<PAGE>
This Form 10-Q consists of 23 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, 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
----- -----
The number of shares of Class A Common Stock outstanding at August 1, 1997 were
48,938,507.
<PAGE>
KOLL REAL ESTATE GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
I N D E X
--------------------------
Page No.
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PART I - Financial Information:
Item 1 - Financial Statements
Balance Sheets -
December 31, 1996 and June 30, 1997. . . . . . . . . . . . 3
Statements of Operations -
Three Months and Six Months Ended June 30, 1996 and 1997 . 4
Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1997. . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 15
PART II- Other Information:
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 20
Item 4 - Submission of Matters to a Vote of Security Holders . . . . 20
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 23
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
--------------
(in millions)
December 31, June 30,
1996 1997
------ ------
ASSETS
Cash and cash equivalents $ 2.1 $ 11.7
Restricted cash .2 --
Real estate held for development or sale 25.2 50.2
Land held for development 223.5 200.7
Other assets 21.2 19.2
------ ------
$272.2 $281.8
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 11.7 $ 4.3
Senior bank debt 7.1 --
Project debt 12.5 42.1
Subordinated debentures and other liabilities subject to
compromise under reorganization proceedings 200.3 212.7
Other liabilities 39.5 36.0
------ ------
Total liabilities 271.1 295.1
------ ------
Stockholders' equity:
Series A Preferred Stock .4 .4
Class A Common Stock 2.4 2.4
Capital in excess of par value 229.2 229.1
Deferred proceeds from stock issuance (.4) (.3)
Minimum pension liability (.6) (.6)
Accumulated deficit (229.9) (244.3)
------ ------
Total stockholders' equity 1.1 (13.3)
------ ------
$272.2 $281.8
------ ------
------ ------
See accompanying notes to financial statements.
3
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
REVENUES:
Asset Sales $ 13.5 $ 4.5 $ 14.0 $ 33.4
Operations 2.5 2.7 4.7 4.7
---- ---- ---- ----
16.0 7.2 18.7 38.1
---- ---- ---- ----
COSTS OF:
Asset Sales 12.4 4.3 12.7 33.0
Operations 1.9 2.6 4.1 4.7
---- ---- ---- ----
14.3 6.9 16.8 37.7
---- ---- ---- ----
Gross operating margin 1.7 .3 1.9 .4
General and administrative expenses 1.8 1.0 3.3 2.4
Interest expense 6.3 6.5 12.4 12.7
Other expense (income), net (.1) .5 .3 (2.6)
---- ---- ---- ----
Loss before income taxes and
reorganization costs (6.3) (7.7) (14.1) (12.1)
Reorganization costs .3 1.7 .4 2.1
---- ---- ---- ----
Loss before income taxes (6.6) (9.4) (14.5) (14.2)
Provision for income taxes .1 .1 .1 .2
---- ---- ---- ----
Net loss $(6.7) $(9.5) $(14.6) $(14.4)
----- ----- ------ ------
----- ----- ------ ------
Net loss per common share $(.14) $(.19) $(.31) $(.29)
----- ----- ------ ------
----- ----- ------ ------
See the accompanying notes to financial statements.
4
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
------------------------
(in millions)
Six Months Ended
June 30,
1996 1997
---- ----
Cash flows from operating activities:
Net loss $(14.6) $(14.4)
Adjustments to reconcile to cash used by operating
activities:
Depreciation and amortization .5 .5
Non-cash interest expense 11.4 12.6
Gains on asset sales (1.3) (.4)
Proceeds from asset sales, net 12.5 33.0
Investments in real estate held for development or sale (6.2) (32.6)
Investments in land held for development (2.0) (2.2)
Decrease in other assets .2 1.5
Increase (decrease) in accounts payable, accrued and
other liabilities 1.8 (11.1)
---- ----
Cash (used) provided by operating activities 2.3 (13.1)
---- ----
Cash flows from financing activities:
Borrowings of senior bank debt 5.2 --
Repayments of senior bank debt (10.4) (7.1)
Borrowings of project debt -- 31.6
Repayments of project debt -- (2.0)
Use of restricted cash 1.2 .2
---- ----
Cash (used) provided by financing activitie (4.0) 22.7
---- ----
Net (decrease) increase in cash and cash equivalents (1.7) 9.6
Cash and cash equivalents - beginning of period 4.9 2.1
---- ----
Cash and cash equivalents - end of period $ 3.2 $ 11.7
------ ------
------ ------
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 Report on Form 10-Q.
The accompanying consolidated financial statements have been presented in
accordance with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." Certain prior period amounts have
been reclassified to conform with their current period presentation. 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.
NOTE 2 - RECAPITALIZATION
On July 14, 1997, the Company, excluding all of its subsidiaries and
affiliates, filed a voluntary petition for relief under Chapter 11 of the
bankruptcy code with the U.S. Bankruptcy Court for the District of Delaware.
Contemporaneously, the Company filed for court approval of a prepackaged plan
of reorganization (the "Prepackaged Plan") which had previously received over
95% approval of each class of stock and bondholders that voted through a
recent public solicitation process. The court confirmation hearing for the
Prepackaged Plan is scheduled for August 19, 1997, and baring any unforeseen
circumstances, the Company expects to complete the recapitalization in early
September. Upon emergence from its Chapter 11 proceedings, the Company will
follow 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 will be
restated to reflect their reorganization value, approximating their fair
value at the effective date of the Prepackaged Plan. In addition, the
accumulated deficit of the Company will be eliminated and its capital
structure recast in conformity with the Prepackaged Plan, and as such, the
Company will record the effects of the Prepackaged Plan and Fresh-Start
Reporting as of the effective date.
The Prepackaged Plan provides for a restructuring of the Company's capital
structure. The only impaired parties under the Prepackaged Plan are 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.
Under the Prepackaged Plan, Senior Debenture holders and Subordinated Debenture
holders will receive 56 shares and 28 shares, respectively, for each $1,000 of
principal amount of their Debentures outstanding as of March 15, 1997, and
holders of liquidated, non-contingent claims will receive 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 proposed reverse split described below). Upon confirmation of the
Prepackaged Plan, 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, will be owned by holders of the Debentures and
liquidated, non-contingent claims (approximately 80.3% by holders of Senior
Debentures and
6
<PAGE>
liquidated, non-contingent claims and 9.8% by holders of Subordinated
Debentures). The remaining 9.9% of the Company's equity will be owned, in the
aggregate, by current 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 holders of Preferred Stock and 4.1% by holders of Class A
Common Stock). Pursuant to approvals received at its 1997 Annual Meeting of
Stockholders, the Company will consolidate 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 (the "Capital Stock Combination") and effect a one for one
hundred (1:100) reverse stock split of each outstanding share of the Company's
capital stock upon the effective date of the Prepackaged Plan.
The Company is conducting normal business operations as a
Debtor-in-Possession subject to the jurisdiction of the Bankruptcy Court. As a
Debtor-in-Possession, and without effect on any of its subsidiaries or
affiliates, the Company may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court, after notice and
hearing. Under Chapter 11, actions to enforce claims against the Company are
stayed if the claims arose, or are based on events that occurred, on or before
the petition date of July 14, 1997, and such claims cannot be paid or
restructured prior to the conclusion of the Chapter 11 proceedings or approval
of the Bankruptcy Court. However, the Prepackaged Plan does 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. The Company's
directly and indirectly owned subsidiaries and affiliates have not filed for
bankruptcy protection, are not involved in this proceeding and continue to
operate in the ordinary course. Liabilities subject to compromise (see Note 6)
in the accompanying consolidated balance sheet represent liabilities subject to
adjustment under the Prepackaged Plan.
Professional fees and expenditures directly related to the Company's
recapitalization are classified as reorganization costs and are expensed as
incurred. Reorganization costs during the six months ended June 30, 1997,
consisted primarily of legal, financial advisors and other professional fees and
costs related to the solicitation of acceptances for the Prepackaged Plan, the
1997 Annual Meeting of Stockholders and the Exchange Offers.
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
Prepackaged Plan process. In the interim, the Company's securities continue to
be traded on the Nasdaq OTC Bulletin Board and on the National Quotation
Bureau's Pink Sheets, although there may be a reduction in the liquidity of and
the market for the Company's Class A Common and Preferred Stock during this
period of time. The Nasdaq Stock Market, Inc. has agreed to list the Company's
Common Stock on the National Market following completion of the
recapitalization.
The proforma financial statements set forth below give effect to the
Prepackaged Plan as if it had occurred as of June 30, 1997. The final
reorganization value of the Company's common equity will be 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 applicable ratios and economic and industry
information relevant to the operations of the Company. While the proforma
reorganization value of the Company has been preliminarily allocated to specific
asset categories pursuant to Fresh-Start Reporting, the value and its allocation
are subject to further refinement or adjustment. Reorganization Value in Excess
of Amounts Allocated to Net Assets reflects the difference in the Company's
estimated valuation and the Company's net assets.
7
<PAGE>
KOLL REAL ESTATE GROUP, INC.
HISTORIC AND UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1997
(in millions)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------
Stock Prepackaged Fresh Start
Historical Conversion (a) Plan (b) Entries (c) Pro Forma
---------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents . . . . . . . . . . . $ 11.7 $ -- $ -- $ -- $ 11.7
Real estate held for
development or sale. . . . . . . . . . . . . . 50.2 -- -- -- 50.2
Land held for development. . . . . . . . . . . . 200.7 -- -- (70.7) 130.0
Reorganization value in excess of
amounts allocated to net assets. . . . . . . . -- -- -- 10.8 10.8
Other assets . . . . . . . . . . . . . . . . . . 19.2 -- -- (7.0) 12.2
------- ------- ------- ------- -------
$ 281.8 $ -- $ -- $ (66.9) $ 214.9
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Accounts payable and
accrued liabilities. . . . . . . . . . . . . . $ 4.3 $ -- $ -- $ -- $ 4.3
Project debt . . . . . . . . . . . . . . . . . . 42.1 -- -- -- 42.1
Subordinated debentures and other
liabilities subject to compromise
under reorganization proceedings . . . . . . . 212.7 -- (212.7) -- --
Other liabilities. . . . . . . . . . . . . . . . 36.0 -- -- (7.5) 28.5
------- ------- ------- ------- -------
Total liabilities. . . . . . . . . . . . . . . 295.1 -- (212.7) (7.5) 74.9
------- ------- ------- ------- -------
Stockholders' equity:
Series A Preferred Stock . . . . . . . . . . . .4 (.4) -- -- --
Class A Common Stock . . . . . . . . . . . . . 2.4 (2.4) -- -- --
Common Stock . . . . . . . . . . . . . . . . . -- .1 .5 -- .6
Capital in excess of par value . . . . . . . . 229.1 2.7 128.5 (220.0) 140.3
Deferred proceeds from
stock issuance . . . . . . . . . . . . . . . (.3) -- -- -- (.3)
Minimum pension liability . . . . . . . . . . (.6) -- -- -- (.6)
Accumulated deficit . . . . . . . . . . . . . (244.3) -- 83.7 160.6 --
------- ------- ------- ------- -------
Total stockholders' equity . . . . . . . . . . (13.3) -- 212.7 (59.4) 140.0
------- ------- ------- ------- -------
$ 281.8 $ -- $ -- $ (66.9) $ 214.9
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- --------------------------------
(a) To reflect conversion of each outstanding share of Preferred Stock to 1.75
shares of Common Stock and each outstanding share of Class A Common Stock
to one share of Common Stock pursuant to the Capital Stock Combination, and
the Reverse Stock Split of one share for each 100 shares of all existing
issued and outstanding shares of the Company's capital stock.
(b) To reflect the issuance of Common Stock in exchange for all outstanding
Debentures and other liabilities subject to compromise under reorganization
proceedings and the resulting extraordinary gain on extinguishment of debt.
The extraordinary gain reflected above is based on the recent market value
of the outstanding Debentures, whereas the actual extraordinary gain will
be based on the fair value of the Common Stock upon issuance.
(c) To reflect the write-down of Bolsa Chica to fair value of $130 million, to
write-off goodwill, to value other liabilities (except for deferred taxes)
based on their expected net present value, and to record "Reorganization
Value in Excess of Amounts Allocable to Identifiable Assets" under "Fresh
Start Reporting" upon emergence from Chapter 11.
8
<PAGE>
NOTE 3 - LOSS PER COMMON SHARE
The weighted average number of outstanding shares of Class A Common Stock
for the three months ended June 30, 1996 and 1997 were 48.0 million shares and
48.9 million shares, respectively, and the weighted average number of
outstanding shares of Class A Common Stock for the six months ended June 30,
1996 and 1997 were 47.8 and 48.9 million shares, respectively. The Preferred
Stock is not included in the loss-per-share calculations because the effect
would be anti-dilutive. Upon the effective date of the Prepackaged Plan, the
interests of the holders of Class A Common Stock and Preferred Stock will be
diluted as discussed in Note 2.
NOTE 4 - LAND HELD FOR DEVELOPMENT
Land held for development is carried at cost net of impairment losses based
on undiscounted cash flows. The estimation process involved in the determination
of fair value is inherently uncertain since it requires estimates as to future
events and market conditions. Such estimation process assumes the Company's
ability to complete development and dispose of its real estate properties in the
ordinary course of business based on management's present plans and intentions.
Economic, market, environmental and political conditions may affect management's
development and marketing plans. In addition, the implementation of such
development and marketing plans could be affected by the availability of future
financing for development and construction activities. Accordingly, the ultimate
fair values of the Company's real estate properties are dependent upon future
economic and market conditions, the availability of financing, and the
resolution of political, environmental and other related issues.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" ("SFAS 121"), which requires an impaired asset (real
property or intangible) to be written down to fair value. If an impairment
occurs, the fair value of an asset for purposes of SFAS 121 is deemed to be the
amount a willing buyer would pay a willing seller for such asset in a current
transaction. As required, the Company adopted SFAS 121 during the quarter ended
March 31, 1996, which did not have any effect on its financial statements. The
Company is currently implementing a Prepackaged Plan to deleverage its capital
structure as discussed in Note 2. Upon court confirmation of the Prepackaged
Plan, the Company will apply the principles required by Fresh Start Reporting,
and the carrying value of real estate properties will be adjusted to fair value,
as reflected in the proforma presentation of the balance sheet set forth in
Note 2.
Following completion of the Company's sale of approximately 880 lowland
acres of its Bolsa Chica property to the State of California on February 14,
1997 as described below, land held for development consists of approximately 310
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 of up to 2,500 homes
on the approximately 200-acre Bolsa Chica mesa (high ground) is expected to
offer a broad mix of home choices, including single-family homes, townhomes and
condominiums at a wide range of prices.
In December 1994, the Orange County Board of Supervisors unanimously
approved a Local Coastal Program ("LCP") for up to 3,300 units of residential
development and a wetlands restoration plan for this property. The 3,300-unit
LCP provided for development of up to 2,500 homes on the mesa 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. The related Development Agreement was
unanimously approved by the Orange County Board of Supervisors in April 1995.
The California Coastal Commission approved the LCP in January 1996 subject to
suggested modifications. These suggested modifications were approved by the
Orange County Board of Supervisors in June 1996, and in July 1996 the California
Coastal Commission certified the LCP for the Company's Bolsa Chica property. On
February 14, 1997, the Company completed the sale of approximately 880 lowland
acres owned by the Company at Bolsa Chica to the California State Lands
Commission for $25 million and will, therefore, forgo opportunities to develop
900 homes in the lowlands.
9
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The Company is now pursuing the secondary permitting process for the mesa
through the County of Orange in order to implement the approved development plan
for the mesa. This process is currently expected to be completed in the first
quarter of 1998. The Company expects, subject to its ability to obtain financing
on a commercially reasonable and timely basis, and subject to obtaining the
secondary permits, to commence infrastructure construction on the mesa in the
second quarter of 1998. 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.
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
LCP is not in compliance with the Coastal Act and other statutory requirements.
These lawsuits sought to set aside the approval of the Bolsa Chica project.
Given the recent sale of the Bolsa Chica lowlands described above, the
plaintiffs in one of these lawsuits recently completed an agreement with the
Company which settled their lawsuit. With respect to the remaining lawsuit, on
June 4, 1997, the San Diego Superior Court issued a decision to return the Bolsa
Chica LCP to the California Coastal Commission for further consideration in the
context of two limited issues. From the Company's perspective, the court's
decision was primarily focused on the lowlands, where the Company no longer has
a real estate development interest. 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's decision concluded that
the Coastal Commission failed to weigh and resolve a conflict in Coastal Act
policies related to Warner Pond. The court's decision directed that the
Coastal Commission reconsider its treatment of Warner Pond. 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.
While the Company believes that the Coastal Commission's prior action
concerning Warner Pond is fully supported under the Coastal Act, the Company is
pleased that its plan for the Bolsa Chica mesa development was [otherwise upheld
or left undisturbed] by the court. The Company is currently considering its
options for dealing with the court's concerns about the findings of the Coastal
Commission concerning Warner Pond, including the possibility of filing an
appeal. In addition, the Company is pursuing or considering various other
options regarding the continued development process, including but not limited
to the following:
1. The Company may request that the Coastal Commission re-approve the
determination that Warner Pond may be filled.
2. The Company may determine not to pursue the filling of Warner Pond
in the event the Company concludes that the economic impact on the project
would be immaterial, or that it would be in the Company's interest to
commence development of the Bolsa Chica mesa sooner rather than later.
The LCP previously certified by the Coastal Commission provided for the
development of up to 2,500 units on the Bolsa Chica mesa. However, in the
event that the Company elects not to fill, or is not permitted to fill,
Warner Pond for construction of certain county-required transportation
improvements, the LCP provides that the maximum number of developable units
would be reduced to 1,235, unless the Company establishes acceptable
substitute improvements. In addition, the Company has 11 acres of adjacent
property within the City of Huntington Beach, for which the Company intends
to seek entitlements for the development of additional residential units at a
later date. However, the Company has received analysis and advice from its
residential real estate market
10
<PAGE>
consultants and advisors which indicates that the fair value to be realized by
the Company from the Bolsa Chica mesa development would not be materially
lessened by a reduction in developable units because 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.
Therefore, while there can be no assurance in this regard, the Company
believes that a lower number of residential units would not materially reduce
the project's potential fair value.
The Company expects that the Bolsa Chica LCP will be reconsidered at the
October 1997 Coastal Commission meeting. The court's ruling may delay the start
of infrastructure construction until the second quarter of 1998; however, the
Company is unable to predict the exact nature or length of any such delay at
this time. While the Company believes that the court's ruling will not
permanently prevent its planned development on the Bolsa Chica mesa, there can
be no assurance in this regard.
NOTE 5 - DEBT
SENIOR BANK DEBT
During the first quarter of 1997, the Company fully repaid the outstanding
loan balance of approximately $7.1 million under a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation. A prepayment of
$.6 million was made in January in connection with a sale of Rancho San Pasqual
lots, and the remaining balance was repaid upon the sale of the Bolsa Chica
lowlands.
Cash payments for interest on senior bank debt were approximately $.9
million and $.1 million for the six month periods ended June 30, 1996 and 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 projects with an outstanding loan balance at June 30, 1997.
11
<PAGE>
Project debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
OUTSTANDING BALANCE
----------------------
Interest Maturity Facility December 31, June 30,
Build-to-suit Project Rate Date Amount 1996 1997
--------------------- -------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Distribution center Prime + 3/4% Prepaid $ 2.0 $ 1.1 $ --
Corporate headquarters LIBOR +2% Aug. 1997 20.0 9.6 18.0
Office/distribution center LIBOR +2% Aug. 1997 9.9 1.8 5.6
Office building LIBOR +2% Feb. 1998 27.0 -- 3.9
Office campus LIBOR +11/2% Oct. 1998 48.1 -- 8.8
Industrial LIBOR +13/4% May 2000 13.1 -- 5.8
------ ------ -------
$120.1 $ 12.5 $ 42.1
------ ------ -------
------ ------ -------
</TABLE>
The Company capitalized approximately $1.0 million of interest costs on
such construction loans for the first half of 1997.
In addition, as of June 30, 1997, two development projects are owned by
unconsolidated limited liability companies in which a subsidiary of the Company
is the general partner. These affiliates have entered into construction loan
agreements for $3.5 and $9.3 million, respectively, which have also been
guaranteed by the parent. Under these construction loan agreements, an aggregate
of $4.2 million was drawn and $8.6 million was available as of June 30, 1997.
Subsequent to June 30, 1997, an affiliate of the Company entered into an
additional construction loan agreement which has been guaranteed by the
parent in the ordinary course of business. This loan agreement is on similar
terms to those existing as of June 30, 1997, and is financing $8.2 million
for a build-to-suit office project.
NOTE 6 - LIABILITIES SUBJECT TO COMPROMISE
The Company is currently implementing a Prepackaged Plan to deleverage its
capital structure as discussed in Note 2. Liabilities subject to compromise
represent liabilities subject to adjustment in the reorganization process.
Liabilities subject to comprise consist of the following (in millions):
December 31, June 30,
1996 1997
------------ --------
Subordinated debt:
Senior Debentures $155.3 $164.6
Subordinated Debentures 38.8 41.1
------ ------
Total face amount 194.1 205.7
Liquidated, non-contingent claims 4.4 4.4
------ ------
Total allowed claims 198.5 210.1
Less unamortized discount (5.0) (4.6)
Plus accrued interest 6.8 7.2
------ ------
$200.3 $212.7
------ ------
------ ------
While the above amounts reflect interest accrued since March 15, 1997 in
accordance with generally accepted accounting principles, such accrued interest
will be discharged upon confirmation of the Prepackaged Plan. The
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Debentures give 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 has been paid in-kind. The Debentures, which are due March 15,
2002, do not require any sinking fund payments and may be redeemed by the
Company at any time in cash only, or at maturity in cash or stock, subject to
certain conditions.
The Company has 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 provide, 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 (2) years following their issuance in connection with the
completion of the Recapitalization. Neither Allied, General Chemical nor
Wolverine is currently a record or beneficial owner of any shares of the
Company's capital stock.
NOTE 7 - INCOME TAXES
Upon confirmation of the Prepackaged Plan, the Company will undergo an
"ownership change" under Section 382 of the Internal Revenue Code (the
"Code") defined as an 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. After the ownership change occurs, the Company's annual use of its
net operating losses ("NOL"s) would generally be limited to the value of the
Company's equity immediately before the ownership change multiplied by the
long-term tax-exempt rate, which is currently approximately 5.6%.
Section 382(l)(5) of the Code, the "bankruptcy exception", provides that
if the ownership change occurs in a bankruptcy, such as the Company's
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 filing on July 14, 1997, or the
debt must have arisen in the ordinary course of the Company's business. The
Company believes that it will qualify for the "bankruptcy exception" of
Section 382(l)(5). Under this exception, the Company would be required to
reduce its "NOLs" by (1) 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 (2) the amount required to make the
reduction equal to the difference between the tax basis and the fair market
value of the debt exchanged for equity. Accordingly, the Company's NOLs of
approximately $283 million as of June 30, 1997 will be reduced by
approximately $86 million, resulting in remaining NOLs available of
approximately $197 million. As reduced, and subject to any disallowance
resulting from the proposed IRS adjustments discussed below, the Company's
NOL carryovers would 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 effective date of a bankruptcy protected ownership change as the
result of a 50 percentage point change in ownership, the second ownership
change would not qualify for Section 382(l)(5)(D) 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 $197 million of NOLs.
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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 Prepackaged Plan. Accordingly, assuming a post-reorganization value of
approximately $140 million and a long-term tax exempt rate of 5.6%, the
Section 382(l)(6) limitation would limit the Company's utilization of its
NOLs to approximately $7.8 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 $197
million of NOLs available, which the Company has estimated could be fully
utilized over the next six years (1998-2003), whereas under Section 382(l)(6)
only approximately $47 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 consideration of the valuation allowance, as of
June 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. The Prepackaged Plan does not
impact the Company's potential liability with respect to its dispute with the
IRS.
Cash payments for federal, state and local income taxes were approximately
$.1 million for each of the six month periods ended June 30, 1996 and 1997.
NOTE 8 - 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
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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. The Prepackaged Plan
does not impact the Company's potential obligation with respect to the Torch
Lake Site.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal activities of the Company include: (i) obtaining zoning and
other entitlements for land it owns and improving the land for residential
development; (ii) single and multi-family residential construction in Southern
California; and (iii) providing commercial, industrial, retail and residential
development services to third parties, including feasibility studies,
entitlement coordination, project planning, construction management, financing,
marketing, acquisition, disposition and asset management services on a national
and international basis, through its offices throughout California, and in
Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the
residential land owned by the Company is entitled, the Company may sell
unimproved land to other developers or investors; sell improved land to
homebuilders; or participate in joint ventures with other developers, investors
or homebuilders to finance and construct infrastructure and homes. The Company
intends to consider additional real estate acquisition and joint venture
opportunities; however, the Company's immediate strategic goals are to
(i) obtain the California Coastal Commission's re-certification of the Bolsa
Chica Local Coastal Program ("LCP"); (ii) obtain new financing for development
of the Bolsa Chica mesa; (iii) complete the secondary permitting for development
of the Bolsa Chica mesa; (iv) commence infrastructure construction on the Bolsa
Chica mesa in the second quarter of 1998; (v) continue the growth of the
Company's commercial development business on a national and international basis;
and (vi) complete the recapitalization to deleverage the Company's capital
structure through the Prepackaged Plan (the "Recapitalization"). There can be no
assurance that the Company will accomplish, in whole or in part, all or any of
these strategic goals.
The Company has been over-leveraged since its December 1989 spin-off from
The Henley Group, Inc. when it had $290 million of debt (including $144 million
of subordinated debt 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. This excessive leverage was exacerbated by continual
delays between 1990 and 1996 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 approximately $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 the LCP for Bolsa Chica in
1996 and the sale of the Bolsa Chica lowlands in February 1997 to the California
State Lands Commission, 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 the California Coastal
Commission's re-certification of the LCP, which is expected to occur in October
1997 as described in Note 4 of Notes to Financial Statements.
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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. While future land sales are also expected to
approximate, or only modestly exceed, break-even, the net cash flow to be
generated by residential land development and sales is expected to
approximate $180 million in the aggregate over the next five years. In
addition, the continuing real estate recovery has increased the demand for
the Company's commercial real estate development services. Accordingly, the
Company expects that these operations will make a greater contribution to
gross operating margins over the next several years. Despite the expected
greater contribution from commercial development services, total gross
margins in 1997 are expected to be less than 1996 due to lower margins on
asset sales. Pursuant to Fresh Start Accounting, implementation of the
Recapitalization through the Prepackaged Plan will result in a write-down of
Bolsa Chica (which will reduce future costs of sales) and therefore, subject
to the re-certification of the Bolsa Chica LCP by the California Coastal
Commission which is expected to occur in October 1997, the Company hopes to
be able to generate profits beginning in 1998 from the Bolsa Chica project
and continued growth of its commercial development business.
Real estate held for development or sale and land held for development
(real estate properties) are carried at cost net of impairment losses based on
undiscounted cash flows. 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 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. Until recently, 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 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.
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, except for gains
on extinguishment of debt upon completion of the Recapitalization, expects to
report losses during 1997. However, a significant portion of such losses is
attributable to non-cash asset revaluations and non-cash interest expense on the
Debentures. The Company will continue to be dependent primarily on real estate
asset sales, and cash and cash equivalents on-hand to fund project development
costs for Bolsa Chica, general and administrative expenses and reorganization
costs during 1997. The Company is also seeking new financing for development of
Bolsa Chica and implementing the Recapitalization through the Prepackaged Plan
to deleverage the Company's capital structure.
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 $11.7 million at June 30, 1997.
The Company has executed option agreements with homebuilders which are
scheduled to purchase an aggregate of 119 remaining Phase I residential lots at
Rancho San Pasqual in Escondido, California for
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approximately $5.3 million during the remainder of 1997 and the first six months
of 1998. During the first six months of 1997, the Company completed sales of 111
residential lots at Rancho San Pasqual to homebuilders for approximately $5.1
million.
In recent years, the Company has incurred in excess of $20 million of
interest expense on the Debentures per year. Since the Debentures do not mature
until March 2002, it is possible that the Company could continue to operate
without facing a liquidity problem until 2002. Nevertheless, the Company
believes the current capital structure restricts its ability to maximize asset
values and grow its business. Therefore, as discussed in Note 2 of Notes to
Financial Statements, on July 14, 1997 the Company, excluding all of its
subsidiaries and affiliates, filed for court approval of the Prepackaged Plan
which received over 95% approval of each class of stock and bondholders that
voted through a recent public solicitation process. The court confirmation
hearing for the Prepackaged Plan is scheduled for August 19, 1997, and baring
any unforeseen circumstances, the Company expects to complete the
Recapitalization in early September.
FINANCIAL CONDITION
JUNE 30, 1997 COMPARED WITH DECEMBER 31, 1996
The $9.6 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
half of 1997, as well as other activity presented in the Statements of Cash
Flows.
The $25.0 million increase in real estate held for development or sale
primarily reflects investments in six build-to-suit projects aggregating
approximately $31.6 million, partially offset by sales of one build-to-suit
project on a portion of the Company's Signal Hill property and sales of
residential lots at Rancho San Pasqual.
The $22.8 million decrease in land held for development reflects the sale
of the Bolsa Chica lowlands, partially offset by investment in the Bolsa Chica
project during the first half of 1997.
The $2.0 million decrease in other assets primarily reflects the collection
of commercial development receivables, partially offset by investments in
pre-development costs for commercial projects.
The $7.4 million decrease in accounts payable and accrued liabilities
primarily reflects contractor payments 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.
The $29.6 million increase in project debt reflects borrowings on six
build-to-suit projects, partially offset by repayment of project debt upon the
sale of the Company's Signal Hill build-to-suit project.
The $3.5 million decrease in other liabilities primarily reflects the
settlement of certain claims during the second quarter of 1997.
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.
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1996
The $9.0 million decrease in asset sales revenues from $13.5 million in
1996 to $4.5 million in 1997, and the $8.1 million decrease in related costs of
asset sales from $12.4 million to $4.3 million primarily reflect the absence in
1997 of the 1996 sale of the Eagle Crest Golf Course at Rancho San Pasqual for
$6.1 million and decreases in Rancho San Pasqual lot sales and Michigan land
sales of $1.4 million and $1.3 million, respectively.
A $.8 million increase in revenues from commercial development operations
during the second quarter of 1997 as compared with the same period of 1996
was partially offset by the absence in 1997 of $.6 million of 1996 revenues
from golf course operations.
The $1.4 million decrease in gross operating margins from the 1996 to
1997 period primarily reflects the decrease in sales of Michigan land.
Commercial development operations have approximated break-even despite the
significant revenue growth in 1997 due to increased costs to expand the
business.
The $.8 million decrease in general and administrative expenses from the
1996 to 1997 period primarily reflects reduced costs of liability insurance
premiums and overhead related to residential operations.
The benefit for income taxes for the three months ended June 30, 1997 has
been offset by a corresponding valuation allowance.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30,
1996
The increase in revenues from asset sales of $14.0 million in 1996 to $33.4
million in 1997 and the increase in the related costs of sales from $12.7
million to $33.0 million primarily reflect the sale of the Bolsa Chica lowlands
for $25.0 million and the $3.1 million sale of the Signal Hill build-to-suit
project in 1997, partially offset by the 1996 sales of the Eagle Crest Golf
Course at Rancho San Pasqual and Michigan land.
A $.9 million increase in revenues from commercial development operations
during the first half of 1997 as compared with the same period of 1996 was
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 the decrease in sales of Michigan land. Commercial
development operations have approximated break-even despite the significant
revenue growth in 1997 due to increased costs to expand the business.
The $.9 million decrease in general and administrative expenses from the
1996 to 1997 period primarily reflects reduced costs of liability insurance
premiums and overhead related to residential operations.
The $.3 million increase in interest expense reflects a $1.4 million
increase in interest accrued on the subordinated debentures, partially offset by
lower interest on senior bank debt due to declining balances, followed by
repayment in February 1997.
The $2.6 million in other income, net for the six months ended June 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 a reduction in a
reserve for an indemnity obligation for which the Company has entered into a
settlement agreement.
The benefit for income taxes for the six months ended June 30, 1997 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 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 the
ability of the Company to successfully complete the Recapitalization, litigation
or appeals of regulatory approvals (including pending litigation challenging the
California Coastal Commission's approval of the Bolsa Chica project) 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. 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 No. 333-22121.
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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 6 of Notes to Financial Statements above and the Company's
Current Report on Form 8-K dated July 14, 1997 regarding the filing of the
Prepackaged Plan of Reorganization.
See Note 4 of Notes to Financial Statements above for a discussion
regarding the two lawsuits filed in the San Francisco County Superior Court on
March 6, 1996 and March 11, 1996 by the Bolsa Chica Land Trust, et al. and the
League for Coastal Protection et al., respectively. These suits 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Stockholders was held on June 19, 1997.
A quorum of Class A Common Stock and Preferred Stock was present in person or by
proxy. The following proposals were approved by the requisite vote of the
Company's stockholders entitled to vote as follows:
Proposal No. 1: THE EXCHANGE OFFERS PROPOSAL. The holders of Class A
Common Stock cast 21,986,509 votes for and 1,567,184 votes against the Company's
proposal to exchange Common Stock for Debentures (the "Exchange Offers
Proposal"). There were 1,301,770 abstentions and 15,444,460 broker non-votes by
the holders of shares of Class A Common Stock with respect to the Exchange
Offers Proposal. The holders of Preferred Stock cast 27,428,313 votes for and
786,597 votes against the Exchange Offers Proposal. There were 78,617
abstentions and 8,575,031 broker non-votes by the holders of shares of Preferred
Stock with respect to the Exchange Offers Proposal. Such votes constituted the
affirmative vote for the Exchange Offers Proposal of the holders of
approximately 54.6% and 74.4%, respectively, of the Class A Common Stock and
Preferred Stock of the Company represented in person or by proxy at the Annual
Meeting, at which the holders of a majority of the outstanding shares of Class A
Common Stock and Preferred Stock were represented in person or by proxy to
constitute a quorum.
Proposal No. 2: THE CAPITAL STOCK COMBINATION PROPOSAL. The holders
of Class A Common Stock cast 22,060,691 votes for and 1,579,385 votes against
the Company's proposal to effect the Capital Stock Combination subject to
completion of the Recapitalization (the "Capital Stock Combination Proposal").
There were 1,215,387 abstentions and 15,444,460 broker non-votes by the holders
of shares of Class A Common Stock with respect to the Capital Stock Combination
Proposal. The holders of Preferred Stock cast 27,433,853 votes for and 692,515
votes against the Capital Stock Combination Proposal. There were 166,925
abstentions and 8,575,265 broker non-votes by the holders of shares of Preferred
Stock with respect to the Capital Stock Combination Proposal. Such votes
constituted the affirmative vote for the Capital Stock Combination Proposal of
the holders of approximately 54.7% and 74.4%, respectively, of the Class A
Common Stock and Preferred Stock of the Company represented in person or by
proxy at the Annual Meeting, at which the holders of a majority of the
outstanding shares of Class A Common Stock and Preferred Stock were represented
in person or by proxy to constitute a quorum.
Proposal No. 3: THE REVERSE SPLIT PROPOSAL. The holders of Class A
Common Stock cast 36,825,404 votes for and 1,361,327 votes against the Company's
proposal to effect the Reverse Stock Split, subject to completion of the
Recapitalization (the "Reverse Split Proposal"). There were 1,186,884
abstentions and 926,308 broker non-votes by the holders of shares of Class A
Common Stock with respect to the Reverse Split Proposal. The holders of
Preferred Stock cast 36,367,942 votes for and 334,355 votes against the Reverse
Split Proposal. There were 166,261 abstentions and no broker non-votes by the
holders of shares of Preferred Stock with respect to the Reverse Split
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Proposal. Such votes constituted the affirmative vote for the Reverse Split
Proposal of the holders of approximately 91.4% and 98.6%, respectively, of the
Class A Common Stock and Preferred Stock of the Company represented in person or
by proxy at the Annual Meeting, at which the holders of a majority of the
outstanding shares of Class A Common Stock and Preferred Stock were represented
in person or by proxy to constitute a quorum.
Proposal No. 4: THE AUTHORIZED CAPITAL PROPOSAL. The holders of Class
A Common Stock cast 35,037,855 votes for and 1,296,826 votes against the
Company's proposal to change the Company's authorized capital stock to 18
million shares of Common Stock, subject to completion of the Recapitalization
(the "Authorized Capital Proposal"). There were 1,219,668 abstentions and
2,745,574 broker non-votes by the holders of shares of Class A Common Stock with
respect to the Authorized Capital Proposal. The holders of Preferred Stock cast
27,408,985 votes for and 835,719 votes against the Authorized Capital Proposal.
There were 164,993 abstentions and 8,458,861 broker non-votes by the holders of
shares of Preferred Stock with respect to the Authorized Capital Proposal. Such
votes constituted the affirmative vote for the Authorized Capital Proposal of
the holders of approximately 86.9% and 74.3%, respectively, of the Class A
Common Stock and Preferred Stock of the Company represented in person or by
proxy at the Annual Meeting, at which the holders of a majority of the
outstanding shares of Class A Common Stock and Preferred Stock were represented
in person or by proxy to constitute a quorum.
Proposal No. 8: THE DIRECTOR PROPOSAL. The Company's director
proposal provided alternative slates of director nominees to be elected (A) in
the event the Recapitalization is completed and the Board Proposal (described
below) is implemented, (B) in the event the Recapitalization is completed but
the Board Proposal is not implemented, and (C) in the event the Recapitalization
is not completed. At the Annual Meeting, each of the nominees under each of
scenario (A), (B) and (C) were elected by a vote equal to approximately 94.4% of
the votes cast for such directorships at the Annual Meeting. Such votes cast for
each of the nominees under scenarios (A), (B) and (C) constituted the
affirmative vote for each of the nominees of a plurality of the outstanding
shares of Class A Common Stock represented in person or by proxy at the Annual
Meeting, at which a majority of the outstanding shares of Class A Common Stock
were represented in person or by proxy to constitute a quorum. Although, as
described below, the Board Proposal, was not approved at the Annual Meeting,
scenario (A) would become effective upon the confirmation and implementation of
the Prepackaged Plan. Scenario (B) or (C) would become effective only if the
Recapitalization is completed without the implementation of the Board Proposal
or if the Recapitalization is not completed, respectively. Set forth below is a
table for each scenario describing the nominees, the terms of office for which
they were elected and how the votes were cast.
SCENARIO (A)
Class A Common
Stock Votes Cast Class A Common
Name Term Expiration "For" Nominee Stock Votes Withheld
- ---- --------------- ------------- --------------------
Donald M. Koll . . . . . 1998 38,761,585 1,538,388
J. Thomas Talbot . . . . 1998 38,766,175 1,533,748
Marco F. Vitulli . . . . 1998 38,766,071 1,533,852
Ray Wirta. . . . . . . . 1998 38,765,821 1,534,102
Phillip R. Burnaman II . 1998 38,766,109 1,533,814
James J. Gaffney . . . . 1998 38,764,673 1,535,250
Robert J. Gagalis. . . . 1998 38,765,981 1,533,942
Thomas W. Sabin, Jr. . . 1998 38,766,005 1,533,918
P. John Wickser II . . . 1998 38,766,005 1,533,918
Paul M. Zeller . . . . . 1998 38,766,111 1,533,812
21
<PAGE>
SCENARIO (B)
Class A Common
Stock Votes Cast Class A Common
Name Term Expiration "For" Nominee Stock Votes Withheld
- ---- --------------- ------------- --------------------
Robert J. Gagalis. . . . 1998 38,763,201 1,536,722
Donald M. Koll . . . . . 1999 38,764,831 1,535,092
Thomas W. Sabin, Jr. . . 1999 38,766,109 1,533,814
P. John Wickser II . . . 1999 38,766,109 1,533,814
Ray Wirta. . . . . . . . 2000 38,766,169 1,533,754
James J. Gaffney . . . . 2000 38,766,175 1,533,748
Phillip R. Burnaman II . 2000 38,766,071 1,533,852
Paul M. Zeller . . . . . 2000 38,766,109 1,533,814
SCENARIO (C)
Class A Common
Stock Votes Cast Class A Common
Name Term Expiration "For" Nominee Stock Votes Withheld
- ---- --------------- ------------- --------------------
Donald M. Koll . . . . . 1999 38,762,251 1,537,672
Paul C. Hegness. . . . . 1999 38,765,991 1,533,932
Ray Wirta. . . . . . . . 2000 38,766,169 1,533,754
Harold A. Ellis. . . . . 2000 38,765,957 1,533,966
Proposal No. 9: THE AUDITOR PROPOSAL. The holders of Class A Common
Stock cast 38,142,664 votes for and 924,465 votes against the Company's proposal
to ratify the appointment of Deloitte & Touche, LLP as the Company's independent
auditors for the fiscal year ending December 31, 1997 (the "Auditor Proposal").
There were 1,232,001 abstentions and 793 broker non-votes by the holders of
shares of Class A Common Stock with respect to the Auditor Proposal. Such votes
constituted the affirmative vote for the Auditor Proposal by the holders of
approximately 94.6% of the outstanding Class A Common Stock represented in
person or by proxy at the Annual Meeting, at which the holders of a majority of
the outstanding shares were present in person or by proxy to constitute a
quorum.
The proposals described below did not receive the requisite 80%
supermajority vote of the holders of Class A Common Stock and were therefore
not approved at the Annual Meeting. However, stockholder approval of these
proposals is not required in order for the Company to complete the
Recapitalization. Notwithstanding the Annual Meeting votes described below,
these proposals will be implemented through the Prepackaged Plan following
its confirmation, upon its effective date. Set forth below is a list of
proposals that were not approved at the Annual Meeting, and a description of
how the votes were cast with respect to such proposals.
Proposal No. 5: THE BOARD PROPOSAL. The holders of Class A Common
Stock cast 22,346,999 votes for and 1,172,615 votes against the Company's
proposal to permit any director to be removed, with or without cause, by the
vote of a majority of the shares of the capital stock of the Company, subject to
completion of the Recapitalization (the "Board Proposal"). There were 1,345,849
abstentions and 15,434,460 broker non-votes by the holders of shares of Class A
Common Stock with respect to the Board Proposal. Such votes constituted the
affirmative votes for the Board Proposal by the holders of approximately 45.7%
of the outstanding Class A Common Stock. The Board Proposal requested approval
for amending Articles Eighth and Thirteenth of the Restated Certificate and
Articles III and XI of the Bylaws to eliminate the classified board and to
delete 80% supermajority voting provisions to change the number of directors,
remove a director for cause or amend any provision applicable thereto, subject
to completion of the Recapitalization.
22
<PAGE>
Proposal No. 6: THE SPECIAL MEETINGS PROPOSAL. The holders of Class A
Common Stock cast 22,485,552 votes for and 1,098,513 votes against the Company's
proposal to amend Articles Ninth and Thirteenth of the Restated Certificate and
Articles II and XI of the Bylaws to permit the holders of 10% of the outstanding
shares of capital stock of the Company entitled to vote to call a special
meeting of the Company's stockholders and to remove 80% supermajority voting
provisions for amending Articles Ninth of the Restated Certificate and Article
II of the Bylaws with respect to such special meetings, subject to completion of
the Recapitalization (the "Special Meetings Proposal"). There were 1,271,400
abstentions and 15,444,458 broker non-votes by the holders of shares of Class A
Common Stock with respect to the Special Meetings Proposal. Such votes
constituted the affirmative vote for the Special Meetings Proposal by the
holders of approximately 46% of the outstanding Class A Common Stock.
Proposal No. 7: THE WRITTEN CONSENT PROPOSAL. The holders of Class A
Common Stock cast 35,269,535 votes for and 1,015,345 votes against the Company's
proposal to amend Article Tenth of the Restated Certificate to delete a
prohibition on stockholder action by written consent without a meeting and to
delete an 80% supermajority vote provision to amend or repeal provisions of
Article Tenth, subject to completion of the Recapitalization (the "Written
Consent Proposal"). There were 1,249,714 abstentions and 2,765,329 broker
non-votes by the holders of shares of Class A Common Stock with respect to the
Written Consent Proposal. Such votes constituted the affirmative vote for the
Written Consent Proposal by the holders of approximately 72.1% of the
outstanding Class A Common Stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Prepackaged Plan of Reorganization of Koll Real Estate Group,
Inc., incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 14, 1997.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated May 27, 1997 attaching a press
release issued on May 28, 1997 regarding the Bolsa Chica
litigation.
Current Report on Form 8-K dated June 4, 1997 attaching a press
release issued June 4, 1997 regarding the Bolsa Chica litigation.
Current report on Form 8-K dated July 14, 1997 regarding the
filing of the Prepackaged Plan of Reorganization.
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 8, 1997 /s/ RAYMOND J. PACINI
----------------- ---------------------------
RAYMOND J. PACINI
Executive Vice President and
Chief Financial Officer
23
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