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This Form 10-Q consists of 14 sequentially numbered pages.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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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 August 1, 1996 were
48,462,791.
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KOLL REAL ESTATE GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
I N D E X
Page No.
PART I - Financial Information: --------
Item 1 - Financial Statements
Introduction to the Financial Statements. . . . . . . . . 3
Balance Sheets -
December 31, 1995 and June 30, 1996 . . . . . . . . . . . 4
Statements of Operations -
Three Months and Six Months Ended June 30, 1995 and 1996. 5
Statements of Cash Flows -
Six Months Ended June 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
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, 1995, 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.
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KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
(in millions)
December 31, June 30,
1995 1996
--------- --------
ASSETS
Cash and cash equivalents $ 4.9 $ 3.2
Restricted cash 2.5 1.3
Real estate held for development or sale 28.1 27.9
Operating properties, net 4.8 ---
Land held for development 220.0 222.0
Other assets 12.1 11.0
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$272.4 $265.4
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
liabilities $ 8.6 $ 9.4
Senior bank debt 16.6 11.4
Subordinated debentures 173.2 184.2
Other liabilities 44.4 45.4
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Total liabilities 242.8 250.4
------- -------
Stockholders' equity:
Series A Preferred Stock .4 .4
Class A Common Stock 2.4 2.4
Capital in excess of par value 229.9 229.7
Deferred proceeds from stock issuance (1.1) (.9)
Minimum pension liability (1.0) (1.0)
Accumulated deficit (201.0) (215.6)
------- -------
Total stockholders' equity 29.6 15.0
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$272.4 $265.4
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------- -------
See accompanying notes to financial statements.
4
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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,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Asset Sales $ 4.2 $ 13.5 $ 9.3 $ 14.0
Operations 1.5 2.5 2.8 4.7
-------- -------- -------- --------
5.7 16.0 12.1 18.7
-------- -------- -------- --------
COSTS OF:
Asset Sales 2.7 12.4 7.8 12.7
Operations 2.5 1.9 4.7 4.1
-------- -------- -------- --------
5.2 14.3 12.5 16.8
-------- -------- -------- --------
Gross operating margin .5 1.7 (.4) 1.9
General and administrative expenses 2.0 2.1 4.1 3.7
Interest expense 5.6 6.3 10.9 12.4
Other expense (income), net (2.7) (.1) (2.7) .3
-------- -------- -------- --------
Loss before income taxes (4.4) (6.6) (12.7) (14.5)
Provision (benefit) for income taxes (1.8) .1 (4.4) .1
-------- -------- -------- --------
Net Loss $ (2.6) $ (6.7) $ (8.3) $ (14.6)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share $ (.06) $ (.14) $ (.18) $ (.31)
--------- --------- --------- ---------
--------- --------- --------- ---------
</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,
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8.3) $ (14.6)
Adjustments to reconcile to cash used by operating activities:
Depreciation and amortization .6 .5
Non-cash interest expense 10.1 11.4
Gains on asset sales (1.5) (1.3)
Proceeds from asset sales, net 8.7 12.5
Investments in real estate held for development or sale (5.6) (6.2)
Investments in land held for development (4.7) (2.0)
Decrease in other assets 4.2 .2
Increase (decrease) in accounts payable, accrued and
other liabilities (29.2) 1.8
------- -------
Cash provided (used) by operating activities (25.7) 2.3
------- -------
Cash flows from financing activities:
Borrowings of senior bank debt 19.1 5.2
Repayments of senior bank debt (2.6) (10.4)
Use of restricted cash 8.4 1.2
Deposit of restricted cash (5.0) ---
------- -------
Cash provided (used) by financing activities 19.9 (4.0)
------- -------
Net decrease in cash and cash equivalents (5.8) (1.7)
Cash and cash equivalents - beginning of period 13.0 4.9
------- -------
Cash and cash equivalents - end of period $ 7.2 $ 3.2
------- -------
------- -------
</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, 1995, 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 period presentation.
NOTE 2 - LOSS PER COMMON SHARE
The weighted average number of common shares outstanding for the three
months ended June 30, 1995 and 1996 were 47.0 million shares and 48.0 million
shares, respectively, and the weighted average number of common shares
outstanding for the six months ended June 30, 1995 and 1996 were 46.8 and 47.8
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 actively 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 within 18 months. 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 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. 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 during the first half of 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
the Bolsa Chica lowlands to the California State Lands Commission. The ability
of the Company to complete any such transaction remains subject to various
contingencies, including: (i) finalizing acquisition terms; (ii) completion of
an environmental site assessment which would be satisfactory to the State Lands
Commission; (iii) satisfactory completion of an appraisal and title report; and
(iv) Coastal Commission and federal approval of the amount of mitigation credits
to be granted to the Ports of Los Angeles and Long Beach in exchange for the
Ports funding a $67 million acquisition and wetlands restoration escrow account.
Of course, there can be no assurance that a definitive agreement will be entered
into or that any transaction will be completed.
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Note 4 - Debt
SENIOR BANK DEBT
During the first six months of 1996, the Company borrowed approximately
$5.2 million and repaid $6.2 million under a construction loan agreement with
Nomura Asset Capital Corporation ("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 $4.2
million under a letter of credit and reimbursement agreement with Nomura. The
amount borrowed includes approximately $1.4 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 June 30, 1996,
the Company's remaining availability under the construction loan was $3.6
million. 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
$1.3 million remains as restricted cash as of June 30, 1996.
Cash payments for interest on senior bank debt were approximately $.7
million and $.9 million for the six months ended June 30, 1995 and 1996,
respectively.
SUBORDINATED DEBT
Subordinated debt was comprised of the following (in millions):
December 31, June 30,
1995 1996
------------ -----------
Senior subordinated debentures $138.2 $146.5
Subordinated debentures 34.6 36.6
------ ------
Total face amount 172.8 183.1
Less unamortized discount (5.6) (5.3)
Plus accrued interest 6.0 6.4
------ ------
$173.2 $184.2
------ ------
------ ------
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 June 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
9
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with regard to this matter and the Company is advised that its dispute with the
IRS could take up to five years to resolve.
Cash payments for federal, state and local income taxes were approximately
$.2 million and $.1 million for the six months ended June 30, 1995 and 1996,
respectively. Tax refunds received were $.4 million and $0 for the six months
ended June 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 between $6 and $7.5 million. EPA
estimates that it has spent between $3 and $4 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. An earlier
settlement in principle with EPA staff pursuant to which UOP would pay
$1.7 million in exchange for a release similar to those normally granted by EPA
in such circumstances was rejected by certain other governmental authorities in
July 1993. 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.
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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, over the next year the Company's 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 potential sale of the Bolsa Chica lowlands to the California State Lands
Commission, as described in Note 3; (iv) evaluate, and if appropriate, pursue
recapitalization alternatives which deleverage the Company's capital structure;
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 withdrawals, 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.
At June 30, 1996, the Company's unrestricted cash and cash equivalents
aggregated $3.2 million and restricted cash of $1.3 million was available to
fund infrastructure improvements at the Company's Rancho San Pasqual project.
During the six months ended June 30, 1996, the Company borrowed $5.2
million under its construction loan agreement with Nomura Asset Capital
Corporation ("Nomura") to fund infrastructure improvements at its
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Rancho San Pasqual golf and residential community in San Diego county. During
the three months ended June 30, 1996, the Company completed sales of 122
residential lots at Rancho San Pasqual to four homebuilders for gross
proceeds aggregating approximately $5.8 million. These four homebuilders
have rolling options which if exercised would result in the sale of an
additional 326 lots over the next two years. In July 1996, one of the
homebuilders purchased an additional 16 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 $10.4 million of
outstanding senior bank debt. During the second quarter, after full repayment
of the original $5 million construction loan, the Company reborrowed $1.4
million under the construction loan agreement's one-time right to reborrow $5
million. As of June 30, 1996, the Company's remaining availability under the
construction loan was $3.6 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. 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 evaluating recapitalization alternatives.
FINANCIAL CONDITION
JUNE 30, 1996 COMPARED WITH DECEMBER 31, 1995
The $1.7 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 $1.4 million in
proceeds from land sales at the Company's resort/residential property in
Michigan during the six months ended June 30, 1996, as well as other activity
presented in the Statements of Cash Flows. Restricted cash of $1.3 million at
June 30, 1996 reflects funds deposited into escrow accounts for funding certain
infrastructure costs at Rancho San Pasqual.
The $4.8 million decrease in operating properties reflects the sale of the
Eagle Crest Golf Course at Rancho San Pasqual.
The $5.2 million decrease in senior bank debt reflects net prepayments on
the Nomura loans, resulting primarily from sales of 122 residential lots and
the Eagle Crest Golf Course at Rancho San Pasqual, partially offset by
construction borrowings.
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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 JUNE 30, 1996 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1995
The $9.3 million increase in asset sales revenues from $4.2 million in 1995
to $13.5 million in 1996 and the $9.7 million increase in related costs of asset
sales from $2.7 million to $12.4 million primarily reflect the sale of
residential lots and the Eagle Crest Golf Course at Rancho San Pasqual for $5.8
million and $6.1 million, respectively, during the second quarter of 1996. These
increases were partially offset by the absence in 1996 of $2.3 million in
Wentworth residential home sales as a result of the sale of the entire Wentworth
project during the fourth quarter of 1995. The decline in gross margin in the
second quarter of 1996 versus the comparable period of 1995 primarily reflects
the absence in 1996 of the 1995 gain on sale of wharfage rights in Coronado,
California.
The $1.0 million and $1.6 million increases in revenues and gross margin,
respectively, from operations are primarily due to improvements in the Company's
commercial development business for the three months ended June 30, 1996 as
compared with the same period in 1995.
The $.7 million increase in interest expense from $5.6 million in 1995 to
$6.3 million in 1996 primarily reflects compounded interest on the Company's
subordinated debentures.
The $2.6 million increase in other expense (income), net during the three
months ended June 30, 1996 as compared with the three months ended June 30, 1995
primarily reflects the absence of 1995 non-recurring income from reductions in
excess environmental reserves due to favorable governmental agency rulings.
The benefit for income taxes for the three months ending June 30, 1996 has
been offset by a corresponding valuation allowance.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
The $4.7 million increase in asset sales revenues from $9.3 million in 1995
to $14.0 million in 1996 and the related $4.9 million increase in costs of asset
sales from $7.8 million in 1995 to $12.7 million in 1996 primarily reflect the
sale of the residential lots and Eagle Crest Golf Course at Rancho San Pasqual
during the six months ended June 30, 1996. These increases were partially offset
by the absence in 1996 of Wentworth residential sales. The decline in gross
margin primarily reflects the absence of the 1995 gain on sale of wharfage
rights.
The $1.9 million and $2.5 million increases in revenues and gross margin,
respectively, from operations primarily reflect higher revenues in the Company's
commercial development business.
The $1.5 million increase in interest expense from $10.9 million in 1995 to
$12.4 million in 1996 principally reflects compounded interest on the Company's
subordinated debentures.
The $3.0 million increase in other expense (income), net reflects the
absence of 1995 non-recurring income described above.
The benefit for income taxes for the six months ending June 30, 1996 has
been offset by a corresponding valuation allowance.
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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, withdrawals, 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:
10.1 Koll Asia Pacific Development Services Amended and Restated
Pacific Rim Joint Business Opportunity Agreement.
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 August 13, 1996 /s/ Raymond J. Pacini
---------------- ----------------------------
RAYMOND J. PACINI
Executive Vice President and
Chief Financial Officer
14
<PAGE>
KOLL ASIA PACIFIC DEVELOPMENT SERVICES
AMENDED AND RESTATED PACIFIC RIM
JOINT BUSINESS OPPORTUNITY AGREEMENT
THIS AMENDED AND RESTATED JOINT BUSINESS OPPORTUNITY AGREEMENT (the
"Agreement") is executed this 24th day of May, 1996, effective as of January 15,
1994, by and between KREG ASIA HOLDINGS, INC., a Delaware corporation ("KREG")
and Koll Asia Holdings Limited, a Hong Kong Limited Liability Company ("KAH").
A glossary of defined terms used herein is set forth in Article V.
RECITALS
WHEREAS, KREG and KAH are engaged in the business of real estate
services and development;
WHEREAS, Koll Real Estate Group, Inc. and The Koll Company
("TKC") previously entered into that certain Pacific Rim Joint Business
Opportunity Agreement dated effective as of January 15, 1994 (the "Original
Agreement");
WHEREAS, with the approval of Koll Real Estate Group, Inc., TKC
previously assigned all of its right, title and interest in and to the Original
Agreement to KAH and, with the approval of KAH, KREG has become the assignee of
all of Koll Real Estate Group, Inc.'s right, title and interest in and to the
Original Agreement;
WHEREAS, KREG and KAH are each interested in pursuing business
opportunities in China and other Asian markets (collectively, the "Pacific
Rim"); and
WHEREAS, KREG AND KAH have determined that it would be in each of their
respective best interest to jointly pursue such Pacific Rim business
opportunities.
AGREEMENT
NOW, THEREFORE, BE IT RESOLVED, that the parties hereto hereby
agree to amend and restate the Original Agreement as follows:
ARTICLE I
IDENTIFICATION OF OPPORTUNITIES
1.1 PACIFIC RIM OPPORTUNITIES.
KREG and KAH shall jointly identify prospective Pacific Rim
development opportunities ("PACIFIC RIM DEVELOPMENT OPPORTUNITIES") including,
but not limited to, the following: (i) real estate development services provided
to third parties on a fee for services basis, as more fully set forth on EXHIBIT
"A" attached hereto; and (ii) equity ownership interest in real estate projects
gained through joint ventures and other arrangements with third parties.
<PAGE>
1.2 FORMATION OF JOINT VENTURES.
KREG and KAH hereby agree to form, directly or through subsidiary or
affiliated companies, two joint ventures, one for the development of Pacific Rim
Development Opportunities in the nature of real estate development services on a
fee for services basis to be known as Koll Asia Pacific Development Services and
the other for the development of equity ownership in real estate projects and/or
ownership in entities with solicited third party investment for the purpose of
development and/or acquisition of equity ownership in real estate projects to be
known as Koll Asia Equities. The organizational documentation for both joint
ventures shall be mutually agreed upon by KREG and KAH and shall be consistent
with this Agreement. The fiscal year for each joint venture for accounting
purposes shall be the calendar year. The formation costs for both joint
ventures shall be shared equally by KREG and KAH.
1.3 SERVICES OF MUNKACY AND OTHER EMPLOYEES.
(a) It is hereby acknowledged that the services of Kenneth A.
Munkacy ("Munkacy"), an employee of KREG will be used extensively in
connection with the identification of Pacific Rim Development
Opportunities. Such services are being provided in accordance with the
terms, provisions and conditions set forth in the employment agreement (the
"Employment Agreement") by and between KREG Operating Co. and Munkacy, a
copy of which is attached as Exhibit "A" to the Original Agreement and the
form and substance of which is hereby approved by KAH. KREG shall be
exclusively responsible for the payment of any salaries and benefits
arising from such use of Munkacy's services; however, during the term of
this Agreement, KAH agrees to reimburse KREG for 50% of the salary,
overhead, expenses and benefits of Munkacy in connection with the
Employment Agreement, an estimate of which costs and expenses shall be set
forth in a line item therefor in periodic budgets mutually agreed upon by
KREG and KAH (the "Approved Budget"). Notwithstanding the foregoing, it is
understood that the management and supervision of Munkacy is the joint
obligation of and the mutual discretion of KREG and KAH except that Munkacy
shall report directly to David Mudgett or other person selected by KREG
with respect to the operations of Koll Asia Pacific Development Services
and Munkacy shall coordinate with the President of KAH with respect to new
business development, marketing coordination and geographic expansion.
KREG and KAH agree that the provisions of this Section 1.3(a) are not
intended to confer any third party benefit to Munkacy.
(b) The employment of additional personnel and all other
employment decisions regarding the identification of Pacific Rim
Development Opportunities shall be determined by KREG, provided the salary,
employee benefit costs and other associated costs of any such employment
decision are within the line items therefor set forth in the then current
Approved Budget, including any amendments thereto. In this regard, KREG
and KAH acknowledge and agree that, as soon as is practicable following the
formation of Koll Asia Pacific Development Services, any and all employees
of KREG or KAH regularly providing services on behalf of Koll Asia Pacific
Development Services shall be employed by Koll Asia Pacific Development
Services with the goal of staffing Koll Asia
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<PAGE>
Pacific Development Services sufficiently to meet its business volume and
to minimize its dependence on its constituent partners, KREG and KAH.
1.4 COSTS AND EXPENSES OF IDENTIFICATION.
KREG and KAH hereby agree to share, on a 50%-50% basis, the aggregate
of all costs and expenses actually incurred by KREG and KAH (including the
salary, overhead and expenses of Munkacy pursuant to Section 1.3 but exclusive
of corporate overhead unless mutually approved by KREG and KAH) in connection
with the identification of Pacific Rim Development Opportunities in accordance
with the terms of this Agreement. To the extent reasonably practicable, KREG
shall notify KAH at such time as KREG determines that any material costs and
expenses set forth in a then current Approved Budget will exceed one hundred
twenty-five percent (125%) of the line item therefor set forth in the then
current Approved Budget and/or costs and expenses in the aggregate for any
relevant period will exceed one hundred ten percent (110%) of the costs and
expenses set forth in the then current Approved Budget. Within ten (10) days
following each calendar month, KREG and KAH shall notify the other party of the
aggregate amount of such costs and expenses incurred by it during such calendar
month; and, within twenty (20) days following such calendar month the party
incurring the lesser amount of such costs and expenses shall reimburse the other
party for 50% of the excess amount of costs and expenses incurred by such other
party.
ARTICLE II
DEVELOPMENT OF OPPORTUNITIES
2.1 DEVELOPMENT OF IDENTIFIED OPPORTUNITIES.
All Pacific Rim Development Opportunities identified by KREG and/or
KAH in connection with this Agreement shall be developed by Koll Asia Pacific
Development Services or Koll Asia Equities, as applicable; provided, however,
that either party shall have the right, in its sole discretion, to decline to
develop any specific identified Pacific Rim Development Opportunity. In the
event that either party identifies a Pacific Rim Development Opportunity, then
such party shall give written notice (the "Identification Notice") to the other
party, which Identification Notice shall include the basic terms and conditions
of the identified Pacific Rim Development Opportunity in such a form as to
enable the non-identifying party to reasonably evaluate such Pacific Rim
Development Opportunity. The non-identifying party shall have ten (10) days
following the effective date of the Identification Notice to elect to jointly
develop such Pacific Rim Development Opportunity with the identifying party. In
the event the non-identifying party notifies the identifying party that it has
declined to develop the identified Pacific Rim Development Opportunity or
otherwise fails to elect to jointly develop the identified Pacific Rim
Development Opportunity with the identifying party within such ten (10) day
period, then such Pacific Rim Development Opportunity shall be the sole property
of the identifying party.
2.2 COSTS, EXPENSES AND PROFITS FROM DEVELOPMENT.
Unless otherwise agreed to by both KREG and KAH, the organizational
documentation for Koll Asia Pacific Development Services and for Koll Asia
Equities shall
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<PAGE>
provide that KREG and KAH will share, on a 50%-50% basis, all of costs,
expenses, profits and losses relating to their joint development of an
identified Pacific Rim Development Opportunity.
2.3 LEASING AND PROPERTY MANAGEMENT.
Unless otherwise agreed to by both KREG and KAH, the organizational
documentation for Koll Asia Pacific Development Services and Koll Asia Equities
shall provide that KREG and KAH shall mutually agree as to the engagement of
third parties (including, without limitation, Koll Asia Pacific, an affiliate of
KAH) to provide leasing and property management services to each Pacific Rim
Development Opportunity developed by Koll Asia Pacific Development Services
and/or Koll Asia Equities.
ARTICLE III
RIGHTS AND OBLIGATIONS
3.1 TERM AND TERMINATION.
The term of this Agreement shall be deemed to have commenced on
January 1, 1994 and shall continue until such time as this Agreement is
terminated by either KAH or KREG following no less than sixty (60) days prior
written notice delivered by the terminating party to the non-terminating party.
Following any termination of this Agreement, the parties shall continue to be
bound by the terms and conditions of the organizational documentation for Koll
Asia Pacific Development Services and for Koll Asia Equities until either such
joint venture expires in accordance with its own terms. In addition, the
parties shall remain liable to each other for costs and expense reimbursement
pursuant to Section 1.4 of this Agreement until such time as all applicable
reimbursements have been accounted for and paid.
3.2 ENGAGEMENT OF CONSULTANTS.
Koll Asia Pacific Development Services shall be entitled to engage
third party consultants and service providers in the normal course of real
estate development whether or not such consultants and service providers provide
the same and/or competitive services to the services provided by KAH without the
consent of KAH provided, prior to engaging any consultant or service provider
providing competitive services to the services provided by KAH, Koll Asia
Pacific Development Services notifies and discusses such engagement with KAH.
Notwithstanding the foregoing, in the event any such engagement would materially
harm the business reputation of either Koll Asia Pacific Development Services or
KAH and/or materially hinder the ability of either Koll Asia Pacific Development
Services or KAH to compete in a market, in the reasonable discretion of either
such party, then such proposed consultant or service provider shall not be so
engaged but rather an alternative consultant or service provider shall be
engaged pursuant to the provisions of this Section 3.2.
3.3 POWER TO INCUR LIABILITIES.
Except as otherwise provided in this Agreement, neither party to this
Agreement shall have the authority to bind the other party in making contracts
and incurring obligations in the name and on the credit of such other party.
Should any party to this Agreement incur any
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<PAGE>
obligation in the name and on the credit of the other party in violation of this
provision, it may be held individually liable by such other party for the entire
amount of the obligation incurred.
3.4 RECORDS OF ACCOUNTS.
KREG and KAH shall maintain accurate and complete records of all costs
and expenses incurred by them, respectively, in connection with the
identification of Pacific Rim Development Opportunities. Such records shall, at
all times, be kept in the principal place of business of the party who incurs
such costs and expenses, and the other party shall, at reasonable times, have
access to, and may inspect and copy, any of such records. The organizational
documentation for Koll Asia Pacific Development Services or Koll Asia Equities,
as applicable, shall provide for (i) separate books and records with respect to
the development of Pacific Rim Development Opportunities accounting for one
hundred percent (100%) of all revenue and expenses from Pacific Rim Development
Opportunities and (ii) regular periodic reporting of all such financial records.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.1 NOTICES.
Any written notice to any party hereto required or permitted under
this Agreement shall be deemed to have been duly given (i) on the date of
service if served personally on the party to whom notice is to be given or if
transmitted via facsimile on the date of such transmission, or (ii) on the
second (2nd) day after mailing if mailed to the party to whom notice is to be
given, by first class or air mail, postage prepaid, and addressed to the
addressee at its principal place of business.
4.2 COUNTERPARTS.
This Agreement may be executed in one or more counterparts.
4.3 GOVERNING LAW.
This Agreement shall be governed by, and construed under, the laws of
the State of Delaware as applied to agreements among Delaware residents entered
into and to be performed entirely within Delaware.
4.4 ASSIGNMENT AND SUCCESSORS.
Neither this Agreement nor any of the rights or obligations hereunder
may be assigned by either party hereto without the prior written consent of the
other party. Subject to the foregoing, this Agreement shall be binding on and
inure to the benefit of the respective permitted successors, assigns and
personal representatives of the parties, except to the extent of any contrary
provision in this Agreement.
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<PAGE>
4.5 SEVERABILITY.
If any term, provision, covenant, or condition of this Agreement is
held by a court of competent jurisdiction to be invalid, void, or unenforceable,
the rest of this Agreement shall remain in full force and effect and shall in no
way be affected, impaired, or invalidated.
4.6 ENTIRE AGREEMENT.
This instrument contains the entire agreement of the parties relating
to the matters set forth herein. Any oral representations or modifications
concerning this Agreement shall be of no force or effect unless contained in a
subsequent written modification signed by KREG and KAH.
4.7 CONSENTS AND AGREEMENT.
Any and all consents and agreements provided for or permitted by this
Agreement shall be in writing, and a signed copy thereof shall be filed and kept
with the records referenced in Section 3.4 above.
4.8 ATTORNEYS' FEES.
Should any litigation be commenced between the parties hereto or their
personal representatives concerning any provision of this Agreement or the
rights and duties of any person in relation thereto, the party or parties
substantially prevailing in the litigation shall be entitled, in addition to
such other relief as may be granted, to a reasonable sum as and for attorneys'
fees in the litigation, as determined by the court in the litigation or in a
separate action brought for that purpose.
4.9 WAIVER.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement, or condition of this Agreement or to exercise any
right or remedy consequent upon a breach shall constitute a waiver of any such
breach of any other covenant, duty, agreement, or condition.
4.10 CAPTIONS.
Titles or captions of articles and paragraphs contained in this
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend or describe the scope of this Agreement or the
intent of any provision hereof.
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<PAGE>
ARTICLE V
DEFINITIONS
5.1 AGREEMENT.
The term "AGREEMENT" means this Amended and Restated Pacific
Rim Joint Business Opportunity Agreement.
5.2 APPROVED BUDGET.
The term "APPROVED BUDGET" is defined in Section 1.3(a).
5.3 IDENTIFICATION NOTICE.
The term "IDENTIFICATION NOTICE" is defined in Section 2.1.
5.4 KAH.
The term "KAH" means Koll Asia Holdings Limited, a Hong Kong limited
liability company.
5.5 KREG.
The term "KREG" means KREG Asia Holdings, Inc., a Delaware
corporation.
5.6 PACIFIC RIM DEVELOPMENT SERVICES.
The term "Pacific Rim Development Services" is defined in Section 1.1.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
KREG ASIA HOLDINGS, INC.
A DELAWARE CORPORATION By:
By: /s/ Richard M. Ortwein,
--------------------------------
Richard M. Ortwein,
President
KOLL ASIA HOLDINGS LIMITED,A HONG
KONG LIMITED LIABILITY COMPANY
By: /s/ D. Glen Raiger,
--------------------------------
D. Glen Raiger,
President
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<PAGE>
EXHIBIT A
PACIFIC RIM DEVELOPMENT OPPORTUNITY SERVICES
1. Development and Development Management
2. Build-to-Suits
3. Buy-to-Suits
4. Construction Management
5. Financing
6. Master Planning
7. Entitlement and Permitting
8. Disposition of Development Property
9. Site Selection and Acquisition
10. Strategic Real Estate Consulting
11. Third Party Project Management
12. Tenant Representation
13. Development Project Leasing
14. Corporate Advisor
15. Pension Fund Advisory
16. Asset/Investment Advisory
17. Property Acquisition
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 250
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 265
<CURRENT-LIABILITIES> 0
<BONDS> 184
0
0
<COMMON> 2
<OTHER-SE> 13
<TOTAL-LIABILITY-AND-EQUITY> 265
<SALES> 14
<TOTAL-REVENUES> 19
<CGS> 13
<TOTAL-COSTS> 17
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (15)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15)
<EPS-PRIMARY> (.31)
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