KDC shall promptly notify KREG and KHI of: (a) any notice or other communication from any Person or entity alleging that the consent of such Person or entity is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; or (c) any actions, suits, claims, investigations or proceedings commenced or threatened against, relating to or involving or otherwise affecting the transactions contemplated hereby. 5.3 RESPONSIBILITY FOR ACCRUED EMPLOYEE BENEFITS. KDC hereby covenants and agrees that it will take whatever steps are necessary to cause to be paid when due any accrued benefits for which KOC or any other KREG affiliated entity might have any liability arising from any Plan that has been disclosed to KDC on or prior to the date of this Agreement to the extent that such liabilities (a) relate to any employees of KOC or the Investments or any employees of KREG who KDC has agreed will become employees of KOC or the Investments on or after the Closing Date and (b) have been properly reflected on the Balance Sheet in accordance with GAAP and are otherwise consistent with representations made by KREG and KHI pursuant to this Agreement. KNHC and KDC acknowledge that the purpose and intent of this covenant is to assure that KREG and its Affiliates shall have no responsibility whatsoever at any time on or after the Closing Date with respect to any such liabilities. KREG and KHI shall retain all liabilities with respect 16 to the foregoing matters to the extent that they relate to any employees of KREG and KHI who will not be employed by KDC after the Closing. 5.4 MEDICAL PREMIUMS AND COSTS. KDC shall for such period as is necessary (but not beyond December 31, 1998) for it to establish a separate health insurance program, promptly reimburse KREG with respect to any and all health insurance premiums and other expenditures made on behalf of employees of KOC or its Affiliates from and after the Closing Date. 5.5 RELEASE OF GUARANTEES. KNHC and KDC shall use reasonable efforts to obtain full releases from all obligations (the "RELEASES") under the corporate guarantees and other contractual obligations set forth on SCHEDULE 5.5 (the "GUARANTEES") which represent all of the Guarantees to which KREG or any of its Affiliates are parties as of the date hereof and, except to the extent of any Releases, as of the Closing Date. VI. CONDITIONS TO OBLIGATIONS OF KREG AND KHI The obligations of KREG and KHI to sell and transfer the Stock pursuant to this Agreement are subject to the satisfaction, at or prior to Closing, of each of the following conditions, any one or more of which may be waived at the sole option of KREG or KHI: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of KNHC and KDC contained herein shall have been true and correct in all material respects when initially made and shall be true and correct in all material respects as of the Closing Date. 6.2 COVENANTS. KNHC and KDC shall have performed and complied in all material respects with all covenants required by this Agreement to be performed and complied with by KNHC and KDC prior to the Closing Date. 6.3 PROCEEDINGS. No action, proceeding or order by any court or other governmental agency or body shall have been instituted, threatened whether orally or in writing, or entered concerning KREG, KHI, KOC or any of their respective Affiliates or their respective business or restraining any of the transactions contemplated hereby. 6.4 GOVERNMENT APPROVALS. All filings with any governmental authority or agency or other Person relating to the consummation of the transactions contemplated herein shall have been made and no action or proceeding shall have been instituted or threatened which could materially affect, restrain or prohibit any of the transactions contemplated hereby. 6.5 CLOSING DELIVERIES. KREG and KHI shall have received all documents, certificates, instruments, assignments and agreements referred to in SECTION 8.2, duly executed and delivered in form reasonably satisfactory to KREG and KHI. 17 6.6 OTHER DOCUMENTS. KREG and KHI shall have received all such other certificates, instruments or documents that are reasonably required by KREG, KHI or their counsel in order to consummate the transactions contemplated herein, including but not limited to those documents and required deliveries set forth in ARTICLE VIII. VII. CONDITIONS TO OBLIGATIONS OF KNHC The obligation of KNHC to acquire the Stock pursuant to this Agreement is subject to the satisfaction, at or prior to Closing, of each of the following conditions, any one or more of which may be waived at the sole option of KNHC: 7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of KREG and KHI contained herein shall have been true and correct in all material respects when initially made and shall be true and correct in all material respects as of the Closing Date. 7.2 COVENANTS. KREG and KHI shall have performed and complied in all material respects with all covenants required by this Agreement to be performed and complied with by KREG and KHI, respectively, prior to the Closing Date. 7.3 PROCEEDINGS. No action, proceeding or order by any court or other governmental agency or body shall have been instituted, threatened whether orally or in writing, or entered concerning KOC or its business or restraining any of the transactions contemplated hereby. 7.4 GOVERNMENT APPROVALS AND REQUIRED CONSENTS. The Required Consents and Project Consents shall have been obtained and all necessary consents of and filings with any governmental authority or agency or other Person relating to the consummation of the transactions contemplated hereby shall have been obtained and made by KNHC and no action or proceeding shall have been instituted or threatened which could materially affect, restrain or prohibit any of the transactions; provided, that KNHC may at its election defer the Closing Date for up to thirty (30) days in order to obtain the Required Consents and/or Project Consents. 7.5 CLOSING DELIVERIES. KNHC shall have received all documents, certificates, instruments, assignments and agreements referred to in SECTION 8.1, duly executed and delivered in form reasonably satisfactory to KNHC. 7.6 OTHER DOCUMENTS. KNHC and KDC shall have received all such other certificates, instruments or documents that are reasonably required by KNHC, KDC or their counsel in order to consummate the transactions contemplated herein, including but not limited to those documents and required deliveries set forth in ARTICLE VIII. 18 VIII. CLOSING DELIVERIES BY THE PARTIES 8.1 DELIVERIES OF KREG AND KHI. At or prior to the Closing Date, KREG and KHI shall deliver to KNHC the following, all of which shall be in a form reasonably satisfactory to KNHC: (a) a certificate representing the Stock, together with accompanying signed stock powers or instruments of assignment, duly endorsed in blank for the transfer of the Stock to KNHC; (b) all of KOC's and the Investments' books and records, including without limitation the certificates evidencing KOC's ownership interest in the Investments and their respective minute books, accounting records, tax records and other corporate records; (c) a certificate of the Chief Financial Officer of KREG and the Chief Financial Officer of KHI, dated the Closing Date, certifying that the representations and warranties of KREG and KHI contained in this Agreement are true and correct on and as of the Closing Date, which certificate shall include a complete and accurate copy of the resolutions evidencing the due authorization of the execution, delivery and performance of this Agreement by KREG and KHI; (d) a certificate of the Chief Financial Officer of KREG and the Chief Financial Officer of KHI dated the Closing Date, (i) as to the performance of and compliance in all material respects by KREG and KHI with all covenants contained in this Agreement on and as of the Closing Date and (ii) certifying that all conditions precedent required by KREG and KHI to be satisfied shall have been satisfied; (e) certificates of KREG and KHI certifying the incumbency of officers and other duly authorized agents of KREG and KHI and as to the signatures of such officers and agents who have executed documents delivered at the Closing on behalf of KREG and KHI; (f) executed copies of any Required Consents; (g) an agreement providing for the termination of (i) the license granted to KREG to use the "Koll" name other than with respect to the use of the "Koll" name from a historical perspective, such termination to be implemented not later than thirty (30) days after the Closing, and (ii) the covenant-not-to-compete by Donald M. Koll, such termination to be effective immediately; (h) assignments of all of KREG's and KHI's right title and interest in and to (i) all items of personal property of KREG and KHI other than the items of personal property set forth on SCHEDULE 8.1(h), and (ii) all agreements running in 19 favor of such parties in connection with the operation of the Project Partnerships or any pre-development activities in relation to future project partnerships; (i) the resignations effective as of the Closing Date from Raymond J. Pacini, Christine Rush and Sandra Sciutto in each of their respective capacities as officers or directors of KOC or any of the Investments provided that Sandra Sciutto shall be available for consultation as reasonably requested by KDC until December 31, 1998, however, such availability shall not exceed four (4) hours per week after August 31, 1998; and (j) such other instrument or instruments executed by KREG or KHI as shall be necessary or appropriate, as KNSH and KDC or their counsel shall reasonably request, to carry out and effect the purpose and intent of this Agreement and the transactions contemplated hereby and, to the extent necessary, KREG and KHI shall execute and deliver any such instruments on a post-Closing basis. 8.2 DELIVERIES OF KNHC. At or prior to the Closing Date, KNHC shall deliver to KREG and KHI the following, all of which shall be in a form reasonably satisfactory to KREG and KHI: (a) a certificate of KNHC and KDC, dated the Closing Date, certifying that the representations and warranties of KNHC and KDC contained in this Agreement are true and correct on and as of the Closing Date, which certificate shall include a complete and accurate copy of the resolutions evidencing the due authorization of the execution, delivery and performance of this Agreement by KNHC and KDC; (b) a certificate of KNHC and KDC, dated the Closing Date, (i) as to the performance of and compliance in all material respects by KNHC and KDC with all covenants contained in this Agreement on and as of the Closing Date and (ii) certifying that all conditions precedent required by KNHC and KDC to be satisfied shall have been satisfied; (c) certificates of KNHC and KDC certifying the incumbency of officers, managers and other duly authorized agents of KNHC and KDC and as to the signatures of such officers, managers and agents who have executed documents delivered at the Closing on behalf of KNHC and KDC; (d) the Closing Consideration and 1998 Activity Consideration; (e) executed copies of the Releases of Guarantees and the Project Consents; (f) the Letter of Credit; 20 (g) resignations effective as of the Closing Date from Donald M. Koll, Richard M. Ortwein, Ray Wirta, Denise Kenneally, Jobe Dubbs and Mary Roylance collectively, (the "KNHC Individuals") in each of their respective capacities as officers, directors or employees of KREG and its Affiliates; (h) the written agreements of the KNHC Individuals to the termination of their respective employment agreements with KREG and the cancellation of all of their outstanding options (including vested options) for KREG common stock and the surrender of any shares (or the sales proceeds therefrom) which were issued upon the exercise of any option, which terminations, cancellations and surrender shall provide for a complete waiver and release of KREG with respect to the payment of any severance or other form of compensation; (i) the written agreement of Ray Wirta to the termination of his consulting agreement with KREG and the cancellation of all of his outstanding options (including vested options) for KREG common stock and the surrender of any shares (or the sales proceeds therefrom) which were issued upon the exercise of any option, which termination, cancellation and surrender shall provided for a complete waiver and release of KREG and its Affiliates with respect to the payment of any severance or other form of compensation; (j) a sublease agreement with respect to the office space, two (2) parking garage spaces and the amenities (including, but not limited to copiers, telephones, fax machines and conference rooms) currently being occupied and enjoyed by the six (6) KREG employees who will continue in the employ of KREG or its Affiliates following the Closing, which sublease shall be at a rental rate equal to the amount currently charged for such space and amenities, and which sublease shall have a term expiring August 31, 1998 unless sooner terminated in the sole discretion of KREG and without payment of any premium or penalty, subject to fifteen (15) days prior written notice to KDC; and (k) such other instrument or instruments executed by KNHC or KDC as shall be necessary or appropriate, as KREG and KHI or their counsel shall reasonably request, to carry out and effect the purpose and intent of this Agreement and the transactions contemplated hereby and, to the extent necessary, KNHC and KDC shall execute and deliver any such instruments on a post-Closing basis. IX. INDEMNIFICATION 9.1 INDEMNIFICATION BY KDC. Subject to the terms and conditions of this ARTICLE IX, KDC hereby agrees to indemnify, defend and hold harmless KREG, KHI and their respective directors, officers (other than the KNHC Individuals), shareholders, employees, agents, attorneys, consultants and Affiliates from and against all losses, claims, obligations, demands, assessments, penalties, liabilities, costs, damages, attorneys' fees and expenses 21 (including, without limitation, all costs of experts and all costs incidental to or in connection with any appellate process) (collectively, "DAMAGES") asserted against or incurred by such individuals and/or entities arising out of, in connection with or resulting from: (a) a breach by KNHC or KDC of any representation or warranty (without giving effect to any "material adverse effect" qualifier or qualifier of like import contained as part of any such representation or warranty that was breached) or covenant of KNHC or KDC contained in this Agreement or in any schedule, exhibit, certificate or other instrument delivered pursuant to or as a part of this Agreement; (b) any act or omission or strict liability relating to the business or operations of KOC or its Affiliates occurring on or after the Closing Date; and (c) any acts or omissions of KOC or its Affiliates that result in any action being threatened or pursued against KREG or any of its Affiliates pursuant to any of the Guarantees. 9.2 INDEMNIFICATION BY KREG. Subject to the terms and conditions of this ARTICLE IX, KREG hereby agrees to indemnify, defend and hold harmless KDC, KNHC and their respective managers, members, directors, officers, shareholders, employees, agents, attorneys, consultants and Affiliates from and against all Damages asserted against or incurred by such individuals and/or entities arising out of, in connection with or resulting from (a) a breach by KREG or KHI of any representation or warranty (without giving effect to any "material adverse effect" qualifier or qualifier of like import contained as part of any such representation or warranty that was breached) or covenant of KREG or KHI contained in this Agreement or in any schedule, exhibit, certificate or other instrument delivered pursuant to or as a part of this Agreement; (b) the case of WHITING CORPORATION V. WT/HRC CORPORATION AND KREG-OC, INC. filed March 25, 1997, Circuit Court, Cook County, Illinois; or (c) the Pullman Inc. Non- contributory Pension Plan. 9.3 CLAIMS. All claims for indemnification pursuant to this ARTICLE IX shall be asserted and resolved as follows: (a) any party claiming indemnification pursuant to this ARTICLE IX (an "INDEMNIFIED PARTY") shall promptly (and, in any event at least ten days prior to the due date for any responsive pleadings, filings or other documents) (i) notify the party for whom indemnification is sought (the "INDEMNIFYING PARTY") of any third -party claim or claims asserted against the Indemnified Party (a "THIRD PARTY CLAIM") that could give rise to a right of indemnification pursuant to this ARTICLE IX and (ii) transmit to the Indemnifying Party a written notice ("CLAIM NOTICE") describing in reasonable detail the nature of the Third Party Claim, a copy of all papers served with respect to such claim (if any), an estimate of the amount of Damages attributable to the Third Party Claim and the basis of the Indemnified Party's request for indemnification under this Agreement. The failure to promptly deliver a Claim Notice shall not relieve any Indemnifying Party of its obligations to any 22 Indemnified Party with respect to the related Third Party Claim except to the extent that the resulting delay is materially prejudicial to the defense of such claim. Within 30 days after receipt of any Claim Notice (the "ELECTION PERIOD"), the Indemnifying Party shall notify the Indemnified Party (x) whether the Indemnifying Party disputes its potential liability to the Indemnified Party under this ARTICLE IX with respect to such Third Party Claim and (y) whether the Indemnifying Party desires, at the sole cost and expense of such Indemnifying Party, to defend the Indemnified Party against such Third Party Claim; (b) If the Indemnifying Party notifies the Indemnified Party within the Election Period that the Indemnifying Party elects to assume the defense of the Third Party Claim, then the Indemnifying Party shall have the right to defend, at its sole cost and expense, with counsel reasonably acceptable to such Indemnified Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnifying Party to a final conclusion or settled at the discretion of the Indemnifying Party in accordance with this SECTION 9.3(b). Except as set forth in SECTION 9.3(f) hereof, the Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof. The Indemnified Party is hereby authorized, at the sole cost and expense of the Indemnifying Party (but only if the Indemnified Party is entitled to indemnification hereunder), to file, during the Election Period, any motion, answer or other pleadings that the Indemnified Party shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and not prejudicial to the Indemnifying Party. If requested by the Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and their counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest, including, without limitation, the making of any related counterclaim against the Person asserting the Third Party Claim or any cross -complaint against any Person. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this SECTION 9.3(b) and shall bear its own costs and expenses with respect to such participation; provided, however, that if the named parties to any such action (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party, and the Indemnified Party has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the Indemnifying Party, then the Indemnified Party may employ separate counsel at the expense of the Indemnifying Party, and upon written notification thereof, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of the Indemnified Party; provided further that the Indemnifying Party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the Indemnified Party, which firm shall be designated in writing by the Indemnified Party. Notwithstanding the foregoing, the Indemnifying Party shall be prohibited from 23 confessing or settling any criminal allegations brought against the Indemnified Party without the express written consent of the Indemnified Party. (c) If the Indemnifying Party fails to notify the Indemnified Party within the Election Period that the Indemnifying Party elects to defend the Indemnified Party pursuant to SECTION 9.3(b), or if the Indemnifying Party elects to defend the Indemnified Party pursuant to SECTION 9.3(b) but fails diligently and promptly to prosecute or settle the Third Party Claim, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party (if the Indemnified Party is entitled to indemnification hereunder), the Third Party Claim by all appropriate proceedings, which proceedings shall be promptly and vigorously prosecuted by the Indemnified Party to a final conclusion or settled. The Indemnified Party shall have full control of such defense and proceedings, provided, however, that the Indemnified Party may not enter into, without the Indemnifying Party's consent, which shall not be unreasonably withheld, any compromise or settlement of such Third Party Claim. Notwithstanding the foregoing, if the Indemnifying Party has delivered a written notice to the Indemnified Party to the effect that the Indemnifying Party disputes their potential liability to the Indemnified Party under this ARTICLE IX and if such dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party shall not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this SECTION 9.3 or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses of such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this SECTION 9.3(c), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation; provided, however, that if the named parties to any such action (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party, and the Indemnifying Party has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the Indemnified Party, then the Indemnifying Party may employ separate counsel and upon written notification thereof, the Indemnified Party shall not have the right to assume the defense of such action on behalf of the Indemnifying Party. (d) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that does not involve a Third Party Claim, the Indemnified Party shall transmit to the Indemnifying Party a written notice (the "INDEMNITY NOTICE") describing in reasonable detail the nature of the claim, an estimate of the amount of damages attributable to such claim and the basis of the Indemnified Party's request for indemnification under this Agreement. If the Indemnifying Party does not notify the Indemnified Party within thirty (30) days from its receipt of the Indemnity Notice that the Indemnifying Party disputes such claim, the claim specified by the Indemnified Party in the Indemnity Notice shall be deemed a liability of the Indemnifying Party hereunder. If the Indemnifying Party has timely 24 disputed such claim, as provided above, such dispute shall be resolved by litigation in an appropriate court of competent jurisdiction if the parties do not reach a settlement of such dispute within thirty (30) days after notice of a dispute is given. (e) Payments of all amounts owing by any Indemnifying Party pursuant to this ARTICLE IX relating to a Third Party Claim shall be made within thirty (30) days after the latest of (i) the settlement of such Third Party Claim, (ii) the expiration of the period for appeal of a final adjudication of such Third Party Claim, or (iii) the expiration of the period for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. Payments of all amounts owing by the Indemnifying Party pursuant to SECTION 9.3(d) shall be made within ten (10) days after the later of (i) the expiration of the 30 -day Indemnity Notice period or (ii) the expiration of the period for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. (f) The Indemnifying Party shall provide the Indemnified Party with written notice of any firm offer that is made to settle or compromise a Third Party Claim against an Indemnified Party. If a firm offer is made to settle such a claim solely by the payment of money damages and the Indemnifying Party notifies the Indemnified Party in writing that the Indemnifying Party agrees to such settlement, but the Indemnified Party elects not to accept and agree to it, the Indemnified Party may continue to contest or defend such Third Party Claim and, in such event, the total maximum liability of the Indemnifying Party to indemnify or otherwise reimburse the Indemnified Party hereunder with respect to such a claim shall be limited to and shall not exceed the amount of such settlement offer, plus reasonable out -of -pocket costs and reasonable expenses (including reasonable attorneys' fees and disbursements) to the date of notice that the Indemnifying Party desired to accept such settlement. (g) Notwithstanding any provision herein to the contrary, the obligation of an Indemnifying Party to provide indemnification to an Indemnified Party for breach of any representation or warranty shall not take effect unless and until the Damages asserted against or incurred in the aggregate and on a collective basis by the Indemnified Parties pursuant to either SECTION 9.1 or 9.2 (as applicable) as a result of such a breach or breaches exceeds $15,000. 9.4 TAX INDEMNIFICATION. (a) Notwithstanding anything in this Agreement to the contrary, each of KREG and KHI shall indemnify KNHC, KDC and their Affiliates (including KOC) and hold them harmless for, from and against (i) all liability for all Taxes of KOC for all taxable periods ending on or before the Closing Date and the portion ending on the Closing Date of any taxable period that includes (but does not end on) the Closing Date ("PRE-CLOSING TAX PERIOD"), including, without limitation, any liability for any Taxes imposed pursuant to Treasury Regulation SECTION 1.1502-6 as a result of being a member of the affiliated group, within the meaning of SECTION 1504 of the Code, of which KREG is a member and liabilities for 25 any Taxes imposed in respect of the matters set forth in SCHEDULE 2.8, (ii) assuming a valid, timely and effective election under Sections 338(g) and 338(h)(10) of the Code is made, as contemplated by SECTION 11.21 of this Agreement (the "ELECTION"), all liability for Taxes accruing on or before the Closing Date which result from (A) the Election, (B) any comparable elections under state or local tax laws and (C) any deemed assets sales resulting from the Election in any jurisdictions, including jurisdictions in which KOC files its Tax Returns on a separate company basis and (iii) any liability for Taxes attributable to a breach by KREG or KHI of any of its obligations under this Agreement. (b) KDC shall indemnify KREG and its Affiliates and hold them harmless for, from and against all liability for Taxes of KOC for any taxable period commencing after the Closing Date. (c) In the case of any taxable period that includes (but does not end on) the Closing Date ("Straddle Period"), the Taxes of KOC for the Pre-Closing Tax Period shall be computed as if such taxable period ended on and included the Closing Date (and included any income from any deemed assets sale). 9.5 PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS. (a) If a claim for Taxes shall be made by any taxing authority in writing, which, if successful, might result in an indemnity payment pursuant to SECTION 9.4, the Indemnified Party shall promptly notify the Indemnifying Party in writing of such claim (a "TAX CLAIM"). If notice of a Tax Claim (a "TAX NOTICE") is not given to the Indemnifying Party within a reasonably sufficient period of time to allow the Indemnifying Party effectively to contest such Tax Claim, or in reasonable detail to apprize the Indemnifying Party of the nature of the Tax Claim, taking into account the facts and circumstances with respect to such Tax Claim, the Indemnifying Party shall not be liable to the Indemnified Party or any of its affiliates to the extent that the Indemnifying Party's position is actually prejudiced as a result thereof. (b) With respect to any Tax Claim which might result in an indemnity payment to KNHC, KDC or any of their Affiliates pursuant to SECTION 9.4 (other than a Tax Claim relating to Taxes of KOC for a Straddle Period), and provided that KREG shall first have admitted its liability to KNHC, KDC or any of their Affiliates as the case may be, KREG shall control all proceedings taken in connection with such Tax Claim (including, without limitation, selection of counsel) and, without limitation of the foregoing, may in its sole discretion and at its sole expense pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any taxing authority with respect thereto, and may, in its sole discretion, either pay the Tax claimed and sue for a refund where applicable law permits such refund suits or contest such Tax Claim in any permissible manner. In no case shall KNHC, KDC or KOC settle or otherwise compromise any Tax Claim referred to in the preceding sentence without KREG's prior written consent. KNHC, KDC, KOC and their affiliates shall cooperate with KREG in contesting such Tax Claim, which cooperation shall include, without limitation, the reasonable retention and (upon KREG's 26 request) the provision to KREG of records and information which are reasonably relevant to such Tax Claim, and making employees reasonably available to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim, all at KREG's expense. (c) The contest of any Tax Claim that relates to Taxes of KOC for a Straddle Period shall be controlled by KDC (or, if required by law, KNHC) and KREG agrees, and agrees to cause its affiliates, to cooperate with KNHC, KDC (and their Affiliates) in pursuing such contest. KREG shall be kept informed of any such contest and shall have the right to participate, or have its legal counsel or advisors participate, at its expense. KDC shall not settle any claim with any taxing authority with respect to taxes for a Straddle Period unless (i) KREG shall have agreed in writing to such settlement, such agreement not to be unreasonably withheld, and (ii) KREG and KDC shall have agreed on an apportionment of the proposed settlement liability amongst the Pre-Closing Tax Period and the portion of the Straddle Period commencing on the day after the Closing Date. To the extent KDC is represented in any discussions with any taxing authority with respect to taxes for a Straddle Period, such representatives shall owe an equal duty to both KDC and KREG. X. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 10.1 NON -DISCLOSURE COVENANT OF KDC AND THE INDIVIDUAL PARTIES. KDC and the Individual Parties recognize and acknowledge that it and they have in the past, currently have, and in the future may continue to have, access to certain Confidential Information of KREG and its Affiliates that is valuable, special and a unique asset of such entity's business. KDC and the Individual Parties, on behalf of themselves and their Affiliates, agree that they will not disclose such Confidential Information to any Person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of KDC and (b) to counsel and other advisors to KNHC or KDC provided that such advisors (other than counsel) agree to the confidentiality provisions of this SECTION 10.1, unless (i) such information becomes available to or known by the public generally through no fault of KDC and the Individual Parties, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii) KDC shall give prior written notice thereof to KREG and provide KREG with the opportunity to contest such disclosure, (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, or (iv) the disclosing party is the sole and exclusive owner of such Confidential Information as a result of the purchase and sale of the Stock or otherwise. In the event of a breach or threatened breach by any party to this Agreement of the provisions of this SECTION 10.1, then each other party to this Agreement shall be entitled to an injunction restraining the party or parties involved in the breach or threatened breach from disclosing, in whole or in part, such Confidential Information, and the party against whom such injunction is sought consents to such relief. Nothing herein shall be construed as prohibiting the exercise of any other available remedy for such breach or threatened breach, including the recovery of damages. 27 10.2 NON-DISCLOSURE COVENANT OF KREG AND KHI. KREG and KHI recognize and acknowledge that they have in the past, currently have, and in the future may continue to have, access to certain Confidential Information of KDC, the Investments, the Project Partnerships and the Individual Parties following the Closing Date that is valuable, special and a unique asset of such parties business. KREG and KHI, on behalf of themselves and their Affiliates, agree that they will not disclose such Confidential Information of KDC and, following the Closing Date, of the Investments, Project Partnerships, and the Individual Parties to any Person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of KREG and KHI and (b) to counsel and other advisers to KREG and KHI provided that such advisers (other than counsel) agree to the confidentiality provisions of this SECTION 10.2, unless (i) such information becomes available to or known by the public generally through no fault of KREG and KHI, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii) KREG and KHI shall give prior written notice thereof to KDC and the Individual Parties and provide KDC and the Individual Parties with the opportunity to contest such disclosure, (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, or (iv) the disclosing party is the sole and exclusive owner of such Confidential Information. In the event of a breach or threatened breach by any party to this Agreement of the provisions of this SECTION 10.2, then each other party to this Agreement shall be entitled to an injunction restraining the party or parties involved in the breach or threatened breach from disclosing, in whole or in part, such Confidential Information, and the party against whom such injunction is sought consents to such relief. Nothing herein shall be construed as prohibiting the exercise of any other available remedy for such breach or threatened breach, including the recovery of damages. 10.3 SURVIVAL. Notwithstanding any other provision of this Agreement to the contrary, the obligations of the parties under this ARTICLE X shall survive the termination of this Agreement. XI. MISCELLANEOUS 11.1 AMENDMENT; WAIVERS. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. Any waiver of any terms and conditions hereof must be in writing, and signed by the parties hereto. The waiver of any of the terms and conditions of this Agreement shall not be construed as a waiver of any other terms and conditions hereof. 11.2 ASSIGNMENT; CONTRIBUTION AND SUBSEQUENT TRANSFERS. Neither this Agreement nor any right created hereby or in any agreement entered into in connection with the transactions contemplated hereby shall be assignable by any party hereto without the consent of KREG and KDC, which consent shall not be unreasonably withheld. Notwithstanding the foregoing provision or any other provision in this Agreement, KNHC's right to assign, transfer, convey, hypothecate or otherwise dispose of the Stock immediately after the Closing 28 to KDC in connection with the Contribution shall be unrestricted other than as required by federal and state securities laws for compliance therewith. Immediately following the Closing, KNHC shall liquidate KOC in connection with the Contribution, and will contribute all of its assets and liabilities to KDC and KNHC shall be released and relieved of any further obligation under this Agreement; provided, however, that no subsequent transfers of the Stock or any of the assets of KOC or any of its lower tier Affiliates shall in any way limit or modify (a) the liabilities that are being transferred to and assumed by KNHC and/or KDC as expressly set forth in this Agreement or by operation of law pursuant to the stock sale transaction contemplated herein, the Contribution or otherwise; or (b) the indemnification provisions in ARTICLE IX which run in favor of KREG and KHI. 11.3 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. Except as otherwise expressly provided herein, neither this Agreement nor any other agreement contemplated hereby or by the transactions shall be deemed to confer upon any Person not a party hereto or thereto any rights or remedies hereunder or thereunder. 11.4 SCHEDULES. Any Schedules attached to this Agreement are by this reference incorporated herein and made a part hereof. 11.5 ENTIRE AGREEMENT. This Agreement and transactions contemplated hereby and thereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. 11.6 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 11.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations, warranties and covenants contained herein shall survive the Closing and all statements contained in any certificate, exhibit or other instrument delivered by or on behalf of any party pursuant to this Agreement shall be deemed to have been representations and warranties by such party, respectively. Notwithstanding any provision in this Agreement to the contrary, the representations and warranties contained herein shall survive the Closing until the fifth (5th) anniversary of the Closing Date, except that the representations 29 contained in SECTION 2.1 shall survive indefinitely and the representations contained in SECTION 2.8 shall survive for the applicable statutes of limitations. 11.8 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereto shall be governed by, construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws rules of the State of Delaware. 11.9 CAPTIONS AND REFERENCES. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. References to Schedules, Sections and Articles refer to those such items as set forth in this Agreement. 11.10 GENDER AND NUMBER. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. 11.11 CONSTRUCTION. The parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The parties to this Agreement intend that each representation, warranty and covenant contained herein shall have independent significance. If any party hereto has breached any representation, warranty or covenant contained in this Agreement in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty or covenant. 11.12 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. The parties on behalf of themselves and their respective Affiliates shall keep this Agreement and its terms confidential, and shall make no press release or public disclosure, either written or oral, regarding the transactions contemplated by this Agreement without the prior knowledge and reasonable consent of the other parties; PROVIDED, that the foregoing shall not prohibit (a) such public announcements or filing of public or administrative reports by KREG, KHI, KNHC, the ultimate corporate parent of KNHC, or KDC as may be required or recommended on advice of their respective counsel, or (b) any disclosure to attorneys, accountants, investment bankers or other agents of the parties assisting the parties in connection with the transactions contemplated by this Agreement. In the event that the transactions contemplated hereby are not consummated for any reason whatsoever, the parties hereto agree not to disclose or use any Confidential Information they may have concerning the affairs of the other parties, except for information that is required by law to be disclosed. The parties further agree on behalf of themselves and their respective 30 Affiliates not to disparage or create any negative inference as to the reputation, prestige, value, image or impression of the other party, or any of the other parties' officers, directors, personnel or related companies, by words, actions or other communications, or by any omissions to speak, act or otherwise communicate, or in any other manner whatsoever. This covenant shall survive the Closing or the termination of this Agreement. 11.13 NOTICE. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request or demand must be in writing to be effective and shall be deemed to be delivered and received (i) if personally delivered or if delivered by telex, telegram or courier service, when delivered to the party to whom notice is sent, (ii) if delivered by facsimile transmission, when so sent and receipt acknowledged by receipt or (iii) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith): If to KREG or KHI: Koll Real Estate Group, Inc. 4343 Von Karman Avenue Newport Beach, CA 92660 Fax: (714) 261 -6550 ATTN: Raymond J. Pacini with a copy to: McDermott, Will & Emery 1301 Dove Street, Suite 500 Newport Beach, California 92660 Fax No.: (714) 851 -9348 ATTN: Gregory W. Preston, Esq. If to KNHC, KDC or the Individual Parties: Koll Development Company, LLC 4343 Von Karman Avenue Newport Beach, CA 92660 Fax: (714) 250 -4344 ATTN: Donald M. Koll and Richard M. Ortwein, and 31 with copies to : Allen, Matkins, Leck, Gamble & Mallory, LLP 18400 Von Karman, Fourth Floor Irvine, CA 92612 -1597 Fax No.: (714) 553 -8354 ATTN: S. Lee Hancock, Esq., and Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Fax No. (212) 735-2000 ATTN: Benjamin F. Needell, Esq. 11.14 NO WAIVER. No party hereto shall by any act (except by written instrument pursuant to SECTION 11.1 ), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. 11.15 TERMINATION PRIOR TO CLOSING. This Agreement and the transactions contemplated hereby may be terminated (a) at any time prior to the Closing by mutual agreement of all parties; or (b) by any party hereto if the Closing of this Agreement and the consummation of the transactions contemplated hereby shall not have occurred on or before April 30, 1998, unless such date is extended pursuant to SECTION 4.1, by KNHC pursuant to SECTION 7.4 or is otherwise mutually extended by all parties; (c) by KREG or KHI in the event of any material breach of the representations, warranties or covenants of KNHC or KDC or their respective failure to provide the deliveries set forth in ARTICLE VIII; (d) by KREG or KHI pursuant to the provisions of SECTION 4.1; or (e) by KNHC or KDC in the event of any material breach of the respective representations, warranties or covenants of KREG or KHI or their respective failure to provide the deliveries set forth in ARTICLE VIII. In the event of any termination of this Agreement other than by reason of a material breach by KNHC or KDC, KNHC shall be entitled to the return of the Initial Consideration (and interest thereon in the amount specified in SECTION 4.1(a)) within five (5) days after the date of such termination. In the event of a termination of this Agreement pursuant to SECTION 4.1, KREG shall pay to KDC on the date of termination the amounts contemplated by SECTION 4.1. All such amounts shall be paid in immediately available funds without any further payment or obligation with respect to any premium, penalty, other consideration or damages, or reimbursement of any costs or expenses 32 11.16 TIME OF ESSENCE. Time is of the essence with respect to this Agreement. 11.17 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. The election of anyone or more remedies by any party hereto shall not constitute a waiver of the right to pursue other available remedies. 11.18 COSTS, EXPENSES AND LEGAL FEES. Whether or not the transactions contemplated hereby are consummated, each party hereto shall bear its own costs and expenses (including attorneys' fees and expenses), except that (a) KNHC and KDC shall be entitled to certain attorneys' fees and expenses to the extent applicable pursuant to the provisions of SECTION 4.1; and (b) each party hereto agrees to pay the costs and expenses (including reasonable attorneys' fees and expenses) incurred by the other parties in successfully (i) enforcing any of the terms of this Agreement, or (ii) proving that another party breached any of the terms of this Agreement. The parties acknowledge that each party shall be responsible for its own attorneys' fees, accountants' and other advisory fees associated with the Closing, it being understood and agreed that none of KREG's or KHI's expenses relating to the transactions contemplated by this Agreement shall be paid or payable by KOC. 11.19 EXECUTION. Other than original stock certificates, this Agreement and any other documents related hereto, including exhibits and/or certificates, may be executed by facsimile signature page if promptly followed by delivery of an executed original. 11.20 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 11.21 SECTION 338(h)(10) ELECTION. (a) With respect to the acquisition of the Stock hereunder, if KNHC so elects with respect to KOC and any corporate Affiliate of KOC that KNHC so designates, (i) KNHC shall make a timely election under section 338(g) of the Code (and any comparable election under state or local tax law), (ii) KREG and KNHC shall jointly make the election provided for by SECTION 338(h)(10) of the Code (the "Election") and KREG and KNHC shall, as promptly as practicable following the Closing Date, cooperate with each other to take all actions necessary and appropriate (including filing such forms, returns, elections, schedules and other documents as may be required) to effect and preserve a timely Election in accordance with the provisions of Treasury Regulation SECTION 1.338(h)(10)-1(d) (or any comparable provisions of state or local tax law) or any successor provisions and (iv) KREG and KNHC shall report the sale of Stock pursuant to this Agreement consistent with the Election (and any comparable elections under state or local tax laws) and shall take no 33 position to the contrary thereto in any Tax Return, any proceeding before any taxing authority, or otherwise. (b) In connection with the Election, KREG and KNHC shall act together in good faith to agree on the Aggregate Deemed Sales Price and Adjusted Grossed-up Basis (as defined under applicable Treasury Regulations) and the allocation of such Adjusted Grossed-up Basis among the assets of KOC and any corporate Affiliate of KOC for which an Election has been made. Such allocation of the Adjusted Grossed-up Basis shall be made in accordance with section 338(b) of the Code and any applicable Treasury Regulations. KREG and KNHC (i) shall be bound by such allocation for purposes of determining any Taxes; (ii) shall prepare and file all Tax Returns to be filed with any taxing authority in a manner consistent with such allocation; and (iii) shall take no position inconsistent with such allocation in any Tax Return, any proceeding before any taxing authority or otherwise. In the event that such allocation is disputed by any taxing authority, the party receiving notice of such dispute shall promptly notify and consult with the other party hereto concerning resolution of such dispute. 11.22 SURVIVAL OF TAX PROVISIONS. Any claim to be made pursuant to Sections 9.4 or 11.21 hereof must be made before the expiration (with valid extensions) of the applicable statutes of limitations relating to the Taxes at issue. 11.23 REAL AND PERSONAL PROPERTY TAXES. KREG shall pay or cause to be paid any and all liabilities of KOC for real and personal property taxes and assessments relating to all periods ending on or prior to December 31, 1997. KDC shall pay or cause to be paid any and all liabilities of KOC for real and personal property taxes and assessments relating to taxable periods commencing on or after January 1, 1998, provided that with respect to periods prior to the Closing Date, personal property taxes and adjustments (but not real property taxes and adjustments which are capitalized) shall be taken into account in determining the 1998 Activity Consideration as set forth in SCHEDULE 1.2. 11.24 TRANSFER TAXES. Notwithstanding any other provisions of this Agreement to the contrary, KDC and KREG shall pay, or cause to be paid, equal shares of all sales, use, transfer, stamp, duties, recording and similar taxes, if any, required to be paid in connection with KDC's purchase of the Stock pursuant to this Agreement. 11.25 RETURN FILINGS, REFUNDS AND CREDITS. (a) KREG shall prepare or cause to be prepared and file or cause to be filed on a timely basis (in each case, at its own cost and expense and in a manner consistent with past practice) all Tax Returns with respect to KOC for taxable periods ending on or prior to the Closing Date. KREG shall provide KOC with copies of such Tax Returns (which, with respect to Tax Returns that relate to an affiliated or combined group that includes KOC, shall be "pro-forma" returns) covering any taxable period beginning on January 1, 1998 and ending on or prior to the Closing Date, on or prior to the due date thereof (including any extensions thereto). KREG shall pay all Taxes shown on all such Tax Returns. 34 (b) KDC shall prepare or cause to be prepared and shall file or cause to be filed on a timely basis all other Tax Returns with respect to KOC. In connection therewith, KDC shall be responsible for and shall pay any Taxes for which KDC has agreed to indemnify KREG pursuant to SECTION 9.4 hereof. In filing its return for purposes of Texas franchise tax, KDC shall treat any income from the deemed sale of assets attributable to the sale of partnership interests owned by KOC as a sale of intangible assets and net gain attributable to such deemed sale shall be included only in the denominator of the gross receipts apportionment formula because it is apportioned (attributed) to the location, i.e. the legal domicile, of the payor in accordance with Texas Regulation, 34 TAC Sec. 3.549. KDC shall provide KREG with copies of any such Tax Returns covering Taxes for which KREG has agreed to indemnify KNHC, KDC and their Affiliates (including KOC) pursuant to SECTION 9.4 hereof at least ten (10) days prior to the due date thereof (giving effect to the extensions thereto), accompanied by a statement calculating KREG's indemnification obligation pursuant to SECTION 9.4 hereof. KREG shall pay to KDC the amount of KREG's indemnification obligation within ten (10) days of receiving copies of such Tax Returns unless the parties are unable to agree on the amount of KREG's indemnification obligation hereunder in which case such dispute shall be resolved by independent accountants acceptable to both parties whose fees and expenses shall be paid by KREG and KDC in proportion to each party's respective liability for Taxes as determined by such accountants, and KREG shall pay the amount determined by such accountants within ten (10) days of such determination. (c) KREG, KOC, KNHC and KDC shall reasonably cooperate, and shall cause their respective affiliates, officers, employees, agents, auditors and representatives reasonably to cooperate, in preparing and filing all Tax Returns (including amended returns and claims for refund), including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods relating to Taxes. KDC and KREG recognize that KREG and its affiliates will need access, from time to time, after the Closing Date, to certain accounting and tax records and information held by KOC to the extent such records and information pertain to events prior to the Closing Date; therefore, KDC agrees that (i) from and after the Closing Date until the eighteenth anniversary of the Closing Date, KDC shall, and shall cause KOC to, (A) use all reasonable efforts to properly retain and maintain such records until such time as KREG agrees that such retention and maintenance is no longer necessary, and (B) allow KREG and its agents and representatives (and agents or representatives of any of its affiliates), to inspect, review and make copies of such records as KREG may deem necessary or appropriate from time to time, such activities to be conducted during normal business hours and at KREG's sole expense and (ii) from and after the eighteenth anniversary of the Closing Date, KDC shall not, and shall cause KOC not to, dispose of any of such records without first providing KREG with an opportunity to take possession of such records or to make copies thereof, at KREG's sole expense, prior to any such disposal. (d) Any refunds or credits of Taxes of KOC for any taxable period ending on or before the Closing Date shall be for the account of KREG. Any refunds or credits of Taxes of KOC for any taxable period beginning after the Closing Date shall be for the account of 35 KDC and shall be paid by KREG to KDC within 10 days after KREG receives such refund. Any refunds or credits of Taxes of KOC for any Straddle Period shall be apportioned between KREG and KDC on the basis of the "interim closing of the books". If KDC in good faith determines that it will not have any adverse effect on its Tax liability, KDC shall, if KREG so requests and at KREG's sole expense, cause KOC to file for and obtain any refunds or credits which KREG is entitled under this SECTION 11.23. If KDC makes such good faith determination, KDC shall cause KOC to forward to KREG any such refund within 10 days after the refund is received (or reimburse KREG for any such credit within 10 days after the relevant Tax Return is filed in which the credit is actually applied against KOC's liability for Taxes). 11.26 CONSISTENT TAX POSITIONS. KNHC and KDC (and by written acknowledgement hereto KOC) covenant and agree that neither KOC nor any of its subsidiaries shall take a position, for federal income tax purposes and comparable state and local tax purposes (including in connection with any examination or audit by any tax authority or other proceeding), inconsistent with the position that (a) the federal consolidated group of which KREG is the common parent (the "KREG Group") underwent an ownership change within the meaning of SECTION 382 of the Code as a result of the bankruptcy reorganization of KREG in 1997, (b) the provisions of SECTION 382(1)(5) apply to such ownership change, and (c) that each member of the KREG Group is subject to the provisions of SECTION 382(1)(5) of the Code in the respect of such ownership change; PROVIDED, HOWEVER, that if KREG elects not to apply the provisions of SECTION 382(1)(5) of the Code, this provision shall not apply. Accordingly, subject to the provision in the preceding sentence, KOC and its subsidiaries shall treat the purchase of the stock of KOC pursuant to this Agreement as a second ownership change within the meaning of SECTION 382(1)(5)(D) of the Code and under any comparable provisions of state and local law. In furtherance of the foregoing, KOC further agrees to execute and deliver, and to cause its subsidiaries to execute and deliver, to KREG such other documents or agreements evidencing the foregoing and compliance therewith, if and when reasonably requested by KREG. 11.27 TERMINATION OF TAX SHARING AGREEMENTS. KREG hereby agrees and covenants that any obligation of KOC pursuant to any tax sharing agreement or similar arrangements shall be terminated on or before the Closing Date, and no payments pursuant to any such tax sharing agreement or arrangements shall be made after such termination. 36 XII. DEFINITIONS As used in this Agreement, the following terms shall have the meanings set forth below: "Affiliate" with respect to any Person shall mean a Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Agreement" shall have the meaning set forth in the preamble to this Agreement. "Claim Notice" shall have the meaning set forth in SECTION 9.3(a) . "Closing" shall mean the closing of the transactions contemplated by this Agreement as set forth in SECTION 1.4. "Closing Consideration" shall have the meaning set forth in SECTION 1.2. "Closing Date" shall have the meaning set forth in SECTION 1.4. "Code" shall have the meaning set forth in SECTION 2.7(b). "Confidential Information" shall mean all trade secrets and other confidential and/or proprietary information of the particular Person, including, but not limited to, information derived from reports, processes, data, know -how, software programs, improvements, inventions, strategies, compensation structures, reports, investigations, research, work in progress, codes, marketing and sales programs and plans, financial projections, cost summaries, formulae, contract analyses, financial information, forecasts, confidential filings with any state or federal agency, and all other confidential concepts, methods of doing business, ideas, materials or information prepared or performed for, by or on behalf of such Person by its employees, officers, directors, agents, representatives, or consultants. "Contribution" shall have the meaning set forth in the preamble to this Agreement. "Damages" shall have the meaning set forth in SECTION 9.1. "Election" shall have the meaning set forth in SECTION 9.4. "Election Period" shall have the meaning set forth in SECTION 9.3(a). "Encumbrance" shall mean any charge, claim, community property interest, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership. 37 "Environmental Laws" shall mean any federal, state or local laws, ordinances, codes, regulations, rules, policies and orders that are intended to assure the protection of the environment, or that classify, regulate, call for the remediation of, require reporting with respect to, or list or define air, water, groundwater, solid waste, Hazardous Substances, or which are intended to assure the safety of employees, workers or other persons, including the public in each case as in effect on the date hereof. "Environmental Liabilities" shall mean all liabilities, whether contingent or fixed, which have arisen, or may arise, under Environmental Laws. "ERISA Affiliates" shall have the meaning set forth in SECTION 2.7(a). "ERISA Liabilities" shall mean all liabilities whether contingent or fixed which have arisen or may arise under the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. "ERISA Plans" shall have the meaning set forth in SECTION 2.7(a). "GAAP" shall mean U. S. generally accepted accounting principles. "Guarantees" shall have the meaning set forth in SECTION 5.5. "Hazardous Substances" shall mean any toxic or hazardous substances, material or waste, or any pollutant or contaminant, or infectious or radioactive substance or material, including without limitation, those substances, materials and wastes defined in or regulated under any Environmental Laws. "Indemnified Party" shall have the meaning set forth in SECTION 9.3(a). "Indemnifying Party" shall have the meaning set forth in SECTION 9.3(a). "Indemnity Notice" shall have the meaning set forth in SECTION 9.3(d). "Initial Consideration" shall have the meaning set forth in SECTION 1.2. "Investments" shall have the meaning set forth in SECTION 2.2. "IRS" shall mean the Internal Revenue Service. "Knowledge of the Individual Parties" means the actual knowledge of Donald M.Koll without any duty of inquiry and the knowledge of Richard M. Ortwein after reasonable inquiry of those persons employed by KOC or its Affiliates who are likely to have knowledge of the subject matter of any particular inquiry. 38 "Knowledge of KNHC or KDC" means the actual knowledge of the executive officers and those persons charged with executive management and policy making decisions after reasonable inquiry. "Knowledge of KREG" means with respect to KREG, KHI and KOC, the actual knowledge of Raymond J. Pacini and Sandra Sciutto after reasonable inquiry (other than inquiry of the Individual Parties or other employees who will remain in the employ of KOC or its lower tier Affiliates after the Closing); and with respect to the KOC Employee Affiliates, Project Partnerships and their respective lower tier Affiliates of KOC, the actual knowledge of Raymond J. Pacini and Sandra Sciutto without any duty of inquiry. "KNHC Individual" shall have the meaning set forth in SECTION 8.2(g). "KOC Employee Affiliates" means KREG-OC, L.P., a California limited partnerships KREG-SW, L.P., a California limited partnership, KREG-SW, EPA L.P., a Texas limited partnership, and KREG-AZ, L.P., an Arizona limited partnership. "KREG Consolidated Group" shall have the meaning set forth in SECTION 2.8. "Letter of Credit" shall mean a letter of credit from a financial institution reasonably acceptable to KREG which shall provide as follows: (a) the Letter of Credit shall be irrevocable and shall initially be in a face amount equal to the indicated percentage of the principal amount of the Guarantees for which Releases shall not have been obtained on or prior to the Closing Date (the "Unreleased Amount"): (i) 5%, if the Unreleased Amount is less than $100 million; (ii) 4%, if the Unreleased Amount is between $100 million and $200 million: and (iii) 3%, if the Unreleased Amount is greater $200 million; (b) the Letter of Credit shall provide that KREG may draw upon the Letter of Credit upon KREG's submission of a written certification to the issuer of the Letter of Credit that: (i) it has received notice from a lender demanding or requiring KREG to perform under a Guarantee and (ii) it has given KDC at least fifteen (15) days' prior written notice of such demand and KDC has not caused the applicable lender to withdraw the demand letter; and (c) the Letter of Credit shall provide that its face amount shall be reduced as of the first business day of each month to the amount that would have been determined pursuant to clause (a) above if the Unreleased Amount in effect as of the close of business on the last business day of the previous month had been the Unreleased Amount on the Closing Date (it being recognized that the outstanding principal amount of the guarantees shall be reduced over time as liability thereunder is satisfied or reduced in accordance with the terms of such guarantees) and shall expire at any time that the Unreleased Amount shall be reduced to less than $2 million. 39 "Material Adverse Effect" shall mean a material adverse effect on the assets, properties, business, operations, condition (financial or otherwise), liabilities, results of operations or prospects of the Person or Persons being referred to, taken as a whole (including its consolidated subsidiaries, if any), in consideration of all relevant facts and circumstances. "Netting Agreements" shall mean the Netting Agreements between each of the KOC Employee Affiliates and the employee partners of such KOC Employee Affiliates. "1998 Activity Consideration" shall have the meaning set forth in SECTION 1.2. "PBGC" shall have the meaning set forth in SECTION 2.7(c). "Person" shall mean any natural person, corporation, partnership, joint venture, limited liability company, association, group, organization or other entity. "Plans" shall have the meaning set forth in SECTION 2.7(a). "Pre-Closing Tax Period" shall have the meaning set forth in SECTION 9.4. "Project Partnerships" means partnerships formed by the KOC Employee Affiliates and third parties to hold interests in real estate. "Purchase Price" shall have the meaning set forth in SECTION 1.2. "Releases" shall have the meaning set forth in SECTION 5.5. "Required Consents" shall have the meaning set forth in SECTION 2.5. "Stock" shall have the meaning set forth in the preamble to this Agreement. "Straddle Period" shall have the meaning set forth in SECTION 9.4(c). "Tax Claim" shall have the meaning set forth in SECTION 9.5(a). "Tax Notice" shall have the meaning set forth in SECTION 9.5(a). "Taxes" shall mean all (a) federal, state, local or foreign income, property, sales, use, occupation, service, transfer, payroll, franchise, excise, withholding and any other taxes (other than real property taxes) or similar governmental charges, fees, levies or other assessments, including any interest, penalties or additions with respect thereto, (b) liabilities for the payment of any amounts of the type described in (a) as a result of being a member of an affiliated, consolidated, combined, unitary or similar group, and (c) liabilities for the payment of any amounts as a result of being party to any tax sharing agreement or similar arrangement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (a) or (b). 40 "Tax Return"shall mean any return, report, information return, or other document (including any related or supporting information) filed or required to be filed with any federal, state, local or foreign governmental entity or other authority in connection with the determination, assessment or collection of any Tax (whether nor not such Tax is imposed on KOC or the Investments) or the administration of any laws, regulations or administrative requirements relating to any Tax. "Third Party Claim" shall have the meaning set forth in SECTION 9.3(a). "Unreleased Amount" shall have the meaning set forth in the definition of Letter of Credit. "Vesting Agreements" shall mean the Vesting Agreements between each of the KOC Employee Affiliates and the employee partners of such KOC Employee Affiliates. 41 IN WITNESS WHEREOF, the parties hereto have duly executed this Stock Purchase Agreement as of the date first written above. KREG: KOLL REAL ESTATE GROUP, INC. By /s/ Raymond J. Pacini ----------------------------------- Raymond J. Pacini Executive Vice President and Chief Financial Officer KHI: KREG HOLDINGS, INC. By /s/ Raymond J. Pacini ----------------------------------- Raymond J. Pacini Executive Vice President and Chief Financial Officer KNHC: KN HOLDING CORP. By ----------------------------------- Name: Title: KDC: KOLL DEVELOPMENT COMPANY LLC By KN Holding Corp. By ---------------------------------- Name: Title: By KDP Holdings, LLC By --------------------------------- Name: Title: INDIVIDUAL PARTIES: /s/ Donald M. Koll ----------------------------------- Donald M. Koll /s/ Richard M. Ortwein ----------------------------------- Richard M. Ortwein 42 EXHIBIT A KREG OPERATING CO. BALANCE SHEET AS OF DECEMBER 31, 1997 (in thousands)
ASSETS: Cash $ 1,097 Restricted cash 242 Accounts receivable 2,587 Real estate held for development 82,096 Reorganization value in excess of amounts allocated in net assets 13,250 Investment in unconsolidated development projects 1,874 Predevelopment 2,329 Other assets 605 ------------- $ 104,080 ------------- ------------- LIABILITIES AND EQUITY: Accounts payable and accrued liabilities $ 6,262 Project debt 74,658 Minority interest 2,869 ------------- Total Third Party Liabilities 83,789 ------------- Due to parent 9,575 STOCKHOLDER'S EQUITY: Common stock 10 Additional paid-in-capital 23,338 Accumulated deficit (12,632) ------------- Total Equity 10,716 ------------- $ 104,080 ------------- -------------
UNAUDITED A - 1 EXHIBIT A KREG OPERATING CO. BALANCE SHEET AS OF FEBRUARY 28, 1997 (in thousands)
ASSETS: Cash $ 563 Restricted cash 242 Accounts receivable 2,377 Real estate held for development 105,605 Reorganization value in excess of amounts allocated in net assets 13,100 Investment in unconsolidated development projects 2,532 Predevelopment 2,157 Other assets 489 ------------- $ 127,065 ------------- ------------- LIABILITIES AND EQUITY: Accounts payable and accrued liabilities $ 2,680 Project debt 100,801 Minority interest 2,869 ------------- Total Third Party Liabilities 106,350 ------------- Due to parent 10,457 STOCKHOLDER'S EQUITY: Common stock 10 Additional paid-in-capital 23,338 Accumulated deficit (13,090) ------------- Total Equity 10,258 ------------- $ 127,065 ------------- -------------
UNAUDITED A - 2 EXHIBIT A KREG OPERATING CO. NOTES TO BALANCE SHEET Note 1 Basis of Presentation The financial statements of KREG Operating Co. (the "Company"), an indirect wholly-owned subsidiary of Koll Real Estate Group, Inc. (the "Parent"), are internally prepared and unaudited. Certain information and substantially all footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company began business on September 30, 1993, upon its acquisition of the domestic development operations of The Koll Company. Note 2 Reorganization value in excess of amounts allocated to net assets Reorganization value in excess of amounts allocated to net assets arose from the adoption of Fresh-Start Reporting upon the Parent's completion of its recapitalization on September 2, 1997 and is being amortized on a straight-line basis over 15 years. Note 3 Income taxes The Company is included in the consolidated tax returns of the Parent and no current or deferred tax provisions are reflected in the accompanying balance sheet from inception. A - 3 Exhibit B Page 1 of 3 NEWS RELEASE - DRAFT DATED 3/30/98 Contact: Raymond J. Pacini, Chief Financial Officer, 714-833-3025 X291 KREG ANNOUNCES AGREEMENT TO SELL COMMERCIAL DEVELOPMENT BUSINESS - COMPANY PLANS TO FOCUS ON RESIDENTIAL BUSINESS NEWPORT BEACH, California -- March 31, 1998 - Koll Real Estate Group, Inc. (NASDAQ:KREG) announced today that it has executed a definitive agreement with Koll Development Company LLC ("KDC") and an affiliated company, for the sale of the Company's commercial development business for (1) $30 million in cash plus adjustments for 1998 activity; and (2) the assumption by KDC of all liabilities related to the business. KDC is a newly formed limited liability company, whose members include the Company's current Chairman and Chief Executive Officer, Donald M. Koll and its President, Richard M. Ortwein. Upon completion of the transaction, Messrs. Koll and Ortwein will resign from their current positions with the Company, and the Company will change its name to discontinue use of the "Koll" name. The Company also announced that, effective upon completion of the transaction, Raymond J. Pacini will be appointed as the Company's new President and Chief Executive Officer. Mr. Pacini has been the Chief Financial Officer of the Company since 1992 and has 18 years of experience with publicly traded companies, including 10 years in real estate development. Prior to moving to the Company's headquarters in Newport Beach, CA in 1990, Mr. Pacini held various financial management positions with the Company's predecessor, The Henley Group, Inc. from 1986 to 1989 in Hampton, NH. From 1979 to 1986, he was a C.P.A. with the "Big Six" accounting firm of Coopers & Lybrand in Boston, MA. In approving the transaction, the Company's Board of Directors accepted a recommendation from a Special Committee of independent directors that had negotiated with KDC that the terms of the proposed sale of the commercial development business to KDC are fair to, and in the best interests of, the Company and its shareholders. March 31, 1998 Page 2 of 3 Mr. Koll stated, "This transaction is beneficial to all parties concerned. The Company and its shareholders will receive necessary capital to continue development of its existing land inventory, while the commercial group will be better positioned to focus on its core competency, which is the development of office, industrial and retail real estate across the United States and Asia." Mr. Pacini commented, "We believe the residential real estate market in California is one of the best in this state's history. By selling the commercial development business, the Company will be in a position to focus exclusively on maximizing the value of its significant residential land holdings. Our residential team, which includes Lucy Dunn, Senior Vice President; Ed Mountford, Vice President; and Mike Rafferty, the President of our homebuilding subsidiary, will remain with the Company to lead the litigation process and the ultimate development of the Bolsa Chica property. This infusion of cash allows the Company to vigorously defend its land use entitlements at Bolsa Chica through the pending court appeals and commence construction immediately thereafter." The Company also is developing master-planned communities elsewhere in Southern California, in Aliso Viejo (1,200 homes), Escondido (580 homes) and Fairbanks Highlands (a 93-home joint venture). KREG received a deposit of $1 million from KDC upon execution of the definitive agreement, which is nonrefundable except under limited circumstances, including if a higher offer for the commercial development business ultimately is accepted by the Company, in which case KDC also would be paid a break-up fee of $2 million plus up to $500,000 for legal and other advisory fees. In the event that a higher offer is accepted, Messrs. Koll and Ortwein would not be obligated to perform any services for the acquiror and would have the right to immediately be released from their employment agreements with the Company, including their covenants-not-to-compete. As noted above, the definitive agreement was unanimously approved by a Special Committee of independant directors, which commissioned an investment banking firm, The Blackstone Group L.P., to provide advice on strategic alternatives and the fairness of the proposed terms of the transaction. The Special Committee has directed March 31, 1998 Page 3 of 3 the Company's management and The Blackstone Group L.P. to be available to receive inquiries from any other parties interested in the possible acquisition of the commercial development business and, if appropriate, to provide information and enter into discussions and negotiations with such parties in connection with any such indicated interest. The transaction is scheduled to be completed on April 30, 1998, subject to various conditions, unless extended by agreement of the parties. The Company expects to realize a gain on this transaction of approximately $9.5 million; however, there can be no assurance that the transaction with KDC will be completed or will close on schedule. The Company is a residential land development and homebuilding company which holds a large residential land inventory in Southern California. The Company's principal subsidiaries and operating divisions are Signal Landmark, which owns the approximately 200-acre Warner Mesa (formerly known as the Bolsa Chica mesa) property, and Hearthside Homes, the fifth largest homebuilder in Orange County, currently building the 1,200 home project in Aliso Viejo, CA. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Certain statements in this press release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. ***END*** SCHEDULE 1.2 1998 Activity Consideration
Notes ----- 1) CARRY ON $30 MILLION @ 13.5% FROM 1/1/98 TO 3/31/98 (A) 1,012,500 (i) ------------ ------------ 2) PLUS NET CASH USED BY OPERATIONS FROM 1/1/98 THROUGH CLOSING (4/30/98): a. Net Cash Used By Operations Before New Project Equity Investments and Asset Sales Activity: i. Net Cash Used By Operations Before Asset Sales Activity (B) (1,799,667) ii. Estimated net pre-development from 1/1 - 4/30 (767,000) iii. Denso TI's, Lincoln and Other Project costs, net (203,000) ------------ subtotal (C) (2,769,667) ------------ b. Net Asset Sales Activity (C) & (D) 3,366,000 ------------ c. NEW PROJECT EQUITY EXPECTED TO BE INVESTED FROM 1/1 TO 4/30 Disney (287,000) Main & MacArthur / NorthStar LLC (466,519) Tech Plaza (168,000) Valley View (29,167) Omni (230,000) Arrowhead (200,000) ------------ Subtotal (E) (1,380,686) ------------ d. Estimated Interest on Net Cash Used By Operations and Preferred Return on Project Equity Investments (C) & (E) (51,000) ------------ Estimated Net Cash Used By Operations from 1/1/98 to closing (F) (835,353) (ii) ------------ ------------ Estimated total due to Parent @ closing = (i)-(ii) 1,847,853 ------------ ------------
NOTES: (A) - (F) See Attached 1.2-1 SCHEDULE 1.2 1998 Activity Consideration NOTES TO SCHEDULE 1.2 (A) Interest carry on the $30 million Purchase Price from January 1, 1998 through March 31, 1998 shall be calculated using a simple interest rate of 13.5% per annum based on a 360 day year (i.e. $30 million * 13.5% / 360 * 90 days = $1,012,500). In the event that KNSH elects to defer the Closing Date in accordance with Section 7.4, then interest carry on the $30 million Purchase Price shall be increased for the period from May 1, 1998 through the Closing Date using a simple interest rate of 12% per annum based on a 360 day year. (B) Net Cash Used By Operations Before Asset Sales shall be calculated based on KOC's standard monthly financial reports (see 1.2 - 4) in a manner consistent with Schedule 1.2 and the notes thereto, and includes an agreed upon allocation of Corporate overhead of $50,000 per quarter, or $16,667 per month (see 1.2 -3). (C) For Net Cash Used By Operations Before new Project Equity Investments and Asset Sales Activity, interest on the average monthly balance (which shall be calculated beginning 1/1/98 by adding net cumulative cash flow as of the beginning of the month plus net cumulative cash flow as of the end of the month and dividing by 2) shall be calculated using a rate of 13.5% per annum, or 1.125% per month for each month between 1/1/98 and 3/31/98, and at a rate of 12% per annum, or 1.00% per month or portion thereof from 4/1/98 through closing. Such calculation shall include the agreed upon allocation of Corporate overhead of $16,667 per month. For Net Asset Sales Activity, interest shall be credited @ a rate of .0375% per day (1.125% per month) prior to 3/31/98 and @ a rate of .0333% per day (1.00% per month) from 4/1/98 through closing, and shall be calculated on the daily balance from the date funds are received by KREG. (D) See 1.2 - 3 (E) For new Project Equity Investments after January 1, 1998, the preferred return shall be calculated on the daily balance from the date such Project Equity Investment is made through and including the Closing Date at a rate of 25% per annum, or .0694444% per day based on a 360 day year from 1/1/98 through 3/31/98 and @ a rate of .0333% per day (1.00% per month) from 4/1/98 through closing. Project Equity Investments shall include partial fundings in advance of project loan fundings where KREG is the intended equity source from the beginning (i.e. Disney project where KREG funded land purchase prior to loan closing). (F) To be adjusted to reflect best estimate one day prior to Closing Date and further adjusted to reflect actual within 30 days of Closing Date. 1.2-2 SCHEDULE 1.2 1998 Activity Consideration NOTES TO SCHEDULE 1.2, (CONTINUED)
(B) ESTIMATED CASH BASIS OPERATING INCOME FROM 1/1 - 4/30 Revenues 3,482,000 98 Expenses - Corporate * (66,667) 98 Expenses - Divisions * * (4,652,000) 97 Bonuses (563,000) ------------ Net operations before asset sales (1,799,667) ------------ ------------ (D) NET ASSET SALES ACTIVITY: Net proceeds before employee distributions * * * 4,256,000 Employee distributions before netting (2,128,000) Deferred development fees paid @ sale 574,000 Denso Preferred Return 64,000 Netting recovery 375,000 ------------ Subtotal - Asset Sales 3,141,000 ------------ RETURN OF CAPITAL FROM ASSET SALES BUDGETED FOR 1Q98 Metro - Return of capital 200,000 Metro - Preferred Return 25,000 ------------ Subtotal 225,000 ------------ Net Asset Sales Activity 3,366,000 ------------ ------------
NOTES: * Reflects negotiated allocation of corporate overhead of $16,667 per month ($50,000 per quarter) * * Includes an allocation of 10% of S. Sciutto and J. Johnston for accounting and tax sevices plus 100% of KREG Operating Co.'s accounting staff * * * Reflects actual sale of Denso and budgeted sales of Metro, Anaheim Tech & Spectrum Land 1.2-3 KOLL REAL ESTATE GROUP SUMMARY STATEMENT OF OPERATIONS AND CASH FLOW FOR THE ONE MONTH ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------------------- SIGNAL LANDMARK ------------------------------------- RANCHO BOLSA OTHER KREG KOLL KREG, INC. SAN PASQUAL CHICA PROPERTIES CORPORATE OPERATING COMMUNITES CONSOLIDATED ------------------------------------------------------------------------------------------- OPERATING STATEMENT REVENUE 950 2,010 2,960 EXPENSES: COST OF SALES 950 1,560 2,510 G & A 18 400 (47) (114) 257 REORGANIZATION 45 45 ------------------------------------------------------------------------------------------- 0 0 (18) (445) 497 114 148 BONUS EXPENSE 337 337 INTEREST INCOME (32) (33) (2) (67) SUBTOTAL 0 0 (32) (33) 335 0 270 OTHER (INC) EXP: 81 (15) (8) (66) 51 43 INTEREST EXPENSE (84) 84 41 41 ------------------------------------------------------------------------------------------- OPERATING PROFIT (LOSS) 0 (81) 29 (320) 144 22 (206) ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- CASH FLOW SOURCES: REVENUES 842 1,288 2,130 BORROWINGS 0 ------------------------------------------------------------------------------------------- TOTAL SOURCES: 842 0 0 0 1,288 0 2,130 USES: G&A, OPERATING EXPENSES 26 (324) (1,055) 246 (1,107) LIABILITIES (234) (234) DEVELOPMT/CONSTRUCTN (244) 259 15 PREDEV/INVESTMENTS (645) 111 (534) LOAN PAYMENTS 0 INTEREST 72 72 ------------------------------------------------------------------------------------------- TOTAL USES: (244) (645) 98 (558) (685) 246 (1,788) ------------------------------------------------------------------------------------------- NET CASH FLOW FOR PERIOD 598 (645) 98 (558) 603 246 342 ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- BEGINNING CASH 6,836 -------------- ENDING CASH 7,178 -------------- --------------
1.2.4 SCHEDULE 2.2 INVESTMENTS
KREG OPERATING CO. SUBSIDIARIES: PERCENTAGE STATE/COUNTRY OWNERSHIP (a) INCORPORATED -------------- -------------- KREG - LA, Inc. 94 Delaware KREG - NC, Inc. 84 Delaware KREG - NW, Inc. 80 Delaware KREG - OC, Inc. 80 Delaware KREG - SD, Inc. 84 Delaware KREG - SW, Inc. 84 Delaware KREG - AZ, Inc. 100 Delaware KREG Asia Holdings, Inc. 100 Delaware KREG Taiwan, Inc. 100 Delaware KREG Malaysia, Inc. 100 Delaware KREG China, Inc. 100 Delaware C.P. Koll Investment Company Ltd. 49 Cayman Islands KOC EMPLOYEE AFFILIATES: KREG - OC, L.P. 50 California KREG - SW, L.P. 50 California KREG - SW, EPA L.P. 50 Texas KREG - AZ, L.P. 50 Arizona
(a) Except for C.P. Koll Investment Company Ltd., the balance of ownership is held by employees. SCHEDULE 2.5 REQUIRED CONSENTS: NONE PROJECT CONSENTS:
PROJECT FINANCIAL PARTNER [2.5 (i)] LENDER [2.5 (ii)] EXISTING GUARANTEES: Nokia Ronoko BankOne NAI N/A Comerica RappCollins N/A Guaranty Federal Nortel N/A Guaranty Federal EPA N/A NationsBank Arrow Center - Ph.1 Guardian & Capellino Bank of Hemet Faraday Guardian & KREG Employees Comerica Otay Mesa Citicorp NationsBank Koll Anaheim Tech. Center Invesco (Stanford) NationsBank Arden Center - Ph. I Invesco (Stanford) NationsBank Spectrum Citicorp Sanwa Bank Century Park East Northstar Comerica Arden Center - Ph. II Invesco (Stanford) NationsBank Lincoln Center The Lincoln National Bank One Ocean Terrace Cigna Tokai Bank Valley View - Ph. I Apollo Bank One
DEALS EXPECTED TO CLOSE PRIOR TO APRIL 30, 1998: Arrowhead Center Citicorp Bank One Technology Plaza Citicorp Sanwa Bank Omni (Sabre Center) Citicorp Bank One Disney Travel N/A Tokai Bank Plantation Ph. I Invesco (Stanford) NationsBank
DEALS APPROVED BY BOARD THAT MAY OR MAY NOT CLOSE BY APRIL 30, 1998: Omnicom to be determined Bank One Nortel Phase II N/A Guaranty Federal Oryx Energy to be determined to be determined Plantation Phase II Invesco to be determined Arrow Center, Phase II Guardian & Capellino to be determined
SCHEDULE 2.7 A 1. KOC Netting and Vesting Agreements 2. KOC Employment Agreements with Walt Rector, Jerry Yahr. Larry Brose, Peter Evans, David Mudgett and Jim Mueller. 3. KREG Employment Agreements with Don Koll, Richard Ortwein and Raymond J. Pacini 4. The Koll Company 401 (K) Plus Plan 5. KREG Defined Benefit Pension Plan (frozen in December 1993) 6. KREG Executive Retirement and Savings Program (nonqualified plan which was terminated effective November 15, 1996) 7. KREG 1993 Stock Option/Stock Issuance Plan 8. Pullman, Inc. Non-Contributory Pension Plan (liability assumed by MAFCO Consolidated Group, Inc. in March 1997) 9. KREG Medical, Dental & Vision Insurance Plans (including pre-tax premium plan) 10. KREG Group Universal Life Insurance 11. KREG Long-Term Disability Insurance 12. KREG Voluntary Accidental Death and Dismemberment (AD&D) Insurance 13. KREG Health Care and Dependent Care Reimbursement Accounts (flex spending) 14. Business Council Credit Union 15. Educational Assistance and Reimbursement Program 16. Extended Health Coverage (COBRA) 17. Workers' Compensation Insurance 18. State Disability Insurance 19. 1994 Stock Issuance Plans of (i) KREG-OC, Inc.; (ii) KREG-LA, Inc.; (iii) KREG-SD, Inc.; (iv) KREG-NC, Inc.; (v) KREG-SW, Inc.; and (vi) KREG-NW, Inc. 20. Verbal understanding with Kristen Pigman regarding August 4, 1995 termination and participation in pending Dunlap/Wal-Mart transaction (see draft severance agreement) 21. KREG Retiree Medical Plan SCHEDULE 2.7 B ERISA AFFILIATES
Percentage State/Country of Ownership Incorporation --------- ------------- Hengro Fifteen Inc. 100 Delaware Henley Disc Media, Inc. 100 Delaware Henley Facilities, Inc. 100 Delaware New Henley Holdings Inc. 100 Delaware Air Correction International, Inc. 100 Delaware GCC Patents Holding Company Inc. 100 Delaware Hengro Fourteen Inc. 100 Delaware Hengro Ten Inc. 100 Delaware Hengro Thirteen Inc. 100 Delaware Henley Deltec Holdings Inc. 100 Delaware Henley Deltec Corporation 100 Delaware Henley Investments, Inc. Two 100 Delaware IRE Corporation 100 Indiana LJC Investments, Inc. 100 Delaware Moore International Inc. 80 Delaware Newco A.C. Corporation 100 Delaware Procon International Inc. 100 Delaware Procon Incorporated 100 Delaware Procofrance, S.A. 100 France Procon (Great Britain) Limited 100 United Kingdom Pullman Environmental Services Inc. 100 Delaware Pullman Passenger Car Company Inc. 100 Delaware Pullman Swindell Ltd. 100 United Kingdom Trailmobile International Ltd. 100 Delaware Pullman Trailmobile de Mexico S.A. de C.V. 100 Mexico Trailmobile Leasing Corp. 100 Delaware W.O.L. Corporation 100 Delaware W. W. C. Corporation 100 Delaware Wheelabrator Export Corporation 100 Delaware Henley Holdings Two Inc. 100 Delaware Signal Landmark Holdings Inc. 100 Delaware Signal Landmark 100 California Calumet Real Estate Inc. 100 Delaware Newport Realty Corp. 100 California Signal Hawaii, Inc. 100 Hawaii Signal Puako Corporation 100 Hawaii KREG Residential Corp. 100 Delaware
2.7B-1 SCHEDULE 2.7 B ERISA AFFILIATES (continued)
Henley/KNO Holding Inc. 100 Delaware Koll Communities Holdings, Inc. 100 Delaware KCI - AV Holdings Company 100 California AV Partnership 49 California AV Partners Corp. 49 California Koll Communities, Inc. 100 Delaware KREG Holdings Inc. 100 Delaware KREG Operating Co. 100 Delaware KREG - LA, Inc. 94 Delaware KREG - NC, Inc. 84 Delaware KREG - NW, Inc. 80 Delaware KREG - OC, Inc. 80 Delaware KREG - SD, Inc. 84 Delaware KREG - SW, Inc. 84 Delaware KREG - AZ, Inc. 100 Delaware KREG Asia Holdings, Inc. 100 Delaware KREG Taiwan, Inc. 100 Delaware KREG Malaysia, Inc. 100 Delaware KREG China, Inc. 100 Delaware C.P. Koll Investment Co. Ltd. 49 Cayman Islands NC Holding Company 100 Delaware Wentworth By The Sea, Inc. * 50 Delaware Newco A. D. Corporation 100 South Carolina Twenty Newco Inc. 100 Delaware Wentworth Holdings Inc. 100 Delaware Wentworth By The Sea, Inc. * 50 Delaware WESI Maryland Inc. 100 Delaware WT/HRC Corporation 100 Illinois Heat Research Corporation 100 Delaware
(*) Together NC Holding Company and Wentworth Holdings Inc. own 100% of Wentworth By The Sea, Inc. 2.7B-2 SCHEDULE 2.8 The Internal Revenue Service ("IRS") has completed its examinations of the tax returns of KREG 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. KREG 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, KREG 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 result in a disallowance of up to $132 million of available NOL carryforwards, of which none are recognized after consideration of the valuation allowance, as of September 30, 1997. KREG has not determined the extent of potential accompanying state tax liability adjustments should the proposed IRS adjustments be upheld. KREG's protest was filed in August 1995 and is being considered by the IRS Appeals Division. Management currently believes that the IRS's positions will not ultimately result in any material adjustments to KREG's financial statements. KREG is prepared to pursue all available administrative and judicial appeal procedures with regard to this matter and KREG is advised that its dispute with the IRS could take up to five years to resolve. SCHEDULE 2.9 TRANSACTIONS WITH AFFILIATES
1. Reconciliation of R. Ortwein cost center reimbursement of 62.5% due to KOC from KREG (assuming 4/30/98 closing) ** $ * 2. Reimbursement for workers compensation insurance due to KREG from KOC $ * 3. Reimbursement for medical insurance due to KREG from KOC $ * 4. Reimbursement, if any, for medical and dependent care reimbursement accounts. $ * 5. Reimbursement for telephone systems and service due to KREG from KOC $ * ---------- Total $ * ---------- ----------
6. 1994 Stock Issuance Plans of (i) KREG-OC, Inc.; (ii) KREG-LA, Inc.; (iii) KREG-SD, Inc.; (iv) KREG-NC, Inc.; (v) KREG-SW, Inc.; and (vi) KREG-NW, Inc. NOTES: * Amounts to be estimated one day prior to Closing Date for the purpose of determining the amount to be paid on the Closing Date. Within thirty (30) days after the Closing Date a final accounting shall be completed and reviewed by the accounting staffs of KDP and KREG and any adjustments shall be paid in the same manner as set forth in Section 1.2 (c). ** If closing does not occur on a month-end, then KOC would owe KREG reimbursement for salaries, payroll taxes, benefits, rent and other overhead for any stub period between the closing date and the end of the next payroll period for D. Koll, J. Dubbs and M. Roylance (assumes these 3 KREG employees stay on KREG payroll until the end of a pay period; alternatively, KREG could remove these people from its payroll as of closing date if that is more convenient. However, since rent and related overhead costs are paid by KREG in advance, KOC would owe KREG for such costs for any stub period.) SCHEDULE 2.12 1. On February 9, 1998, KREG-SW, EPA, L.P. was threatened with litigation regarding a claim for commissions payable with respect to KOC's EPA project in Kansas City, Kansas. 2. WHITING CORPORATION V. WT/HRC CORPORATION AND KREG-OC, INC., filed March 25, 1997, Circuit Court, Cook County, Illinois. SCHEDULE 5.5 KREG CORPORATE GUARANTEES
LOAN AMOUNT MATURITY LENDER PROJECT LOCATION (IN MILLIONS) DATE ------ ------- -------- ------------- ---- 1. BANK ONE Nokia Los Colinas, TX $ 37.7 4/98 2. BANK ONE Lincoln Center Scottsdale, AZ 35.5 12/99 spec. office 3. BANK ONE Valley View - Ph. I Las Vegas, NV 6.2 9/99 4. BANK OF HEMET Arrow Center - Ph. I Rancho Cucamonga 3.5 6/98 spec. Industrial 5. COMERICA Faraday - spec.. Carlsbad, CA 9.3 8/98 industrial 6. COMERICA NAI Carlsbad, CA 9.7 12/98 7. COMERICA Century Park West L.A. 7.9 7/99 East - spec. office rehab 8. GUARANTY FEDERAL RappCollins Los Colinas, TX 10.8 2/99 9. GUARANTY FEDERAL Nortel Richardson, TX 48.1 10/98 10. NATIONSBANK EPA Kansas City, KS 31.5 12/99 11. NATIONSBANK Otay Mesa San Diego, CA 9.2 8/00 spec. Industrial 12. NATIONSBANK Koll Anaheim Anaheim, CA 13.1 5/00 Tech. Center 13. NATIONSBANK Arden Center - Ph. I Hayward, CA 9.7 11/00 spec. industrial 14. NATIONS BANK Arden Center - Ph. II Hayward, CA 5.0 2/00 spec. industrial 15. SANWA BANK Spectrum Carlsbad, CA 26.9 10/99 spec. industrial 16. TOKAI BANK Ocean Terrace San Diego, CA 22.7 1/00 spec. office/R&D ---- TOTAL EXISTING GUARANTEES $ 286.8 -----
5.5-1 SCHEDULE 5.5 KREG CORPORATE GUARANTEES (CONTINUED)
LOAN AMOUNT LENDER PROJECT LOCATION (IN MILLIONS) ------ ------- -------- ------------- LOANS EXPECTED TO CLOSE IN APRIL 1. BANK ONE Omni (Sabre Center) San Diego, CA $ 12.6 2. BANK ONE Arrowhead Ctr. Phoenix, AZ 12.1 spec. office 3. SANWA BANK Technology Plaza San Diego, CA 9.4 spec. industrial 4. TOKAI BANK Disney Travel Anaheim, CA 2.4 ------- PLANNED APRIL CLOSINGS 36.5 OTHER DEALS-IN-PROGRESS 1. BANK ONE Omnicom Plano, Tx 37.0 2. GUARANTY FEDERAL Nortel Phase II Richardson, TX 32.0 3. TO BE DETERMINED Oryx Energy Plano, TX 21.0 4. TO BE DETERMTINED Plantation City of Industry, 55.0 spec. industrial CA 5. TO BE DETERMTINED Arrow Center, Rancho Cucamonga, 6.0 phase II CA --- spec. industrial OTHER DEALS-IN-PROGRESS $187.5 ------ TOTAL AUTHORIZED GUARANTEES $474.3 ------
5.5-2 SCHEDULED 8.1 (h) PERSONAL PROPERTY DONALD M. KOLL'S OFFICE: Computer; printer, etc. (or KOC can reimburse KREG $5,000) RAYMOND J. PACINI'S OFFICE: Executive Chair Executive Desk, credenza, and file cabinets (in Keith Ross's office) Wood filing cabinets (2) Artwork (2) Computer (on desk of Mary Roylance) Printer, etc. Misc. desk supplies CHRISTINE RUSH'S WORK AREA: Chair Steel filing cabinets (2) Computer Printer, etc. (on desk of Mary Roylance) Fax Machine Typewriter Inter-com Heater Electronic rollodex (2) Misc. desk supplies SANDRA SCIUTTO'S OFFICE: Computer, printer, etc. Chair File Cabinet Calculator Misc. desk supplies JON JOHNSTON'S OFFICE: Computer, printer, etc. Chair Calculator Metal book shelf Misc. desk supplies MARY ROYLANCE'S WORK AREA: Casio 10-key calculator Heavy duty 3-hole punch Misc. desk supplies MARY KOBLENTZ'S WORK AREA: Computer, printer, etc. Chair Calculator Modem Bulletin Board Misc. desk supplies MARGIE GRAUPENSPERGER'S WORK AREA: Computer, printer, etc. Chair Fax Machine Typewriter Calculator Heavy Duty 3-hole punch and stapler 2-hole punch Bulletin Board Misc. desk supplies GENERAL: Phone System from 4400 MacArthur Blvd. Postage Meter from 4400 MacArthur Blvd. Compaq Prosignia 200 Server 50% of Anzac check printer & cartridge (owned with TKC/International) Charlie Abdi's Toshiba Laptop (or KOC can reimburse KREG $1,000) Furniture and copier at 4400 MacArthur Blvd. 8.1(h)-2 EX-21.01 3 EXHIBIT 21.01 KOLL REAL ESTATE GROUP, INC. WORLDWIDE SUBSIDIARIES
Percentage State/Country of Ownership Incorporation ---------- ------------- Hengro Fifteen Inc. 100 Delaware Henley Disc Media, Inc. 100 Delaware Henley Facilities, Inc. 100 Delaware New Henley Holdings Inc. 100 Delaware Air Correction International, Inc. 100 Delaware GCC Patents Holding Company Inc. 100 Delaware Hengro Fourteen Inc. 100 Delaware Hengro Ten Inc. 100 Delaware Hengro Thirteen Inc. 100 Delaware Henley Deltec Holdings Inc. 100 Delaware Henley Deltec Corporation 100 Delaware Henley Investments, Inc. Two 100 Delaware IRE Corporation 100 Indiana LJC Investments, Inc. 100 Delaware Moore International Inc. 80 Delaware Newco A.C. Corporation 100 Delaware Procon International Inc. 100 Delaware Procon Incorporated 100 Delaware Procofrance, S.A. 100 France Procon (Great Britain) Limited 100 United Kingdom Pullman Environmental Services Inc. 100 Delaware Pullman Passenger Car Company Inc. 100 Delaware Pullman Swindell Ltd. 100 United Kingdom Trailmobile International Ltd. 100 Delaware Pullman Trailmobile de Mexico S.A. de C.V. 100 Mexico Trailmobile Leasing Corp. 100 Delaware W.O.L. Corporation 100 Delaware W. W. C. Corporation 100 Delaware Wheelabrator Export Corporation 100 Delaware Henley Holdings Two Inc. 100 Delaware Signal Landmark Holdings Inc. 100 Delaware Signal Landmark 100 California Calumet Real Estate Inc. 100 Delaware Newport Realty Corp. 100 California Signal Hawaii, Inc. 100 Hawaii Signal Puako Corporation 100 Hawaii KREG Residential Corp. 100 Delaware 1 Henley/KNO Holding Inc. 100 Delaware Koll Communities Holdings, Inc. 100 Delaware KCI - AV Holdings Company 100 California AV Partnership 49 California AV Partners Corp. 49 California Koll Communities, Inc. 100 Delaware KREG Holdings Inc. 100 Delaware KREG Operating Co. 100 Delaware KREG - LA, Inc. 94 Delaware KREG - NC, Inc. 84 Delaware KREG - NW, Inc. 80 Delaware KREG - OC, Inc. 80 Delaware KREG - SD, Inc. 84 Delaware KREG - SW, Inc. 84 Delaware KREG - AZ, Inc. 100 Delaware KREG Asia Holdings, Inc. 100 Delaware KREG Taiwan, Inc. 100 Delaware KREG Malaysia, Inc. 100 Delaware KREG China, Inc. 100 Delaware C.P. Koll Investment Co. Ltd. 49 Cayman Islands NC Holding Company 100 Delaware Wentworth By The Sea, Inc. *50 Delaware Newco A. D. Corporation 100 South Carolina Twenty Newco Inc. 100 Delaware Wentworth Holdings Inc. 100 Delaware Wentworth By The Sea, Inc. *50 Delaware WESI Maryland Inc. 100 Delaware WT/HRC Corporation 100 Illinois Heat Research Corporation 100 Delaware
(*) Together NC Holding Company and Wentworth Holdings Inc. own 100% of Wentworth By The Sea, Inc. 2 EX-27.01 4 EXHIBIT 27.01
5 1,000 4-MOS 1-MO DEC-31-1997 DEC-31-1997 SEP-03-1997 SEP-03-1997 DEC-31-1997 SEP-30-1997 7 5 0 0 0 0 0 0 137 180 0 0 0 0 0 0 173 215 0 0 0 0 0 0 0 0 1 1 139 139 173 215 4 13 4 14 4 12 4 13 0 0 0 0 0 0 (2) 0 0 0 (2) 0 1 0 0 0 0 0 (1) 0 (.04) .02 0 .02
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