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