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This Form 10-Q consists of 15 sequentially numbered pages.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
Commission file number 0-17189
KOLL REAL ESTATE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0426634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
4343 Von Karman Avenue
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 833-3030
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
The number of shares of Class A Common Stock outstanding at November 1, 1996
were 48,932,555.
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KOLL REAL ESTATE GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
I N D E X
PAGE NO.
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Part I - Financial Information:
Item 1 - Financial Statements
Introduction to the Financial Statements.......... 3
Balance Sheets -
December 31, 1995 and September 30, 1996.......... 4
Statements of Operations -
Three Months and Nine Months Ended
September 30, 1995 and 1996................... 5
Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1996..... 6
Notes to Financial Statements..................... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 11
PART II - Other Information:
Item 1 - Legal Proceedings.................................. 14
Item 6 - Exhibits and Reports on Form 8-K................... 14
SIGNATURE............................................................. 15
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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, 1995, and the current year's previously issued Quarterly Reports 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.
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KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
(in millions)
December 31, September 30,
1995 1996
ASSETS ----- -----
Cash and cash equivalents $ 4.9 $ 1.2
Restricted cash 2.5 .6
Real estate held for development or sale 28.1 34.3
Operating properties, net 4.8 --
Land held for development 220.0 222.6
Other assets 16.9 16.6
------ ------
$277.2 $275.3
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
liabilities $ 4.9 $ 6.2
Senior bank debt 16.6 11.7
Project debt - 6.8
Subordinated debentures 173.2 189.9
Other liabilities 52.9 53.3
------ ------
Total liabilities 247.6 267.9
====== ======
Stockholders' equity:
Series A Preferred Stock .4 .4
Class A Common Stock 2.4 2.4
Capital in excess of par value 229.9 229.4
Deferred proceeds from stock issuance (1.1) (.6)
Minimum pension liability (1.0) (1.0)
Accumulated deficit (201.0) (223.2)
------ -----
Total stockholders' equity 29.6 7.4
------ -----
$277.2 $275.3
====== ======
See accompanying notes to financial statements.
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KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
REVENUES:
Asset Sales $ 3.6 $ 3.6 $12.9 $17.6
Operations 3.2 2.8 6.0 7.5
----- ----- ----- -----
6.8 6.4 18.9 25.1
----- ----- ----- -----
COSTS OF:
Asset Sales 3.1 2.2 10.9 14.9
Operations 2.8 3.0 7.5 7.1
---- ---- ---- ----
5.9 5.2 18.4 22.0
---- ---- ---- ----
Gross operating margin .9 1.2 .5 3.1
General and
administrative expenses 1.8 2.1 5.9 5.8
Interest expense 5.9 6.3 16.8 18.7
Other expense, net 8.9 .3 6.2 .6
---- ---- ---- ----
Loss before income taxes (15.7) (7.5) (28.4) (22.0)
Provision (benefit) for
income taxes (7.2) .1 (11.5) .2
----- ---- ------ ----
Net Loss $ (8.5) $(7.6) $(16.9) $(22.2)
======= ===== ======= ======
Net loss per common share $ (.18) $(.16) $(.36) $(.46)
======= ===== ======= ======
See the accompanying notes to financial statements.
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KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
(in millions)
Nine Months Ended
September 30,
1995 1996
---- ----
Cash flows from operating activities:
Net loss $(16.9) $(22.2)
Adjustments to reconcile to cash
used by operating activities:
Depreciation and amortization .9 .7
Non-cash interest expense 15.4 17.3
Asset revaluations 7.5 --
Gains on asset sales (2.0) (2.7)
Proceeds from asset sales, net 12.2 16.0
Investments in real estate held
for development or sale (10.5) (14.7)
Investments in land held for development (6.9) (2.6)
Decrease (increase) in other assets 5.5 (.4)
Increase (decrease) in accounts payable,
accrued and other liabilities (36.6) 1.1
----- -----
Cash used by operating activities (31.4) (7.5)
----- -----
Cash flows from financing activities:
Borrowings of senior bank debt 20.3 6.2
Repayments of senior bank debt (4.2) (11.1)
Borrowings of project debt -- 6.8
Use of restricted cash -- 1.9
----- ------
Cash provided (used) by
financing activities 16.1 3.8
------ ------
Net decrease in cash and cash equivalents (15.3) (3.7)
Cash and cash equivalents - beginning of period 20.5 4.9
------ ------
Cash and cash equivalents - end of period $ 5.2 $ 1.2
====== ======
See the accompanying notes to financial statements.
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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, 1995, and the current year's previously issued Quarterly
Reports on Form 10-Q.
Certain prior period amounts have been reclassified to conform with
their current period presentation.
NOTE 2 - LOSS PER COMMON SHARE
The weighted average number of common shares outstanding for the three
months ended September 30, 1995 and 1996 were 47.3 million shares and
48.5 million shares, respectively, and the weighted average number of common
shares outstanding for the nine months ended September 30, 1995 and 1996
were 47.0 and 48.0 million shares, respectively. The Series A Preferred
Stock is not included in the loss-per-share calculations because the effect
would be anti-dilutive.
NOTE 3 - LAND HELD FOR DEVELOPMENT
REAL ESTATE
Real estate held for development or sale and land held for
development (real estate properties) are carried at the lower of cost or
estimated net realizable value based on undiscounted cash flows. The
estimation process involved in the determination of net realizable 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 net realizable 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. Any potential future revaluation of
the Bolsa Chica property that could result if a recapitalization is
implemented by the Company would be based on the facts and circumstances at
that time.
Land held for development consists of approximately 1,200 acres known as
Bolsa Chica located in Orange County, California, adjacent to the Pacific
Ocean, surrounded by the City of Huntington Beach and
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approximately 35 miles south of downtown Los Angeles. In January 1996 the
California Coastal Commission approved Orange County's Local Coastal Program
("LCP") which provides for development of up to 2,500 homes on the mesa
(high ground) portion of the property and up to 900 homes on the lowland
portion of the property, not to exceed 3,300 homes in the aggregate, and a
wetlands restoration plan for this property, which remains subject to further
governmental approvals, as further described below.
The Coastal Commission approval in January 1996 was subject to suggested
modifications. These suggested modifications were approved by the Orange
County Board of Supervisors in June 1996, and on July 11, 1996 the
California Coastal Commission certified the LCP for the Company's Bolsa
Chica property. The Company is pursuing the secondary permitting process for
the mesa through the County of Orange in order to implement the approved
development plan. This process is currently expected to be completed in
the second half of 1997. The Company expects, subject to its ability to
obtain financing on a commercially reasonable and timely basis, and subject
to obtaining the secondary permits, to commence infrastructure construction
on the mesa in the second half of 1997. However, due to certain factors
beyond the Company's control, including possible objections of various
environmental and so-called public interest groups that may be made in
legislative, administrative or judicial forums, the start of construction
could be delayed substantially. In this regard, on March 6, 1996 and March
11, 1996, two lawsuits were filed against the Coastal Commission, the Company
and other Bolsa Chica landowners as real parties in interest, alleging that
the Coastal Commission's approval of the 3,300-unit LCP is not in
compliance with the Coastal Act and other statutory requirements. These
lawsuits seek to set aside the approval of the Bolsa Chica project, and
are currently expected to be tried in the first half of 1997. The Company
does not believe that these lawsuits will be successful in permanently
preventing the Company from completing the Bolsa Chica project, however
there can be no assurance in this regard or that these suits will not
result in delays.
Under the 3,300-unit LCP the Company is committed to restoring the
wetlands at Bolsa Chica provided that federal agencies approve development
of up to 900 homes in the lowlands. Wetlands restoration and development on
the lowlands remains subject to approval of a federal permit by the U.S.
Army Corps of Engineers, which the Company continues to pursue. The
Company's goal is to obtain such approval in 1997, however, the Corps of
Engineers could delay or decline its approval. In the meantime, the Company
has continued to work closely with the various state and federal agencies
which have expressed an interest in acquiring the Bolsa Chica lowlands and
restoring the wetlands. In March 1996, the Company entered into a letter
of intent to sell approximately 880 lowland acres owned by the Company
at Bolsa Chica to the California State Lands Commission for $25
million. On October 4, 1996, various state and federal agencies, led by
the State Resources Agency, the State Lands Commission and the U.S.
Department of the Interior, entered into an interagency agreement which
provides a funding mechanism for acquisition and restoration of the Bolsa
Chica lowlands. On October 8, 1996 the California Coastal Commission also
approved this proposal. Under the interagency agreement, the Ports of Los
Angeles and Long Beach have agreed to fund an aggregate of $67 million for
an acquisition and wetlands restoration escrow account in exchange for
habitat mitigation credits required for their on-going facilities'
expansion. The sale of the lowlands is targeted to close by year-end but the
ability of the Company to complete any such transaction remains subject
to various contingencies, including: (i) finalizing acquisition terms;
(ii) analysis of the results of an environmental site assessment by state
and federal agencies; (iii) negotiation and execution of an oil field
cleanup agreement between the oil operator and the State Lands Commission;
(iv) satisfactory completion and analysis of an appraisal and title
report; and (v) State Lands Commission approval. Of course, there can be
no assurance that a definitive agreement will be entered into or that any
transaction will be completed.
NOTE 4 - DEBT
SENIOR BANK DEBT
During the first nine months of 1996, the Company borrowed approximately
$6.2 million and repaid approximately $6.5 million under a construction
loan agreement with Nomura Asset Capital Corporation
<PAGE>
("Nomura") to partially fund infrastructure construction at Rancho San Pasqual,
the Company's golf/residential property in San Diego County. In June 1996, the
Company also repaid approximately $4.6 million under a letter of credit and
reimbursement agreement with Nomura. The amount borrowed includes
approximately $2.5 million borrowed under the agreement's one-time right to
reborrow $5 million after repayment of the initial $5 million construction
loan, which occurred in June 1996. As of September 30, 1996, the Company's
remaining availability under the construction loan was approximately
$2.5 million. The Company currently expects to exercise its option to extend
the initial maturity date under the loans from December 20, 1996 to
December 20, 1997. As required under the construction loan agreement,
in January 1995 the Company deposited $5 million into an escrow account to be
used solely for funding of infrastructure construction costs at
Rancho San Pasqual, of which $.6 million remains as restricted cash as
of September 30, 1996.
Cash payments for interest on senior bank debt were approximately $.9
million and $1.2 million for the nine months ended September 30, 1995 and
1996, respectively.
PROJECT DEBT
In the third quarter of 1996, a subsidiary of the Company obtained a $20
million construction loan, guaranteed by the Company, for a build-to-suit
corporate headquarters facility. The initial interest rate on the loan was
8.25%. The Company elected to convert the interest rate to 30-day LIBOR plus
2% after the first construction draw. The maturity date of the loan is the
earlier of July 1, 1997 or 15 days after substantial completion of the
building. As of September 30, 1996, the total amount borrowed was $6.7
million. The Company has entered into a purchase and sale agreement with a
financial institution which will purchase the building upon completion.
Also during the third quarter, a subsidiary of the Company obtained a $2
million non-revolving line of credit, guaranteed by the Company, for
construction of a build-to-suit distribution facilty. The line of credit
bears interest at prime plus .75% and is due August 12, 1997. As of
September 30, 1996, the total amount borrowed was $.1 million. The Company
is negotiating with a prospective purchaser which would acquire the building
upon completion.
SUBORDINATED DEBT
Subordinated debt was comprised of the following (in millions):
December 31, September 30,
1995 1996
------------ -------------
Senior subordinated debentures $138.2 $155.3
Subordinated debentures 34.6 38.8
------ -----
Total face amount 172.8 194.1
Less unamortized discount (5.6) (5.2)
Plus accrued interest 6.0 1.0
------ -----
$173.2 $189.9
====== ======
The Company is continuing to negotiate with its Debentureholders for an
acceptable solution to de-leverage its capital structure; however, unless
these negotiations are completed to the Company's satisfaction on a timely
basis, the Company will consider other alternatives.
<PAGE>
NOTE 5 - INCOME TAXES
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 $147 million of available net operating loss
carryforwards, of which none are recognized after consideration of the
valuation allowance, as of September 30, 1996. The Company has not
determined the extent of potential accompanying state tax liability
adjustments should the proposed IRS adjustments be upheld. The Company's
protest was filed in August 1995 and is 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.
Any potential future recapitalization implemented by the Company could
have an effect on the amount of net operating loss carryforwards available
to offset future taxable income.
Cash payments for federal, state and local income taxes were
approximately $.2 million and $.1 million for the nine months ended
September 30, 1995 and 1996, respectively. Tax refunds received were $.4
million and $0 for the nine months ended September 30, 1995 and 1996,
respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The United States Environmental Protection Agency ("EPA") has
designated Universal Oil Products ("UOP"), among others, as a Potentially
Responsible Party ("PRP") with respect to an area of the Upper Peninsula of
Michigan (the "Torch Lake Site") under the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). UOP is allegedly the successor in interest to one of the
companies that conducted mining operations in the Torch Lake area and an
affiliate of Allied Signal Inc., a predecessor of the Company. The
Company has not been named as a PRP at the site. However, Allied Signal
has, through UOP, asserted a contractual indemnification claim against the
Company for all claims that may be asserted against UOP by EPA or other
parties with respect to the site. EPA has proposed a clean-up plan which
would involve covering certain real property both contiguous and
non-contiguous to Torch Lake with soil and vegetation in order to address
alleged risks posed by copper tailings and slag at an estimated cost of
$6.2 million. EPA estimates that it has spent approximately $3.9 million
to date in performing studies of the site. Under CERCLA, EPA could assert
claims against the Torch Lake PRPs, including UOP, to recover the cost of
these studies, the cost of all remedial action required at the site, and
natural resources damages. In June 1995, EPA proposed a CERCLA
settlement pursuant to which UOP pay approximately between $2.6 and $3.3
million in exchange for a limited covenant by EPA not to sue UOP in the
future. The Company, without admission of any obligation to UOP, has
determined to vigorously defend UOP's position that the EPA's proposed
cleanup plan is unnecessary and inconsistent with the requirements of CERCLA
given that the EPA's own Site Assessment and Record of Decision found no
immediate threat to human health. In the Company's view the proposed
remediation costs would be in excess of any resulting benefits.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal activities of the Company include: (i) obtaining zoning
and other entitlements for land it owns and improving the land for
residential development; (ii) single and multi-family residential
construction in Southern California; and (iii) providing commercial,
industrial, retail and residential development services to third
parties, including feasibility studies, entitlement coordination,
project planning, construction management, financing, marketing,
acquisition, disposition and asset management services on a national and
international basis, through its offices throughout California, and in
Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once
the residential land owned by the Company is entitled, the Company
may sell unimproved land to other developers or investors; sell
improved land to homebuilders; or participate in joint ventures with other
developers, investors or homebuilders to finance and construct
infrastructure and homes. The Company intends to consider additional
real estate acquisition and joint venture opportunities; however, the
Company's immediate strategic goals are to (i) obtain new financing for
development of the Bolsa Chica mesa; (ii) complete the secondary permitting
for development of the Bolsa Chica mesa and secure all federal permits
for development and restoration of the Bolsa Chica lowlands; (iii)
continue working with state and federal agencies in an effort to complete the
proposed sale of the Bolsa Chica lowlands to the California State Lands
Commission, as described in Note 3; (iv) complete negotiations with its
Debentureholders to de-leverage the Company's capital structure as
described in Note 4; and (v) to maintain adequate liquidity to cover general
and administrative, liability management and interest costs. There can
be no assurance that the Company will accomplish, in whole or in part, all
or any of these strategic goals.
Real estate held for development or sale and land held for development
(real estate properties) are carried at the lower of cost or estimated
net realizable value based on undiscounted cash flows. The Company's real
estate properties are subject to a number of uncertainties which can affect
the future values of those assets. These uncertainties include litigation
or appeals of regulatory approvals and availability of adequate capital,
financing and cash flow. In addition, future values may be adversely
affected by increases in property taxes, increases in the costs of
labor and materials and other development risks, changes in general
economic conditions, including higher mortgage interest rates, and other
real estate risks such as the demand for housing generally and the supply
of competitive products. Real estate properties do not constitute liquid
assets and, at any given time, it may be difficult to sell a particular
property for an appropriate price. The state of California's economy has had
a negative impact on the real estate market generally, on the availability
of potential purchasers for such properties and upon the
availability of sources of financing for carrying and developing
such properties. However, over the past year, the number of potential
purchasers and capital sources interested in Southern California residential
properties appears to have increased.
LIQUIDITY AND CAPITAL RESOURCES
The principal assets in the Company's portfolio are residential land
which must be held over an extended period of time in order to be developed to
a condition that, in management's opinion, will ultimately maximize the
return to the Company. Consequently, the Company requires significant
capital to finance its real estate development operations.
During the nine months ended September 30, 1996, the Company borrowed $6.2
million under its construction loan agreement with Nomura Asset
Capital Corporation ("Nomura") to fund infrastructure improvements at its
Rancho San Pasqual golf and residential community in San Diego county.
During the nine months ended September 30, 1996, the Company completed
sales of 138 residential lots at Rancho San Pasqual to four homebuilders
for gross proceeds aggregating approximately $6.3 million. These four
homebuilders have rolling options which if exercised would result in the
sale of an additional 310 lots over the next two years
<PAGE>
for aggregate gross proceeds approximating $13.4 million. In October 1996,
one of the homebuilders purchased an additional 19 lots under the terms of
such an option agreement. In June 1996, the Company sold its Eagle Crest
Golf Course at Rancho San Pasqual to a nationally recognized owner/operator
of high-end daily fee golf courses and private country clubs for $6.1
million. After paying termination related costs to the operator of the
golf course and closing costs, the Company realized net proceeds of
approximately $5 million. Under loan agreements with Nomura, the Company
utilized 90% of such sales proceeds, along with 50% of the net proceeds
from Rancho San Pasqual assessment district reimbursements, to prepay
approximately $11.1 million of outstanding senior bank debt. During the
second and third quarters, after full repayment of the original $5 million
construction loan, the Company reborrowed $2.5 million under the
construction loan agreement's one-time right to reborrow $5 million. As
of September 30, 1996, the Company's remaining availability under the
construction loan was approximately $2.5 million.
Historically, sources of capital have included bank lines of
credit, specific property financings, asset sales and available internal
funds. The Company has reported losses since 1991, with the exception of
1993 results which included gains on dispositions and extinguishment of debt,
and expects to report losses in the foreseeable future. While a significant
portion of such losses is attributable to non-cash interest expense on
the Company's subordinated debentures, the Company's capital expenditures
for project development and infrastructure are significant. The Company
will continue to be dependent primarily on real estate asset sales,
existing financing arrangements (Note 4) and cash and cash equivalents
on-hand to fund infrastructure construction costs at Rancho San Pasqual, a
minimum level of project development costs for Bolsa Chica, cash interest
payments and general and administrative expenses during the remainder of
1996. At September 30, 1996, the Company's unrestricted cash and cash
equivalents aggregated $1.2 million and restricted cash of $.6 million was
available to fund infrastructure improvements at the Company's Rancho
San Pasqual project. With the recent approval of the Bolsa Chica project
by the California Coastal Commission, the Company is also seeking new
financing for development of Bolsa Chica and continuing to negotiate
with its Debentureholders for an acceptable solution to de-leverage the
Company's capital structure, as described in Note 4. While the Company
expects to complete the sale of the Bolsa Chica lowlands by December 31, 1996
as described in Note 3, in the event that such sale is not completed on a
timely basis, the Company believes it would be able to secure new
financing, or complete other asset sales in order to be able to meet its
obligations as they become due during 1997.
FINANCIAL CONDITION
SEPTEMBER 30, 1996 COMPARED WITH DECEMBER 31, 1995
The $3.7 million decrease in cash and cash equivalents primarily reflects
spending for Bolsa Chica project development costs, and general
and administrative expenses, partially offset by approximately $2.5
million in proceeds from land sales at the Company's
resort/residential property in Michigan during the nine months ended
September 30, 1996, as well as other activity presented in the
Statements of Cash Flows. Restricted cash of $.6 million at September 30,
1996 reflects funds deposited into escrow accounts for funding certain
infrastructure costs at Rancho San Pasqual.
The $6.2 million increase in real estate held for development or sale
primarily reflects construction costs for a build-to-suit project in Phoenix,
Arizona. The Company has contracted for the building to be sold upon
completion of construction in the second half of 1997.
The $4.8 million decrease in operating properties reflects the June 1996
sale of the Eagle Crest Golf Course at Rancho San Pasqual.
The $4.9 million decrease in senior bank debt reflects net prepayments on
the Nomura loans, resulting primarily from sales of 138 residential lots and
the Eagle Crest Golf Course at Rancho San Pasqual, partially offset by
construction borrowings during the nine months ended September 30, 1996.
The $6.8 million increase in project debt reflects borrowing from banks
for two build-to-suit projects by subsidiaries of the Company. The Company
has entered into a purchase and sale agreement with a financial institution
for the sale of one of the buildings upon completion, and is negotiating with
a potential purchaser for the sale of the other building upon completion.
<PAGE>
RESULTS OF OPERATIONS
The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from year to year.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1995
Asset sales revenues during the third quarter of 1996 of $3.6 million
primarily reflect $1.2 million in sales of resort/residential lots in
Michigan and $1.9 million of residential sales at the Company's Oceanside
Hills project in San Diego County, California. The $3.6 million of asset
sales during the third quarter of 1995 primarily reflect residential
sales at the Wentworth project in New Hampshire and the sale of a
leasehold interest in Grand Caribe Island in Coronado, California, along
with $.5 million in residential sales at the Oceanside project. The $.9
improvement in gross margin on asset sales reflects the lower cost of
sales of Michigan lots.
Revenues from operations in 1996 reflect a $.6 million increase in the
commercial development business which was more than offset by a $1.3
million decrease due to the absence of Wentworth marina and Eagle Crest
Golf Course revenues in the recent quarter due to the sale of these assets.
The $.3 million increase in general and administrative expense from
$1.8 million in 1995 to $2.1 million in 1996 primarily reflects costs related
to the evaluation of recapitalization alternatives with respect to the
subordinated debentures.
The $.4 million increase in interest expense from $5.9 million in 1995 to
$6.3 million in 1996 primarily reflects compounded noncash interest on
the Company's subordinated debentures.
The $8.6 million decrease in other expense, net from $8.9 million in 1995
to $.3 million in 1996 primarily reflects $7.5 million in asset write-downs in
1995 on the Company's Wentworth project and Eagle Crest Golf Course at
Rancho San Pasqual to reflect estimated net realizable values and $1.0
million of non-recurring income in 1996 from a reduction in litigation
reserves due to a recent settlement.
The benefit for income taxes for the three months ended September 30, 1996
has been offset by a corresponding valuation allowance.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 1995
The $4.7 million increase in asset sales revenues from $12.9 million in
1995 to $17.6 million in 1996 and the related $4.0 million increase in costs
of asset sales from $10.9 million in 1995 to $14.9 million in 1996
primarily reflect the sale of the residential lots and Eagle Crest Golf
Course at Rancho San Pasqual and sales of resort/residential lots in
Michigan during the nine months ended September 30, 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 $.7 million improvement in gross margin on
asset sales primarily reflects gains on sales of Michigan lots, partially
offset by the absence in 1996 of the gains on sales of the Coronado wharfage
rights and leasehold interest in 1995.
The $1.5 million and $1.9 million increases in revenues and gross margin,
respectively, from operations primarily reflect higher revenues in the
Company's commercial development business during the nine months ended
September 30, 1996, partially offset by the absence of Wentworth marina
revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June
1996.
The $1.9 million increase in interest expense from $16.8 million in 1995 to
$18.7 million in 1996 principally reflects compounded noncash interest on
the Company's subordinated debentures.
<PAGE>
The $5.6 million decrease in other expense, net primarily reflects the
absence of 1995 asset write-downs described above, partially offset by
$3.0 million of non-recurring income in 1995 from a reduction in excess
environmental reserves.
The benefit for income taxes for the nine months ended September 30, 1996
has been offset by a corresponding valuation allowance.
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 and availability of
adequate capital, financing and cash flow. In addition, future values may be
adversely affected by increases in property taxes, increases in the costs of
labor and materials and other development risks such as the demand for
housing generally and the supply of competitive products. Real estate
properties do not constitute liquid assets and, at any given time, it may be
difficult to sell a particular property for an appropriate price. Other
significant risks and uncertainties are discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See "Item 3 - Legal Proceedings" in the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1995.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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: November 14, 1996 /s/ Raymond J. Pacini
----------------------------
RAYMOND J. PACINI
Executive Vice President and
Chief Financial Officer
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