<PAGE>
This Form 10-Q consists of 20 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, 1997
------------------
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
----- ----
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- ----
The number of shares of Common Stock outstanding at November 12, 1997, including
the shares being delivered to former debenture holders upon surrender of their
debenture certificates, was 11,906,378.
<PAGE>
KOLL REAL ESTATE GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
I N D E X
------------
PAGE NO.
--------
Part I - Financial Information:
- ------
Item 1 - Financial Statements
Balance Sheets -
December 31, 1996 (Predecessor Company)
and September 30, 1997 (Successor Company). . . . . . 3
Statements of Operations -
Predecessor Company
-------------------
Three Months Ended September 30, 1996,
and Two Month Period Ended September 2, 1997
Nine Months Ended September 30, 1996,
and Eight Month Period Ended September 2, 1997
Successor Company
-----------------
One Month Period Ended September 30, 1997 . . . . . . 4
Statements of Cash Flows -
Predecessor Company
-------------------
Nine Months Ended September 30, 1996,
and Eight Month Period Ended September 2, 1997
Successor Company
-----------------
One Month Period Ended September 30, 1997 . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 13
Part II - Other Information:
- --------
Item 1 - Legal Proceedings. . . . . . . . . . . . . . . . . . . 19
Item 2 - Changes in Securities and Use of Proceeds. . . . . . . 20
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . 20
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
<PAGE>
KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
--------------
(in millions)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------- -----------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2.1 $ 5.0
Restricted cash .2 --
Real estate held for development or sale 25.2 48.3
Land held for development 223.5 131.8
Reorganization value in excess of amounts
allocated to net assets -- 16.6
Other assets 21.2 13.1
-------- -------
$ 272.2 $ 214.8
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 11.7 $ 5.3
Senior bank debt 7.1 --
Project debt 12.5 39.6
Subordinated debentures and other liabilities subject to
compromise under reorganization proceedings 200.3 --
Other liabilities 39.5 29.7
-------- -------
Total liabilities 271.1 74.6
-------- -------
Stockholders' equity:
Series A Preferred Stock .4 --
Class A Common Stock 2.4 --
Common Stock -- .6
Capital in excess of par value 229.2 140.0
Deferred proceeds from stock issuance (.4) --
Minimum pension liability (.6) (.6)
Retained earnings (accumulated deficit) (229.9) .2
-------- -------
Total stockholders' equity 1.1 140.2
-------- -------
$ 272.2 $ 214.8
-------- -------
-------- -------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
------------------------
(in millions, except per share amount)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
----------------------------------------------------------- -----------------
THREE MONTHS TWO MONTH NINE MONTHS EIGHT MONTH ONE MONTH
ENDED PERIOD ENDED ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 2, SEPTEMBER 30, SEPTEMBER 2, SEPTEMBER 30,
1996 1997 1996 1997 1997
------------ ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Asset Sales $ 3.6 $ 20.2 $ 17.6 $ 53.6 $ 12.9
Operations 2.8 2.5 7.5 7.2 1.0
------- ------- ------- ------- -------
6.4 22.7 25.1 60.8 13.9
------- ------- ------- ------- -------
COSTS OF:
Asset Sales 2.2 20.2 14.9 53.2 12.3
Operations 3.0 1.9 7.1 6.6 1.0
------- ------- ------- ------- -------
5.2 22.1 22.0 59.8 13.3
------- ------- ------- ------- -------
Gross operating margin 1.2 .6 3.1 1.0 .6
General and administrative expenses 1.6 .6 4.9 3.0 .3
Interest expense 6.3 4.4 18.7 17.1 --
Other expense (income), net .3 .4 .6 (2.2) .1
------- ------- ------- ------- -------
Income (loss) before reorganization
items, income taxes and
extraordinary gain (7.0) (4.8) (21.1) (16.9) .2
Reorganization items:
Fresh-start adjustments -- 57.1 -- 57.1 --
Reorganization costs .5 3.5 .9 5.6 --
------- ------- ------- ------- -------
Income (loss) before income taxes
and extraordinary gain (7.5) (65.4) (22.0) (79.6) .2
Provision for income taxes .1 .1 .2 .3 --
------- ------- ------- ------- -------
Income (loss) before
extraordinary gain (7.6) (65.5) (22.2) (79.9) .2
Extraordinary gain on extinguishment
of debt, net of income taxes of $0 -- 89.5 -- 89.5 --
------- ------- ------- ------- -------
Net income (loss) $ (7.6) $ 24.0 $ (22.2) $ 9.6 $ .2
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per common share N/A N/A N/A N/A $ .02
-------
-------
</TABLE>
See the accompanying notes to financial statements.
4
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
------------------------
(in millions)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------ -----------------
NINE MONTHS EIGHT MONTH ONE MONTH
ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 2, SEPTEMBER 30,
1996 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (22.2) $ 9.6 $ . 2
Adjustments to reconcile to cash used by
operating activities:
Fresh-Start adjustments -- 57.1 --
Extraordinary gain on extinguishment of debt -- (89.5) --
Non-cash reorganization costs -- 1.9 --
Depreciation and amortization .7 .5 .1
Non-cash interest expense 17.3 17.1 --
Gains on asset sales (2.7) (.4) (.6)
Proceeds from asset sales, net 16.0 53.1 12.8
Investments in real estate held for development or sale (14.7) (50.0) (13.0)
Investments in land held for development (2.6) (4.2) (1.8)
Decrease (increase) in other assets (.4) .8 (.1)
Increase (decrease) in accounts payable, accrued and
other liabilities 1.1 (9.9) (1.0)
------- ------ -------
Cash used by operating activities (7.5) (13.9) (3.4)
------- ------ -------
Cash flows from financing activities:
Borrowings of senior bank debt 6.2 -- --
Repayments of senior bank debt (11.1) (7.1) --
Borrowings of project debt 6.8 47.5 9.8
Repayments of project debt -- (21.5) (8.7)
Use of restricted cash 1.9 .2 --
------- ------ -------
Cash provided by financing activities 3.8 19.1 1.1
------- ------ -------
Net (decrease) increase in cash and cash equivalents (3.7) 5.2 (2.3)
Cash and cash equivalents - beginning of period 4.9 2.1 7.3
------- ------ -------
Cash and cash equivalents - end of period $ 1.2 $ 7.3 $ 5.0
------- ------ -------
------- ------ -------
</TABLE>
See the accompanying notes to financial statements.
5
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1 - Basis of Presentation
- ------------------------------
The accompanying financial statements 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 and Notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, and the current
year's previously issued Quarterly Reports on Form 10-Q. The financial
information presented herein reflects all adjustments, including Fresh-Start
Reporting adjustments as discussed below, 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. This report
contains forward looking statements. Readers are cautioned that any such
forward looking statements are not guarantees of future performance and
involve risks and uncertainties that actual events or results may differ
materially from those described herein as a result of various factors,
including without limitation, the factors discussed generally in this report.
Certain prior period amounts have been reclassified to conform with their
current period presentation.
Note 2 - Recapitalization
- -------------------------
On September 2, 1997, the Company completed its recapitalization (the
"Recapitalization") which became effective pursuant to a prepackaged plan of
reorganization that was confirmed by the U.S. Bankruptcy Court for the
District of Delaware on August 19, 1997. The prepackaged plan was filed by
the Company, excluding all of its subsidiaries and affiliates,
contemporaneously with a voluntary petition for relief under Chapter 11 of
the bankruptcy code on July 14, 1997. The Recapitalization had previously
received over 95% approval of each class of stock and bondholders that voted
through a public solicitation process in June 1997. On September 2, 1997, the
effective date of the Recapitalization, the Company (referred to as
"Successor Company" for periods after September 2, 1997) adopted the
provisions of Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start
Reporting") as promulgated by the American Institute of Certified Public
Accountants in November 1990. Accordingly, all assets and liabilities were
revalued to reflect their reorganization value, approximating their fair
value at the effective date of the Recapitalization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure
recast in conformity with the Recapitalization, and as such, the Company has
recorded the effects of the Recapitalization and Fresh-Start Reporting as of
the effective date.
The Recapitalization provided for a restructuring of the Company's
capital structure. The only impaired parties under the Recapitalization were
the holders of (a) the 12% Senior Subordinated Pay-In-Kind Debentures due
March 15, 2002 ("Senior Debentures"), (b) the 12% Subordinated Pay-In-Kind
Debentures due March 15, 2002 ("Subordinated Debentures") (collectively,
the "Debentures"), (c) liquidated, non-contingent claims, and (d) equity
securities of the Company. The prepackaged plan did not alter the Company's
obligations to its other creditors, including its trade creditors, customers,
employees, holders of contingent and unliquidated claims, holders of guaranty
claims, and parties to contracts with the Company.
Under the Recapitalization, Senior Debenture holders and Subordinated
Debenture holders are entitled to receive 56 shares and 28 shares, respectively,
for each $1,000 of principal amount of their Debentures outstanding as of
6
<PAGE>
March 15, 1997, and holders of liquidated, non-contingent claims received 56
shares for each $1,000 of their claims (all after consolidation of all
outstanding shares of preferred and common stock into a single class of newly
issued common stock and the reverse split described below). Upon completion
of the Recapitalization, approximately 90.1% of the Company's equity, in the
form of newly issued shares of common stock, excluding shares of common stock
underlying certain options and warrants, is now owned by former holders of
the Debentures and liquidated, non-contingent claims (approximately 80.3% by
former holders of Senior Debentures and liquidated, non-contingent claims and
9.8% by former holders of Subordinated Debentures). The remaining 9.9% of the
Company's equity is now owned, in the aggregate, by former holders of the
Company's Class A Common Stock (the "Class A Common Stock") and Series A
Preferred Stock (the "Preferred Stock") (approximately 5.8% by former holders
of Preferred Stock and 4.1% by former holders of Class A Common Stock).
Pursuant to approvals received at its 1997 Annual Meeting of Stockholders,
the Company consolidated its Class A Common Stock and Preferred Stock into a
single class of stock, through the issuance of 1.75 shares of new common
stock (the "Common Stock") for each outstanding share of Preferred Stock and
one share of Common Stock for each outstanding share of Class A Common Stock
and effected a one for one hundred (1:100) reverse stock split of each
outstanding share of the Company's capital stock on September 2, 1997, the
effective date of the Recapitalization.
Upon implementation of the Recapitalization, $216.9 million book value of
Debentures and other liabilities subject to compromise were cancelled in
exchange for equity, resulting in an $89.5 million extraordinary gain on
extinguishment of debt. This gain was partially offset by $57.1 million of
net adjustments to revalue all assets and liabilities to reflect fair value
as of September 2, 1997 as required by Fresh Start Reporting. The results of
operations and cash flows for the two month and eight month periods ended
September 2, 1997 include operations prior to completion of the
Recapitalization (referred to as "Predecessor Company"). The results of
operations and cash flows for the one month period ended September 30, 1997
include operations subsequent to the Company's Recapitalization and reflect
the effects of Fresh-Start Reporting. As a result, the net income for the
period ended September 2, 1997 is not comparable with prior periods and the
net income for the nine months ended September 30, 1997 is divided into
Successor Company and Predecessor Company and is also not comparable with
prior periods. In addition, the balance sheet as of September 30, 1997 is not
comparable with prior periods for the reasons discussed above.
The reorganization value of the Company's common equity was determined by
the Company with the assistance of financial advisors after consideration of
several factors and by reliance on various valuation methods, including
discounted projected cash flows, and other economic and industry information
relevant to the operations of the Company. The reorganization value of the
Company was allocated to specific asset categories pursuant to Fresh-Start
Reporting. Reorganization Value in Excess of Amounts Allocated to Net Assets,
which represents the difference in the Company's estimated valuation and the
Company's net assets at fair value, of $16.7 million is amortized on a
straight-line basis over 15 years.
Professional fees and expenditures directly related to the Company's
Recapitalization are classified as reorganization costs and were expensed as
incurred. Reorganization costs during the periods ended September 2, 1997
consisted primarily of legal, financial advisors and other professional fees,
incentive compensation to directors and officers of the Company and costs
related to the solicitation of security holder acceptances of the
Recapitalization, the 1997 Annual Meeting of Stockholders and the public
exchange offers of the securities that were subject to the Recapitalization.
The Company's Class A Common Stock and Preferred Stock were delisted from
the Nasdaq National Market on July 14, 1997 pending completion of the
Recapitalization. The Nasdaq Stock Market, Inc. listed the
post-Recapitalization Common Stock of the Company on the National Market
effective September 4, 1997, following completion of the Recapitalization.
7
<PAGE>
Note 3 - Earnings Per Common Share
- -----------------------------------
The weighted average number of outstanding shares of the Successor
Company's Common Stock, including the conversion rights of all Debenture
holders and warrant holders, for the period ended September 30, 1997 was 11.9
million shares. Per share data for periods prior to September 2, 1997 have
been omitted since these amounts do not reflect the Successor Company's
current capital structure.
Note 4 - Stock Based Compensation
- ---------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," which was effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair market value of
the equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue
to apply APB Opinion No. 25 to its stock based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share.
During April 1997, in connection with the Recapitalizaton, the
Compensation Committee of the Company's Board of Directors approved the grant
of stock options equivalent to 6% of the Company's fully diluted equity for
certain directors and officers. The options have a term of ten years and vest
40% after one year, an additional 30% after two years and the final 30% after
three years. Stock option grants of 759,984 shares have been issued at a
price of $11.99 per share based on the 20-day average closing price following
completion of the Recapitalization.
Note 5 - Real Estate Held for Development or Sale
- -------------------------------------------------
Real estate held for development or sale consists of the following (in
millions):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------
Residential $12.4 $ 6.4
Commercial/Industrial 12.8 41.9
----- -----
$25.2 $48.3
----- -----
----- -----
See Note 7 - Debt regarding project debt secured by the Commercial
/Industrial projects.
Note 6 - Land Held for Development
- ----------------------------------
The Company owns approximately 350 acres located in Orange County,
California adjacent to the Pacific Ocean, surrounded by the City of
Huntington Beach and approximately 35 miles south of downtown Los Angeles
("Bolsa Chica"). The planned community at Bolsa Chica is expected to offer a
broad mix of home choices, including single-family homes and townhomes at a
wide range of prices. The Company's Bolsa Chica holdings include
approximately 200 acres to be developed on the Bolsa Chica mesa,
approximately 110 acres zoned as park or conservation land on, or adjacent
to, the Huntington mesa and 42 acres of lowlands which were acquired in
September 1997. The Company is negotiating to sell the recently acquired 42
lowland acres to the State of California for a price approximating its
acquisition cost. The Local Coastal Program ("LCP") for development of Bolsa
Chica was approved by the Orange County Board of Supervisors in December 1994
and by the California Coastal Commission in January 1996.
8
<PAGE>
A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of
Supervisors was filed in January 1995. After remanding the matter to the
Board of Supervisors for additional processing and findings, in January 1997
the court entered a judgment in favor of the Company. Plaintiffs in the CEQA
Lawsuit have appealed the court's decision and the appeal is pending. In
March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging the
approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit
was entered by the court in August 1997, and required the Coastal Commission
to reconsider the filling of a 1.7 acre pond on the Bolsa Chica mesa ("Warner
Pond") and development of any homes in the lowlands. On October 9, 1997, in
response to the court's decision, the Coastal Commission approved
modifications to the LCP which eliminated the filling of Warner Pond and
thereby reduced the maximum density from 2,500 homes to no more than 1,235
homes on the mesa. On November 18, 1997, the Orange County Board of
Supervisors is scheduled to review the LCP modifications adopted by the
Coastal Commission. If the Board of Supervisors accepts the modifications
without change, the LCP will be deemed approved upon confirmation by the
Executive Director of the Coastal Commission. The Company expects that the
Executive Director will provide such confirmation in December 1997.
The Company is currently pursuing the secondary permitting process, such as
tract maps and grading plans, for the mesa through the County of Orange in
order to implement the LCP. This process is currently expected to be
completed by March 31, 1998. While an appeal of the trial court's August 1997
judgment has been filed by opponents of the Bolsa Chica project, the Company
does not believe that the appeal will permanently prevent the Company from
completing the Bolsa Chica project; however, there can be no assurance in
that regard or that further delays will not result. The Company expects to
commence infrastructure construction during the second quarter of 1998,
unless restrained by a court. See "Item 1 - Legal Proceedings" for a further
discussion of pending litigation.
Pursuant to confirmation and implementation of the Company's
Recapitalization as discussed in Note 2, the Company applied the principles
required by Fresh-Start Reporting and the carrying value of land held for
development was adjusted to fair value as of September 2, 1997 (after
consideration as discussed below of the October 9, 1997 Coastal Commission
action). The estimation process involved in the determination of fair value
is inherently uncertain since it requires estimates as to future events and
market conditions. Such estimation process assumes the Company's ability to
complete development and dispose of its real estate properties in the
ordinary course of business based on management's present plans and
intentions. Economic, market, environmental and political conditions may
affect management's development and marketing plans. In addition, the
implementation of such development and marketing plans could be affected by
the availability of future financing for development and construction
activities. Accordingly, the ultimate fair values of the Company's real
estate properties are dependent upon future economic and market conditions,
the availability of financing, and the resolution of political, environmental
and other related issues.
The Company has considered the reduction in density from a maximum of up
to 2,500 homes on the Bolsa Chica mesa to no more than 1,235 homes in its
determination of the Bolsa Chica project's fair value as reflected in the
Company's balance sheet as of September 30, 1997. The Company has received
analysis and advice from its residential real estate market consultants and
advisors which indicates that the fair value to be realized by the Company
from the Bolsa Chica mesa development will not be materially lessened by the
reduction in developable units as compared to previous estimates, since
residential land value is not exclusively driven by unit count. Rather, the
following factors are also highly determinative of such value:
(i) the location and quality of the master planned community;
(ii) the competitive condition of the real estate market at the time of
development and sale;
(iii) the demand for various residential product types;
(iv) the product mix, segmentation and absorption rate;
(v) the number of acres available for development; and
(vi) the project development costs.
9
<PAGE>
Therefore, while there can be no assurance in this regard, the Company
believes that the lower number of residential units will not materially
reduce the project's fair value.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" ("SFAS 121"), which requires an impaired asset
(real property or intangible) to be written down to fair value. In the event
of an impairment, the fair value of an asset for purposes of SFAS 121 is
deemed to be the amount a willing buyer would pay a willing seller for such
asset in a current transaction. As required, the Company adopted SFAS 121
during the quarter ended March 31, 1996, which did not have any effect on its
financial statements.
Note 7 - Debt
- -------------
SENIOR BANK DEBT
During the first quarter of 1997, the Company utilized a portion of the
proceeds from a sale of Rancho San Pasqual lots and the sale of the Bolsa
Chica lowlands to fully repay the outstanding loan balance of approximately
$7.1 million due to Nomura Asset Capital Corporation under a letter of credit
and reimbursement agreement. Cash payments for interest on senior bank debt
were approximately $.9 million and $.1 million for the nine months ended
September 30, 1996 and the eight month period ended September 2, 1997,
respectively.
PROJECT DEBT
The Company and certain of its affiliates have entered into several
contracts to develop and construct commercial properties, primarily on a
build-to-suit basis. To finance certain of these projects, the Company's
affiliates have entered into construction loan agreements which have been
guaranteed by the parent. The Company's affiliates have entered into purchase
and sale agreements for the sale, upon completion of construction, of each of
the build-to-suit projects with an outstanding loan balance at September 30,
1997.
Project debt secured by commercial development projects is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------------- -----------------------------
MATURITY LOAN OUTSTANDING LOAN OUTSTANDING
DATE AMOUNT AMOUNT AMOUNT AMOUNT
----------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Build-to-Suit Projects
- ----------------------
Distribution center Sold/Repaid $ 2.0 $ 1.1 $ -- $ --
Corporate headquarters Sold/Repaid 20.0 9.6 -- --
Office/distribution center Sold/Repaid 9.9 1.8 -- --
R&D regional headquarters Dec. 1998 -- -- 8.2 2.5
Office building April 1998 -- -- 37.7 12.6
Office headquarters Dec. 1998 -- -- 9.8 2.3
Office campus Oct. 1998 -- -- 48.1 13.3
Office headquarters Feb. 1999 -- -- 10.8 2.5
Speculative Projects
- --------------------
Industrial May 2000 -- -- 13.1 6.4
------- ------- ------- ------
$ 31.9 $ 12.5 $ 127.7 $ 39.6
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
10
<PAGE>
All of these construction loans bear interest at variable rates ranging
from LIBOR plus 1 1/2% to LIBOR plus 2%. The Company capitalized
approximately $1.7 million and $.2 million of interest costs on such
construction loans for the eight month period ended September 2, 1997 and the
one month period ended September 30, 1997, respectively.
In addition, as of September 30, 1997, four development projects are
owned by unconsolidated limited liability companies in which a subsidiary of
the Company is the managing member. These affiliates have entered into
construction loan agreements for speculative industrial projects aggregating
$49.2 million, which have also been guaranteed by the parent. Under these
construction loan agreements, an aggregate of $18.2 million was drawn and
$31.0 million was available as of September 30, 1997.
Subsequent to September 30, 1997, an affiliate of the Company entered
into an additional construction loan agreement which has been guaranteed by
the parent. The loan agreement is on similar terms to those existing as of
September 30, 1997, and is financing $9.7 million for a speculative
industrial project in Hayward, California.
Note 8 - Liabilities Subject to Compromise
- -------------------------------------------
Liabilities subject to compromise represent liabilities which were
exchanged for equity upon completion of the Recapitalization (as discussed in
Note 2) and consisted of the following as of December 31, 1996 (in millions):
Subordinated debt:
Senior Debentures $155.3
Subordinated Debentures 38.8
------
Total face amount 194.1
Liquidated, non-contingent claims 4.4
------
Subtotal 198.5
Less unamortized discount (5.0)
Plus accrued interest 6.8
------
$200.3
------
------
The Debentures gave the Company the right to pay interest in-kind, in
cash or, subject to certain conditions, in Class A Common Stock.
Historically, interest on the Debentures was paid in-kind.
During the second quarter of 1997, the Company entered into mutual
settlement and release agreements with the three holders of liquidated,
non-contingent claims: AlliedSignal Inc. ("Allied"), The General Chemical
Group Inc. ("General Chemical"), and Wolverine Tube, Inc. ("Wolverine").
These agreements provided, among other things, for the issuance of 168,000
shares, 53,760 shares and 25,200 shares of Common Stock in settlement of
$3,000,000, $960,000 and $450,000 of liquidated, non-contingent claims (56
shares per $1,000) held by Allied, General Chemical and Wolverine,
respectively. It is currently expected that these holders will sell all of
such shares within two years following their issuance in connection with the
completion of the Recapitalization. Neither Allied, General Chemical nor
Wolverine was a record or beneficial owner of any shares of the Company's
capital stock prior to the Recapitalization.
Note 9 - Income Taxes
- ---------------------
Upon completion of the Recapitalization, the Company experienced an
"ownership change" under Section 382 of the Internal Revenue Code (the
"Code") as a result of the increase in the percentage of the Company's stock
by value held by certain persons (including creditors who exchange debt for
stock) of more than 50 percentage points at any time during a three-year
period. Subsequent to an ownership change, the Company's annual use of its net
11
<PAGE>
operating losses ("NOLs") is generally limited to the value of the Company's
equity immediately before the ownership change multiplied by the long-term
tax-exempt rate, which for September 1997 was 5.45%.
Section 382(l)(5) of the Code, the "bankruptcy exception", provides that
if the ownership change occurs through a bankruptcy, such as the Company's
Recapitalization which utilized a prepackaged plan, and if the continuing
shareholders and "qualifying creditors" before the ownership change own at
least 50% of the Company's stock after the ownership change, the general
limitations of Section 382 will not apply. "Qualifying creditors" generally
must have held their debt at least 18 months before the prepackaged plan was
filed on July 14, 1997, or the debt must have arisen in the ordinary course
of the Company's business. The Company believes that it qualifies for the
"bankruptcy exception" of Section 382(l)(5). Under this exception, the Company
is required to reduce its NOLs by (i) the amount of interest accrued on any
debt exchanged for stock in the bankruptcy proceeding during the year of the
proceeding and the three prior taxable years and (ii) an additional amount
required to make the total reduction equal to the amount of cancellation of
indebtedness income realized. Accordingly, the Company's NOLs of
approximately $286 million as of September 2, 1997 will be reduced by
approximately $81 million, resulting in remaining NOLs available of
approximately $205 million. As reduced, and subject to any disallowance
resulting from the proposed IRS adjustments discussed below, the Company's
NOL carryovers will be fully deductible against post-reorganization income
provided there is not a second ownership change as discussed below, and
subject to the general rules regarding expiration of NOLs.
If the Company were to experience another ownership change within two
years of the September 2, 1997 effective date of the Recapitalization, as the
result of a 50 percentage point change in ownership, the second ownership
change would not qualify for Section 382(l)(5) treatment and the use of all
remaining NOLs would be disallowed. Pursuant to Section 382(l)(5)(D), the
Section 382 Limitation from and after the second ownership change would be
zero, and thus would eliminate the availability of any remaining unused
portion of the $205 million of NOLs.
If the Company experiences or expects a successive ownership change prior
to the filing of its 1997 tax return, a determination could be made to elect
out of Section 382(l)(5), which would preserve some of the NOL carryovers.
The election out of Section 382(l)(5) would be irrevocable and must be made
by the due date (including any extensions of time) of the Company's 1997 tax
return and would bind the Company without regard to whether or not subsequent
ownership changes (expected or not) occur. If the Company elects out of
Section 382(l)(5) or if the requirements of such section are not met, the
general rules of Section 382 would apply. However, in determining the
limitation placed on the Company's annual use of its net operating losses
under those general rules, Section 382(l)(6) provides that the value of the
equity of the Company immediately before the ownership change would be deemed
to include the increase in the value of the Company's equity resulting from
any surrender or cancellation of creditors' claims due to implementation of
the Recapitalization. Accordingly, assuming the Company's recent
post-Recapitalization equity market value of approximately $140 million, and
a recent long-term tax exempt rate of 5.45%, Section 382(l)(6) would limit
the Company's utilization of its NOLs to approximately $7.6 million per year,
plus any built-in gains recognized during the five year period following the
ownership change. In summary, under Section 382(l)(5), the Company would have
approximately $205 million of NOLs available, which the Company has estimated
could be fully utilized over the next nine years (1998-2006), whereas under
Section 382(l)(6) only approximately $69 million of NOLs would be available
to the Company during that time frame, due to the annual limitation described
above.
The Internal Revenue Service ("IRS") has completed its examinations of
the tax returns of the Company and its consolidated subsidiaries, including
formerly affiliated entities, for the years ended December 31, 1989, 1990 and
1991. With respect to each examination, the IRS has proposed material audit
adjustments. The Company disagrees with the positions taken by the IRS and
has filed a protest with the IRS to vigorously contest the proposed
adjustments. After review of the IRS's proposed adjustments, the Company
estimates that, if upheld, the adjustments could result in Federal tax
liability, before interest, of approximately $17 million (net of amounts
which may be payable by former affiliates pursuant to tax sharing
agreements). The IRS proposed adjustments, if upheld, could result in a
disallowance of up to $132 million of available NOL carryforwards, of which
none are recognized after
12
<PAGE>
consideration of the valuation allowance, as of September 30, 1997. The
Company has not determined the extent of potential accompanying state tax
liability adjustments should the proposed IRS adjustments be upheld. The
Company's protest was filed in August 1995 and is 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.
Cash payments for federal, state and local income taxes were
approximately $.1 million for the nine months ended September 30, 1996, $.2
million for the eight month period ended September 2, 1997 and less than $.1
million for the one month period ended September 30, 1997.
Note 10 - 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, a
predecessor of the Company. The Company has not been named as a PRP at the
site. However, Allied has, through UOP, asserted a contractual
indemnification claim against the Company for all claims that may be asserted
against UOP by EPA or other parties with respect to the site. EPA has
proposed a clean-up plan which would involve covering certain real property
both contiguous and non-contiguous to Torch Lake with soil and vegetation in
order to address alleged risks posed by copper tailings and slag at an
estimated cost of $6.2 million. EPA estimates that it has spent approximately
$3.9 million to date in performing studies of the site. Under CERCLA, EPA
could assert claims against the Torch Lake PRPs, including UOP, to recover
the cost of these studies, the cost of all remedial action required at the
site, and natural resources damages. In June 1995, EPA proposed a CERCLA
settlement pursuant to which UOP pay approximately between $2.6 and $3.3
million in exchange for a limited covenant by EPA not to sue UOP in the
future. The Company, without admission of any obligation to UOP, has
determined to vigorously defend UOP's position that the EPA's proposed
cleanup plan is unnecessary and inconsistent with the requirements of CERCLA
given that the EPA's own Site Assessment and Record of Decision found no
immediate threat to human health. In the Company's view the proposed
remediation costs would be in excess of any resulting benefits.
In June 1997, the Company entered into an agreement with The Charter
Township of Calumet (the "Township"), whereby the Company has agreed to
sell approximately 160 acres of its land in Michigan to the Township in
exchange for the Township obtaining an agreement from EPA to release the
Company, its predecessors and affiliates from any environmental liability
associated with the Torch Lake Site. There can be no assurances that the
Township will be successful in obtaining such a release of the Company from
EPA.
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; (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; and (iv) developing
13
<PAGE>
commercial projects for the Company's own account. 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. While the
Company intends to consider additional real estate acquisition and joint
venture opportunities, its immediate strategic goal is to commence
infrastructure construction on the Bolsa Chica mesa in the second quarter of
1998; however, there can be no assurance in that regard.
The Company was over-leveraged from its December 1989 spin-off from The
Henley Group, Inc., when it had $290 million of debt (including $144 million
of subordinated debentures due to The Henley Group, Inc.) and $268 million of
accounts payable and other liabilities against $707 million of assets and
stockholders equity of $149 million, until completion of the Recapitalization
on September 2, 1997. This excessive leverage was exacerbated by continual
delays between 1990 and 1997 in obtaining the governmental approvals
necessary to develop the Company's principal asset, the Bolsa Chica property.
At the time of the 1989 spin-off from The Henley Group, Inc., the Company
expected that the Bolsa Chica property would be fully entitled and under
construction as early as 1991. During the last seven years, the Company has
generated over $300 million in cash from asset sales. The Company has
utilized the majority of the proceeds of such asset sales to repay
approximately $131 million of senior debt, to pay various liabilities, and to
fund project development and infrastructure costs for its principal
residential development projects, including Bolsa Chica. With the California
Coastal Commission's approval of modifications to the LCP for Bolsa Chica on
October 9, 1997, the Company is proceeding with its plans for residential
development on the Bolsa Chica mesa and expects to commence infrastructure
construction in the second quarter of 1998, subject to certain contingencies
as described in Note 6 of Notes to Financial Statements.
Historically, the Company has not been able to generate significant gross
operating margins or cash flows from operating activities due to the nature
of its principal assets. The substantial majority of the Company's assets are
residential land which has required significant investments before the land
could be sold to homebuilders or developed in joint ventures. In addition,
the relatively high book value of these assets has resulted in sales
approximating break-even. Pursuant to Fresh Start Reporting, implementation
of the Recapitalization through the prepackaged plan resulted in a write-down
of Bolsa Chica to fair value (which will reduce future costs of sales) and
therefore, provided that there are no further litigation delays, the Company
hopes to begin generating profits from the Bolsa Chica project beginning in
1998.
Real estate held for development or sale and land held for development
(real estate properties) are carried at fair value as of September 30, 1997
following adoption of Fresh-Start Reporting as discussed in Note 2. The
Company's real estate properties are subject to a number of uncertainties
which can affect the fair values of those assets. These uncertainties include
litigation or appeals of regulatory approvals (as discussed above) and
availability of adequate capital, financing and cash flow. In addition,
future values may be adversely affected by increases in property taxes,
increases in the costs of labor and materials and other development risks,
changes in general economic conditions, including higher mortgage interest
rates, and other real estate risks such as the demand for housing generally
and the supply of competitive products. Real estate properties do not
constitute liquid assets and, at any given time, it may be difficult to sell
a particular property for an appropriate price. Recently, the strengthened
economy of the Southwest, and California in particular, has resulted in
improvement in the real estate market, generally increasing the availability
of potential purchasers for such properties and sources of financing for
carrying and developing such properties. Over the past year, the number of
potential purchasers and capital sources interested in Southern California
residential properties appears to have increased, resulting in improving
prices. However, there can be no assurance regarding the continued health of
the economy and the strength and longevity of current conditions affecting
the real estate market.
LIQUIDITY AND CAPITAL RESOURCES
The principal asset in the Company's portfolio is 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.
14
<PAGE>
Historically, sources of capital have included bank lines of credit,
specific property financings, asset sales and available internal funds. The
Company will continue to be dependent primarily on residential and commercial
real estate asset sales, and cash and cash equivalents on-hand to fund
project development costs for Bolsa Chica, commercial project pre-development
expenditures and equity investments, as well as general and administrative
expenses during the remainder of 1997. The Company is seeking new financing
for development of Bolsa Chica and expects to obtain a land development and
infrastructure construction loan approximating $30 million during the first
quarter of 1998.
Following completion of the sale of the Bolsa Chica lowlands in February
1997 and utilization of $7.1 million to repay senior debt, as well as other
activity presented in the Statement of Cash Flows, the Company's unrestricted
cash and cash equivalents aggregated $5.0 million at September 30, 1997.
The Company has executed option agreements with homebuilders which are
scheduled to purchase an aggregate of 88 remaining Phase I residential lots
at Rancho San Pasqual in Escondido, California for approximately $4.3 million
during the fourth quarter of 1997 and the first six months of 1998. During
the first nine months of 1997, the Company completed sales of 162 residential
lots at Rancho San Pasqual to homebuilders for approximately $7.1 million.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED WITH DECEMBER 31, 1996
The $2.9 million increase in cash and cash equivalents primarily reflects
the sale of the Bolsa Chica lowlands in February 1997 for $25.0 million,
partially offset by repayments of $7.1 million to Nomura, payments of certain
liabilities, spending for project development costs primarily at Bolsa Chica,
general and administrative expenses, and reorganization costs during the
first nine months of 1997, as well as other activity presented in the
Statements of Cash Flows.
The $23.1 million increase in real estate held for development or sale
primarily reflects investments in eight build-to-suit projects and one
speculative industrial project aggregating approximately $61.9 million,
partially offset by sales of three of the build-to-suit projects with
aggregate costs of $30.3 million and costs of sales of residential lots at
Rancho San Pasqual aggregating $7.0 million.
The $91.7 million decrease in land held for development reflects the
February 1997 sale of the Bolsa Chica lowlands for $25.0 million and a
write-down under Fresh-Start Reporting of $72.7 million to reflect the fair
value of Bolsa Chica of $130 million as of September 2, 1997. These decreases
were partially offset by investments in the Bolsa Chica project during the
first three quarters of 1997, including the acquisition of an adjacent
42-acre parcel.
The $8.1 million decrease in other assets primarily reflects a
Fresh-Start adjustment of $6.9 million to eliminate the value of goodwill
recorded in the 1993 acquisition of the commercial development business, as
well as the collection of commercial development receivables, partially
offset by investments in unconsolidated commercial projects.
The $6.4 million decrease in accounts payable and accrued liabilities
primarily reflects payments to contractors on build-to-suit projects,
payments of accrued expenses related to the sale of the Bolsa Chica lowlands
and reorganization costs.
The $7.1 million decrease in senior bank debt reflects the repayment of
the outstanding loan balance due to Nomura Asset Capital Corporation.
15
<PAGE>
The $27.1 million increase in project debt reflects aggregate borrowings
of $57.3 million on eight build-to-suit projects and one speculative
industrial project, partially offset by aggregate repayments of $30.2 million
of project debt upon the sales of three of the build-to-suit projects
discussed above.
The $200.3 million decrease in subordinated debentures and other
liabilities subject to compromise reflects cancellation of such obligations
and the issuance of common stock to the holders of such claims in accordance
with the Recapitalization as further discussed in Note 2.
The $9.8 million decrease in other liabilities primarily reflects a $5.8
million Fresh-Start adjustment to discount the carrying value of such
liabilities to fair value upon completion of the Recapitalization and
payments of $3.4 million in connection with the settlement of certain claims
during the second quarter of 1997.
The $139.1 million increase in stockholders' equity primarily reflects
the exchange of equity for subordinated debentures and other liabilities
subject to compromise discussed above, partially offset by the $57.1 million
net write-down of assets and liabilities to fair value under Fresh-Start
Reporting as discussed in Note 2, as well as other activity presented in the
Statements of Operations.
RESULTS OF OPERATIONS
The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from quarter to
quarter and year to year. In addition, the Company's completion of the
Recapitalization has significantly deleveraged its capital structure.
Furthermore, the restatement of assets and liabilities to reflect fair value
as of September 2, 1997 under Fresh Start Reporting will reduce future cost
of sales for Bolsa Chica, while increasing amortization expense related to
Reorganization Value in Excess of Amounts Allocated to Net Assets and
discounted liabilities.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
The $29.5 million increase in asset sales revenues from $3.6 million in
1996 to $33.1 million in 1997, and the $30.3 million increase in related
costs of asset sales from $2.2 million to $32.5 million primarily reflect the
sales of two build-to-suit projects and a $1.5 million increase in Rancho San
Pasqual lot sales, partially offset by the absence in 1997 of the 1996 sales
of homes at Oceanside Hills of $1.9 million, and a decrease in Michigan
residential land sales of $1.1 million.
The $.7 million increase in revenues from commercial development
operations during the third quarter of 1997 as compared with the same period
of 1996 primarily reflects rental income from building operations prior to
sale.
While gross operating margins were comparable for the 1996 and 1997 third
quarter periods, the margins in 1997 primarily reflect build-to-suit project
sales and rental income prior to such sales, and margins in 1996 primarily
reflect sales of Michigan residential land. Commercial development
operations, excluding property operations, have approximated break-even
despite the significant revenue growth in 1997 due to increased costs to
expand the business.
The $.7 million decrease in general and administrative expenses from the
1996 to 1997 third quarter periods primarily reflects reduced costs of
liability insurance premiums and reduced overhead expense related to
residential operations.
The $1.9 million decrease in interest expense reflects the absence of
interest on the subordinated debentures after they were cancelled on
September 2, 1997, the effective date of the Recapitalization, and lower
interest on senior bank debt which was repaid in February 1997.
16
<PAGE>
The $.2 million increase in other expense reflects the amortization of
(i) Reorganization Value in Excess of Amounts Allocated to Net Assets and
(ii) the discount on other liabilities for the one month period ended
September 30, 1997, as well as other non-recurring activity.
The benefit for deferred income taxes for the two month period ended
September 2, 1997 has been offset by a corresponding valuation allowance.
The $89.5 million extraordinary gain on extinguishment of debt represents
the difference between the book value of subordinated debentures and other
liabilities subject to compromise, which were cancelled in the
Recapitalization, and the fair market value of the Company's Common Stock
which was issued to the holders of such claims.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
The increase in revenues from asset sales of $17.6 million in 1996 to
$66.5 million in 1997 and the increase in the related costs of sales from
$14.9 million to $65.5 million primarily reflect the sale of the Bolsa Chica
lowlands for $25.0 million, sales of three build-to-suit projects aggregating
$34.1 million and an increase in sales of lots at Rancho San Pasqual of $.8
million in 1997, partially offset by the absence in 1997 of 1996 sales of the
Eagle Crest Golf Course at Rancho San Pasqual for $6.1 million, and homes at
Oceanside Hills for $2.5 million, as well as a $2.4 million decrease in sales
of Michigan residential land.
The $.7 million increase in revenues from operations during the first
nine months of 1997 as compared with the same period of 1996 reflects a $1.6
million increase in revenues from commercial development operations, which
was partially offset by the absence in 1997 of $.9 million of 1996 revenues
from golf course operations.
The $1.5 million decrease in gross operating margins from the 1996 to
1997 period primarily reflects a $1.9 million decrease in margins on sales of
Michigan residential land, partially offset by $.6 million in margins on
sales of build-to-suit projects and rental income prior to such sales in
1997. Commercial development operations, excluding property operations, have
approximated break-even despite the significant revenue growth in 1997 due to
increased costs to expand the business.
The $1.6 million decrease in general and administrative expenses from the
1996 to 1997 period primarily reflects reduced costs of liability insurance
premiums and reduced overhead expense related to residential operations.
The $1.6 million decrease in interest expense reflects the absence of
interest on the subordinated debentures after they were cancelled on
September 2, 1997, the effective date of the Recapitalization, and lower
interest on senior bank debt which was repaid in February 1997.
The $2.1 million in other income, net for the nine months ended September
30, 1997 primarily reflects an aggregate of $2.9 million of nonrecurring
income from the sale of a minority interest in a privately held company and
gains recognized in connection with the settlement of certain claims.
The benefit for deferred income taxes for the eight month period ended
September 2, 1997 has been offset by a corresponding valuation allowance.
The $89.5 million extraordinary gain on extinguishment of debt represents
the difference between the book value of subordinated debentures and other
liabilities subject to compromise, which were cancelled in the
Recapitalization, and the fair market value of the Company's Common Stock
which was issued to the holders of such claims.
17
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain of the foregoing information as well as certain information set
forth in Part II of this report under the heading "Legal Proceedings" is
forward looking in nature and involves risks and uncertainties that could
significantly impact the ability of the Company to achieve its currently
anticipated goals and objectives. These risks and uncertainties include, but
are not limited to litigation or appeals of regulatory approvals (including
appeals of the trial court decisions in the CEQA Lawsuit and the Coastal Act
Lawsuit), injunctions prohibiting implementation of approved development
plans pending the outcome of litigation, and the 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. Other significant risks and uncertainties are discussed in
the Company's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996 and in the Company's Registration Statement on Form S-4, as
amended, Registration Nos. 333-22121 and 333-29883.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
-----------------
See "Item 3 - Legal Proceedings" in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1996.
See Notes 2 and 8 of Notes to Financial Statements above and the
Company's Current Reports on Form 8-K dated August 19, 1997 and September 2,
1997 regarding court confirmation of the Recapitalization and completion
thereof.
In January 1995 a lawsuit challenging the December 1994 approvals of the
Orange County Board of Supervisors was filed in the Orange County Superior
Court by the Bolsa Chica Land Trust, et al. After remanding the matter to the
Board of Supervisors for additional processing and findings, in January 1997
the Superior Court entered a judgment in favor of the Company. Plaintiffs
have appealed the Superior Court decision and the matter is pending in the
California Court of Appeal.
In March 1996 a lawsuit was filed in the San Francisco Superior Court
(and later removed to San Diego Superior Court) by the Bolsa Chica Land
Trust, et al. against the California Coastal Commission, the Company and
other Bolsa Chica landowners as real parties in interest, alleging that the
Coastal Commission's approval of the LCP was not in compliance with the
Coastal Act and other statutory requirements. This lawsuit sought to set
aside the approval of the Bolsa Chica project. In August 1997, the San Diego
Superior Court rendered a judgment that returned the Bolsa Chica LCP to the
Coastal Commission for further consideration in the context of two issues.
The court's decision that the Coastal Commission reconsider the LCP was based
on the court's determination (i) that development of homes in the lowlands is
not in compliance with the Coastal Act, and (ii) that the filling of a 1.7
acre pond on the Bolsa Chica mesa ("Warner Pond") is not in compliance with
the Coastal Act.
With respect to the Bolsa Chica mesa, the court determined that the
Coastal Commission failed to weigh and resolve a conflict in Coastal Act
policies related to Warner Pond. The court's decision required the Coastal
Commission to reconsider its treatment of Warner Pond. On October 9, 1997, in
response to the court's decision, the Coastal Commission approved
modifications to the LCP which eliminated the filling of Warner Pond and
thereby reduced the maximum density from 2,500 homes to no more than 1,235
homes on the mesa.
In every other respect, the court denied challenges to the Coastal
Commission's approval of the plan for development of the mesa. The court
specifically approved the Coastal Commission's findings with regard to (i)
the relocation of raptor habitat, (ii) adequacy of a buffer between the new
residential development and the lowlands, and (iii) treatment of
archeological resources.
On September 18, 1997, another Bolsa Chica landowner which owned 42 acres
of lowlands filed an appeal with respect to the court's August 1997 judgment.
On September 30, 1997 the Company acquired such 42 acres of lowlands and
thereby gained control of the former landowner's appeal. The Company is also
negotiating the potential sale of the 42 lowland acres to the State Lands
Commission. On October 14, 1997 the Company received notice that opponents of
the Bolsa Chica project filed an appeal with respect to the court's August
1997 judgment. The Company does not believe that the appeal will permanently
prevent the Company from completing the Bolsa Chica project; however, there
can be no assurance in that regard or that further delays would not result.
The Company expects to commence infrastructure construction during the second
quarter of 1998, unless restrained by a court.
In October 1997, the Company entered into a mutual settlement and release
agreement with Svedala Industries, Inc. ("Svedala") to settle the Svedala
litigation, which is more fully described on page 137 of the Prospectus, in
which Svedala filed a lawsuit naming as defendants the Company and Nichols
Engineering & Research Corporation ("Nichols"), an indirect wholly owned
subsidiary of the Company, as well as several other unrelated companies.
19
<PAGE>
The lawsuit seeks recovery of costs of clean-up of a property in Mt. Olive,
New Jersey and asserted that the clean-up costs totaled approximately $10
million. The settlement agreement remains subject to court approval and will
provide the Company and its subsidiaries with a complete release of Svedala's
claims for any liability arising from the facts of the lawsuit in
consideration for the payment of $200,000 by the Company.
ITEM 2 - Changes in Securities and Use of Proceeds
-----------------------------------------
Incorporated by reference to (i) the Registrant's Registration
Statement on Form S-4, as amended, Registration Nos. 333-22121 and
333-29883; (ii) Current Report on Form 8-K dated August 19, 1997;
and (iii) Current Report on Form 8-K dated September 2, 1997. See
also, "Notes to Financial Statements -- Note 2 - Recapitalization"
in Part I of this report.
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated August 19, 1997 announcing
court confirmation of the Registrant's Recapitalization and
attaching a press release issued August 19, 1997 regarding
such confirmation.
Current Report on Form 8-K dated September 2, 1997 attaching a
press release regarding the completion of the Registrant's
Recapitalization and issuance of new common stock.
Current Report on Form 8-K dated October 9, 1997 attaching a
press release announcing the approval of a modified Local
Coastal Program for the Registrant's Bolsa Chica property by
the California Coastal Commission and noting that the
Registrant was notified that opponents of the Bolsa Chica
project filed an appeal of the August 1997 San Diego Superior
Court judgment.
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 13, 1997 /s/ Raymond J. Pacini
----------------- ----------------------------------
RAYMOND J. PACINI
Executive Vice President and
Chief Financial Officer
20
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<CGS> 12 53
<TOTAL-COSTS> 13 60
<OTHER-EXPENSES> 0 (2)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 17
<INCOME-PRETAX> 0 (80)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 90
<CHANGES> 0 0
<NET-INCOME> 0 10
<EPS-PRIMARY> .02 0
<EPS-DILUTED> 0 0
</TABLE>
