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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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 Identification
incorporation or organization) No.)
4343 VON KARMAN AVENUE 92660
NEWPORT BEACH, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 833-3030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.05 PER SHARE
(TITLE OF CLASS)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES /X/ NO / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 1998 was $111,944,017.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 as of March 2, 1998,
including the shares to be delivered to former debenture holders upon surrender
of their debenture certificates, was 11,906,378.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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PART I
ITEM 1. BUSINESS
The Company is a residential land development and homebuilding company with
properties located primarily in Southern California. The principal activities of
the Company and its consolidated subsidiaries include: (i) obtaining zoning and
other entitlements for land it owns and improving the land for residential
development; (ii) single-family residential construction in Southern California;
and (iii) providing residential real estate development services to third
parties. Once the residential land owned by the Company is entitled, the Company
may sell unimproved land to other developers or homebuilders; sell improved land
to homebuilders; or participate in joint ventures with other developers,
investors or homebuilders to finance and construct infrastructure and homes. On
March 30, 1998, the Company executed an agreement to sell its commercial
development business as further described in Note 4 to the Company's Financial
Statements included in this Annual Report. The transaction is scheduled to
close, subject to various conditions, on April 30, 1998 unless extended by
agreement of the parties. The Company's immediate strategic goals are to (i)
successfully appeal the February 20, 1998 court decision which ordered a third
hearing before the California Coastal Commission (the "Coastal Commission") to
approve the Warner Mesa (formerly known as the Bolsa Chica mesa) project; (ii)
complete the permitting for development of Warner Mesa; and (iii) commence
infrastructure construction on Warner Mesa as soon as possible; however, the
Company may also consider other strategic and joint venture opportunities. There
can be no assurance that the Company will accomplish, in whole or in part, all
or any of these strategic goals.
The Company's executive offices are located at 4343 Von Karman Avenue,
Newport Beach, California 92660 (telephone: (714) 833-3030).
PRINCIPAL PROPERTIES
The following sections describe the Company's principal properties.
WARNER MESA. The Warner Mesa property is the principal property in the
Company's portfolio, located within the land area collectively known as Bolsa
Chica. Warner Mesa is one of the last large undeveloped coastal properties in
Southern California, and is located in Orange County, approximately 35 miles
south of downtown Los Angeles. Following the Company's February 1997 sale of its
approximately 880-acre Bolsa Chica lowlands property to the State of California,
as described below, and the September 1997 acquisition of 40 acres of lowlands,
the Company owns approximately 340 acres of the 1,600 acres of undeveloped land
at Bolsa Chica. The Company's holdings include approximately 200 acres to be
developed on the Warner Mesa, approximately 100 acres on, or adjacent to, the
Huntington mesa and approximately 40 acres of lowlands which were acquired in
September 1997. Warner Mesa is bordered on the north and east by residential
development, to the south by open space and the Bolsa Chica lowlands, and to the
west by the Pacific Coast Highway, the Bolsa Chica State Beach, and the Pacific
Ocean.
The planned community at Warner Mesa is expected to offer a broad mix of
home choices, including primarily single-family homes, as well as townhomes, at
a wide range of prices. A Local Coastal Program ("LCP") for development of up to
3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica
lowlands, which were subsequently sold as discussed below) was approved by the
Orange County Board of Supervisors in December 1994 and by the Coastal
Commission in January 1996.
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 Warner Mesa ("Warner Pond") and
development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in
response to the court's decision, the Coastal Commission approved modifications
to the LCP which
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eliminated the filling of Warner Pond and thereby reduced the maximum density
from 2,500 homes to no more than 1,235 homes on Warner Mesa. On November 18,
1997 and February 3, 1998, the Orange County Board of Supervisors approved the
Coastal Commission's suggested modifications.
On February 20, 1998, the court ruled that the Coastal Commission should not
have narrowed the scope of public comments during the Coastal Commission's
October 1997 hearing, and ordered the Coastal Commission to hold a third hearing
on the LCP. The Company intends to appeal the court's latest decision, as well
as pursue all other available legal and administrative options. The court's
ruling will delay the previously planned start of infrastructure construction
beyond December 31, 1998; however, the Company is unable to predict the length
of such delay at this time. The Company does not believe that the recent court
decision will permanently prevent the Company from completing the Warner Mesa
project; however, there can be no assurance in that regard or that further
delays will not result. See "Item 3 - Legal Proceedings" for a further
discussion of pending litigation.
On February 14, 1997, the Company completed the sale of its approximately
880-acre Bolsa Chica lowlands, which had previously been planned for the
development of up to 900 homes, to the California State Lands Commission for $25
million. Under an interagency agreement among various state and federal
agencies, these agencies have agreed to restore the Bolsa Chica wetlands habitat
utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve
of $1.5 million was included in the Company's Balance Sheet as of December 31,
1996, with respect to potential costs payable by the Company under agreements
negotiated with the State Lands Commission and certain oil field operators
regarding environmental clean-up at the Bolsa Chica lowlands. See Note 5 to the
Company's Financial Statements included in this Annual Report. In connection
with the sale of the Bolsa Chica lowlands, the Company paid $833,333 of these
costs at closing, leaving a reserve balance of $700,000 on its balance sheet as
of December 31, 1997 for potential additional clean-up costs.
Upon completion of the recapitalization of the Company on September 2, 1997,
as discussed in Note 3 to the Company's Financial Statements included in this
Annual Report, the Company applied the principles required by Fresh-Start
Reporting and the carrying value of land held for development (Warner Mesa) was
adjusted to fair value as of September 2, 1997, after consideration of the
October 9, 1997 Coastal Commission action discussed above. 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 Warner Mesa to no more than 1,235 homes in its determination
of the Warner Mesa project's fair value as of September 2, 1997 and as reflected
in the Company's balance sheet as of December 31, 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 Warner Mesa development should 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;
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(v) the number of acres available for development; and
(vi) the project development costs.
The Company believes that the lower number of residential units will not
materially reduce the Warner Mesa project's fair value; however, there can be no
assurance in this regard.
RANCHO SAN PASQUAL (FORMERLY EAGLE CREST). In the City of Escondido in San
Diego County, approximately 30 miles north of downtown San Diego, the Company is
developing an 850-acre, gated community consisting of 580 residential lots
surrounding an 18-hole championship golf course which the Company operated from
May 1993 to June 1996. The Company sold its Eagle Crest Golf Course at Rancho
San Pasqual in June 1996, to a nationally recognized owner/operator of high-end
daily fee golf courses and private country clubs for $6.1 million.
Infrastructure construction was partially financed in 1995 and 1996 by a major
financial institution which provided a total of $10 million in construction
loans for the project. During the years ended 1996 and 1997, the Company sold
218 and 215 residential lots, respectively, at Rancho San Pasqual to four
homebuilders for gross proceeds aggregating approximately $10.1 million and $9.8
million, respectively. The remaining 35 phase I residential lots are scheduled
to be sold in April 1998 to a homebuilder for approximately $1.6 million. The
Company is evaluating its alternatives with respect to the 112 lots remaining in
phase II and expects to either build such homes or sell these lots to another
homebuilder.
FAIRBANKS HIGHLANDS. This property consists of approximately 390 acres near
the communities of Fairbanks Ranch and Rancho Santa Fe in the northern part of
the City of San Diego. The approved vesting tentative map includes 93
single-family residential lots averaging 1.34 acres each and approximately 215
acres of open space. In December 1996, the Company formed a joint venture with a
major homebuilder to develop this property. Under the terms of the joint venture
agreement, the Company contributed its land to the venture at market value of
$7.6 million in exchange for an initial cash payment of $4 million, a preferred
return on its $3.6 million capital contribution and a continuing partnership
interest in the venture. The Company's partner is managing the day-to-day
operations of the venture, providing all construction financing and expects to
build all of the homes at the site. Infrastructure construction is scheduled to
begin in mid-1998, homebuilding in October 1998 and home sales are expected to
commence in February 1999.
ALISO VIEJO. Through a subsidiary, the Company owns a 49% general
partnership interest in a 230-acre project, planned for approximately 1,200
single-family residential units in southern Orange County. The property is well
located, within close proximity to transportation infrastructure, employment
centers and other attractions, including the Orange County (John Wayne) Airport
(approximately 15 miles), the San Joaquin Hills Transportation Corridor (a
quarter mile) and Laguna Beach (approximately 10 minutes). Homes are now offered
for sale at all twelve planned communities, and a total of 665 homes have been
sold and 189 homes were in escrow as of March 2, 1998. However, due to a
significant shortfall in sales during 1995 (following the Orange County
bankruptcy) versus forecast, the highly leveraged capital structure of the
partnership and the significant amount of participating mortgages with
preference to the Company's equity interest, the Company does not expect to
receive a financial return from this partnership and established a reserve in
1995 as discussed in Note 4 to the Company's Financial Statements included in
this Annual Report.
OTHER PROPERTIES. The Company owns land zoned for commercial/industrial use
in Signal Hill, California, and resort/residential property in Michigan. These
properties are currently held for sale, subject to market conditions.
PROPERTY DISPOSITIONS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's property dispositions during 1995, 1996 and 1997.
ENVIRONMENTAL AND REGULATORY MATTERS. Before the Company can develop a
property, it must obtain a variety of discretionary approvals from local and
state governments, as well as the federal government in
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certain circumstances, with respect to such matters as zoning, subdivision,
grading, architecture and environmental matters. The entitlement approval
process is often a lengthy and complex procedure requiring, among other things,
the submission of development plans and reports and presentations at public
hearings. Because of the provisional nature of these approvals and the concerns
of various environmental and public interest groups, the approval process can be
delayed by withdrawals or modifications of preliminary approvals and by
litigation and appeals challenging development rights. Accordingly, the ability
of the Company to develop properties and realize income from such projects could
be delayed or prevented due to litigation challenging recently obtained
governmental approvals.
As more fully described above, in October 1997, the Coastal Commission
approved Orange County's residential development plan for Warner Mesa with
suggested modifications, in response to an August 1997 trial court order in
connection with the Coastal Act Lawsuit. As further described above, in February
1998, the trial court decided that the Coastal Commission should hold a third
hearing on the LCP. Therefore, the approval process for the Warner Mesa property
remains subject to the litigation described above, and there can be no assurance
that further delays will not result.
The Company has expended and will continue to expend significant financial
and managerial resources to comply with environmental regulations and local
permitting requirements. Although the Company believes that its operations are
in general compliance with applicable environmental regulations, certain risks
of unknown costs and liabilities are inherent in developing and owning real
estate. However, the Company does not believe that such costs will have a
material adverse effect on its business, financial condition or results of
operations, including the potential remediation expenditures proposed in
connection with certain indemnity obligations discussed below in "Corporate
Indemnification Matters."
CORPORATE INDEMNIFICATION MATTERS. The Company and its predecessors have,
through a variety of transactions effected since 1986, disposed of several
assets and businesses, many of which are unrelated to the Company's current
operations. By operation of law or contractual indemnity provisions, the Company
may have retained liabilities relating to certain of these assets and
businesses, including certain tax liabilities. See Notes to the Company's
Financial Statements included in this Annual Report. Many of such liabilities
are supported by insurance or by indemnities from certain of the Company's
predecessors and currently or previously affiliated companies. The Company
believes its balance sheet reflects adequate reserves for these matters.
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 AlliedSignal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However,
AlliedSignal 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 would pay between $2.6 and
$3.3 million in exchange for a limited covenant by EPA not to sue UOP in the
future. The Company, without admission of any obligation to UOP, has determined
to vigorously defend UOP's position that the EPA's proposed cleanup plan is
unnecessary and inconsistent with the requirements of CERCLA given that the
EPA's own Site Assessment and Record of Decision found no immediate threat to
human health. In the Company's view the proposed remediation costs would be in
excess of any resulting benefits.
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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.
EMPLOYEES. As of March 2, 1998 the Company and its subsidiaries had
approximately 172 employees, approximately 89 of which are engaged in the
commercial development business which is scheduled to be sold as discussed in
Note 4 to the Company's Financial Statements included in this Annual Report.
YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
In 1998, the Company will initiate a conversion from existing accounting
software to programs that are Year 2000 compliant. Management believes that the
Year 2000 issue will not pose significant operational problems for its computer
systems. The Company will also conduct formal communications with all of its
significant suppliers to determine the extent to which those third parties'
failure to remediate their own Year 2000 issue may pose problems for the
Company. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project within one year but not later than
October 31, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project will be expensed as incurred
and is not expected to have a material effect on the Company's results of
operations.
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 "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" 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 related to the Company's principal
asset, Warner Mesa), injunctions prohibiting implementation of approved
development plans pending the outcome of litigation, 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.
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EXECUTIVE OFFICERS OF THE COMPANY
Mr. Donald M. Koll is also an executive officer of The Koll Company ("Koll")
and its affiliates. Accordingly, Mr. Koll devotes less than all of his working
time to the businesses of the Company. Set forth below is information with
respect to each executive officer.
<TABLE>
<CAPTION>
NAME AND TITLE AGE* BUSINESS EXPERIENCE
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<S> <C> <C>
Donald M. Koll 64 Chairman of the Board of the Company since March 1993
Chairman of the Board and Chief Executive and Chief Executive Officer since October 1996. Managing
Officer Director - President and Director of the Company since
prior to 1993. Chairman of the Board and Chief Executive
Officer of Koll (general contracting and international
real estate development since prior to 1993) and a
director of CB Commercial Real Estate Services Group,
Inc. ("CB") which acquired Koll Management Services,
Inc., also known as Koll Real Estate Services ("KRES")
(real estate management), in August 1997. Also a
Director of Fidelity National Financial, Inc. since
March 1995.
Richard M. Ortwein 56 President of the Company since October 1993. President
President of the Southern California Division of Koll and
Executive Vice President of KRES prior to 1993. Director
of KRES from prior to 1993 to March 1994.
Raymond J. Pacini 42 Executive Vice President and Secretary of the Company
Executive Vice President, since 1993. Chief Financial Officer and Treasurer of the
Chief Financial Officer, Company since prior to 1993. Executive Vice President
Treasurer and Secretary and Chief Financial Officer of KRES from March to
November 1993.
Sandra G. Sciutto 37 Senior Vice President of the Company since February 1996
Senior Vice President and and Controller of the Company since March 1993. Group
Controller Controller of KRES from prior to 1993 until October
1993.
</TABLE>
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* As of March 2, 1998
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Newport Beach,
California. The Company and each of its subsidiaries believe that their
properties are generally well maintained, in good condition and adequate for
their present and proposed uses. The inability to renew any short-term real
property lease would not be expected to have a material adverse effect on the
Company's results of operations.
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The principal properties of the Company and its subsidiaries, which are
owned in fee unless otherwise indicated, are as follows:
<TABLE>
<CAPTION>
PROPERTY LOCATION ACRES PRESENT OR PLANNED USE
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<S> <C> <C> <C>
Newport Beach* Newport Beach, CA -- Headquarters
Warner Mesa and other holdings at Huntington Beach, CA 340 Oceanfront residential community
Bolsa Chica
Rancho San Pasqual Escondido, CA 475 Residential community
Fairbanks Highlands** San Diego, CA 390 Residential community
Aliso Viejo** Aliso Viejo, CA 60 Residential community
Michigan Land Upper Peninsula, MI 450 Resort/residential lots
Signal Hill Signal Hill, CA 2 Industrial land
</TABLE>
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* Leased
** Minority interest in partnership or limited liability company
ITEM 3. LEGAL PROCEEDINGS
In January 1995, the CEQA 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, the Coastal Act Lawsuit was filed in the San Francisco County
Superior Court (and later removed to San Diego Superior Court) by the Bolsa
Chica Land Trust, et al. 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 in January 1996 was not in compliance with the
Coastal Act and other statutory requirements. The Coastal Act Lawsuit sought to
set aside the approval of the Warner Mesa project. In August 1997, the San Diego
Superior Court rendered a judgment that returned the 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 Warner
Mesa ("Warner Pond") is not in compliance with the Coastal Act. With respect to
the Warner Mesa, the court determined in August 1997 that the Coastal Commission
failed to weigh and resolve a conflict in Coastal Act policies related to the
proposed filling of Warner Pond. The court's August 1997 decision required the
Coastal Commission to reconsider its treatment of Warner Pond. In every other
respect, the court denied challenges to the Coastal Commission's approval of the
LCP for development of the mesa. The court specifically approved the Coastal
Commission's findings with regard to (i) the relocation of raptor habitat, (ii)
the adequacy of a buffer between the new residential development and the
lowlands, and (iii) treatment of archeological resources. 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 and February 3, 1998, the Orange County Board of Supervisors
accepted the Coastal Commission's suggested modifications without change.
On February 20, 1998, the court ruled that the Coastal Commission should not
have narrowed the scope of public comments during the Coastal Commission's
October 1997 hearing, and ordered the Coastal Commission to hold a third hearing
on the LCP. The Company intends to appeal the court's latest decision, as well
as pursue all other available legal and administrative options. The court's
ruling will delay the previously planned start of infrastructure construction
beyond December 31, 1998; however, the
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Company is unable to predict the length of such delay at this time. The Company
does not believe that the recent court decision will permanently prevent the
Company from completing the Warner Mesa project; however, there can be no
assurance in that regard or that further delays will not result.
In October 1997, the Company entered into a mutual settlement and release
agreement with Svedala Industries, Inc. ("Svedala") to settle the Svedala
litigation, 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. 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. The lawsuit was filed on March 31,
1994, in New Jersey Superior Court in Morris County, New Jersey. Svedala filed a
Second Amended Complaint on August 16, 1994. 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 lawsuit alleges that
Nichols, which is a wholly-owned subsidiary of New Henley Holdings Inc., which
is a direct wholly-owned subsidiary of the Company, is responsible, in whole or
in part, for contaminating the property with hazardous substances during
Nichols' operations there from the 1940's to the 1970's. Nichols has not engaged
in business operations since approximately 1983. New Henley Holdings Inc.
acquired the stock of Nichols in 1989, after Nichols was no longer operational.
On February 9, 1995, Nichols filed for Chapter 7 bankruptcy protection. On July
19, 1995, the Nichols' bankruptcy plan was approved and the case was closed. On
or about October 11, 1995, Svedala served a Third Amended Complaint on New
Henley Holdings Inc. and The Henley Group, Inc., which was the parent company of
New Henley Holdings Inc. and was a direct wholly-owned subsidiary of the
Company, alleging that they are liable for the purported acts of Nichols that
allegedly resulted in whole or in part, in Svedala's cleanup costs. In April
1997, The Henley Group, Inc. was merged into the Company. Neither the Company,
The Henley Group, Inc. nor New Henley Holdings Inc. (collectively, "Henley") has
been ordered by any federal, state or local agency to undertake any remediation
at the Property. On December 15, 1995, Henley moved to dismiss Svedala's action
for lack of jurisdiction and on the basis that Henley is not liable as a
successor for Nichols' liability. The Superior Court denied the motion without
prejudice and ordered discovery on these defenses. Attorneys for both Svedala
and the Company have agreed to suspend discovery pending action by the court on
the proposed bar order required under the settlement agreement.
On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a
lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division,
naming, among others, the Company and WT/ HRC Corporation, a direct subsidiary
of the Company, as defendants in a complaint for declaratory relief and breach
of contract and indemnification. The complaint alleges that WT/HRC owes Whiting
a defense and indemnity for several hundred asbestos cases pending in several
states, as well as for similar asbestos claims which may be filed in the future.
The complaint states no specified amount of damages. All claims against the
Company were dismissed in early 1998, and WT/HRC is now the only named
defendant. The lawsuit is based on a 1983 Asset Purchase Agreement in which the
seller, Whiting-Illinois (now named WT/HRC), sold assets and the business of its
"Whiting Engineered Products Group" to plaintiff's predecessor in interest.
Whiting contends that the seller agreed in the Asset Purchase Agreement to
indemnify Whiting for personal injury, sickness, death or property damages
claims which arise from occurrences predating the closing date (December 30,
1983). The Company has denied the allegations in the complaint and has
vigorously defended the action. At present, no claims are asserted against the
Company itself; instead, the only remaining claims are directed against its
subsidiary, WT/HRC.
On July 14, 1995, the Grandview/Crest Homeowners Association, representing
owners of 341 condominium units, filed a lawsuit in the Orange County Superior
Court naming as defendants Lake Forest Properties, Signal Landmark, Inc., now
known as Signal Landmark ("Signal"), and Onyx Land Company, as well as various
unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a
California joint venture which was the developer of the subject 341-unit
condominium project. Lake Forest
9
<PAGE>
Properties had two joint venture partners, Signal, an indirect subsidiary of the
Company, and Onyx Land Company which was a wholly-owned subsidiary of Signal,
which was dissolved and its assets transferred to Signal on December 31, 1988.
Lake Forest Properties also was dissolved effective December 31, 1988. The
original complaint for construction defects alleges warranty, liability,
negligence and breaches of covenants, conditions and restrictions, and of
fiduciary duties. On June 25, 1996, the Plaintiff filed a First Amended
Complaint alleging that structural distress, life-safety hazards, and extensive
water intrusion have resulted from the alleged defects in construction estimated
in September 1997 at a preliminary cost of approximately $20.4 million. On March
23, 1998 the Company entered into a mutual settlement agreement with the
plaintiff as well as with the Company's insurance carriers which have
responsibility for the claims. The Company and its insurance carriers have
agreed that the insurance carriers will bear primary responsibility for the $4.6
million settlement and related legal and other costs of defense, subject to the
Company's approximately $.6 million contribution for deductibles, which does not
exceed previously established reserves in the Company's balance sheet.
On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class
action complaint in San Diego Superior Court for breach of warranties, strict
liability, negligence, breach of contract, products liability, intentional
misrepresentation, fraud and deceit, and negligent representation against
Signal, and a former subsidiary of Signal, for damages allegedly arising out of
construction deficiencies at the plaintiffs' homes in Coronado, California (the
"Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al.,
filed a first amended complaint against Signal and its former subsidiary for the
same causes of action. On September 17, 1997, plaintiffs filed a second amended
complaint for construction deficiencies in the names of 126 of the homeowners in
Coronado, California, as well as the Homeowners Association. On March 3, 1998
the plaintiffs asserted a claim of $13.0 million. The Company is vigorously
contesting this lawsuit and is holding discussions with its insurance carriers
with responsibility for the claims. The Company expects its insurance carriers
to bear primary responsibility for such claims, subject to deductibles; however,
there can be no assurances in that regard. The Company believes that any
liability not covered by insurance for the Coronado Lawsuit will not exceed
previously established reserves with respect to such uninsured liability which
is reflected in the Company's balance sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following tables set forth information with respect to bid quotations
for the Common Stock of the Company for the periods indicated as reported by
NASDAQ. These quotations are interdealer prices without retail markup, markdown
or commission and may not necessarily represent actual transactions. The new
Common Stock began trading on September 2, 1997 concurrent with the
Recapitalization and the one for one hundred (1:100) reverse stock split.
Accordingly, prices for the old common shares have been restated to reflect the
1:100 reverse stock split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
First Quarter.............................................................. $ 18.75 $ 12.50
Second Quarter............................................................. $ 18.75 $ 9.38
Third Quarter.............................................................. $ 14.00 $ 9.38
Fourth Quarter............................................................. $ 12.50 $ 11.50
1996
First Quarter.............................................................. $ 53.13 $ 25.00
Second Quarter............................................................. $ 31.25 $ 15.63
Third Quarter.............................................................. $ 25.00 $ 15.63
Fourth Quarter............................................................. $ 25.06 $ 12.50
1995
First Quarter.............................................................. $ 50.00 $ 34.40
Second Quarter............................................................. $ 46.90 $ 31.30
Third Quarter.............................................................. $ 59.40 $ 34.40
Fourth Quarter............................................................. $ 46.90 $ 25.00
</TABLE>
The number of holders of record of the Company's Common Stock as of December
31, 1997 was approximately 12,000. The Company has not paid any cash dividends
on its Common Stock to date, nor does the Company currently intend to pay
regular cash dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data with respect to the Company and its subsidiaries
are set forth on pages F-1 to F-2 of this Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth beginning on page F-3 of this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, schedules and supplementary data of the Company and
its subsidiaries, listed under Item 14, are submitted as a separate section of
this Annual Report, commencing on page F-10.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information appearing under the caption "Election of
Directors" of the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference in this Annual Report.
EXECUTIVE OFFICERS. Information with respect to executive officers appears
under the caption "Executive Officers of the Company" in Item 1 of this Annual
Report.
ITEM 11. EXECUTIVE COMPENSATION
Information in answer to this Item appears under the caption "Compensation
of Directors and Executive Officers" of the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders and is incorporated herein by reference in
this Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in answer to this Item appears under the captions "Voting
Securities and Principal Holders Thereof" and "Election of Directors" of the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, and is
incorporated herein by reference in this Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in answer to this Item appears under the captions "Certain
Transactions" and "Compensation of Directors and Executive Officers" of the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, and is
incorporated herein by reference in this Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following financial statements and supplementary data of the Company are
included in a separate section of this Annual Report on Form 10-K commencing on
the page numbers specified below:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Selected Financial Data.......................................................................... F-1
Management's Discussion and Analysis of Financial Condition and Results of Operations............ F-3
Independent Auditors' Report..................................................................... F-9
Balance Sheets as of December 31, 1996 and 1997.................................................. F-10
Statements of Operations for the Years Ended December 31, 1995, 1996, the
Eight-Month Period Ended September 2, 1997 and the Four-Month Period ended December 31, 1997.... F-11
Statements of Cash Flows for the Years Ended December 31, 1995, 1996, the
Eight-Month Period Ended September 2, 1997 and the Four-Month Period ended December 31, 1997.... F-12
Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997........ F-13
Notes to Financial Statements.................................................................... F-14
</TABLE>
12
<PAGE>
(2) Financial Statement Schedules:
All schedules have been omitted since they are not applicable, not required,
or the information is included in the financial statements or notes thereto.
(3) Listing of Exhibits:
<TABLE>
<CAPTION>
3.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference
to Exhibit 4.02 to the Registrant's Post-Effective Amendment No. 4 to Form S-4,
Registration Statement No. 333-29883, filed August 28, 1997.
<C> <S>
3.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the
Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No.
333-29883, filed August 28, 1997.
4.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference
to Exhibit 4.02 to the Registrant's Post-Effective Amendment No. 4 to Form S-4,
Registration Statement No. 333-29883, filed August 28, 1997.
4.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the
Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No.
333-29883, filed August 28, 1997.
10.01 Tax Sharing Agreement dated as of December 18, 1989, between the Registrant and The
Henley Group, Inc. ("Henley Group"), incorporated by reference to Exhibit 10.03 to
the Registrant's Annual Report on Form 10-K for 1989.
10.02 Tax Sharing Agreement dated as of December 15, 1988, between Wheelabrator
Technologies, Inc. (formerly The Wheelabrator Group, Inc.) ("WTI") and the
Registrant ("WTI Tax Sharing Agreement"), incorporated by reference to Exhibit
10.02 to Amendment No. 3 on Form 8 to the Registrant's Registration Statement on
Form 10.
10.02A Amendment No. 1 to WTI Tax Sharing Agreement dated February 14, 1994, incorporated
by reference to Exhibit 10.02A to the Registrant's Annual Report on Form 10-K for
1993.
10.03 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.03A
to the Registrant's Annual Report on Form 10-K for 1993.
10.04 Deferred Compensation Plan for Non-Employee Directors of the Registrant,
incorporated by reference to Exhibit 10.14 to the Registrant's Registration
Statement on Form 10.
10.05 Retirement Plan for Non-Employee Directors of the Registrant, incorporated by
reference to Exhibit 10.15 to the Registrant's Registration Statement on Form 10.
10.06 Retirement Plan of the Registrant, incorporated by reference to Exhibit 10.16 to
Amendment No. 3 on Form 8 to the Registrant's Registration Statement on Form 10.
10.06A Amendment to Retirement Plan of the Registrant dated December 8, 1993, incorporated
by reference to Exhibit 10.07A to the Registrant's Annual Report on Form 10-K for
1993.
10.07 The Koll Company 401(k) Plus Plan and Trust Agreement dated July 1, 1989 under
which the Registrant elected to participate as an employer effective as of October
1, 1993, incorporated by reference to Exhibit 10.08 to the Registrant's Annual
Report on Form 10-K for 1993.
</TABLE>
13
<PAGE>
<TABLE>
<C> <S>
10.08 Restated Environmental Matters Agreement dated as of July 28, 1989, among a
predecessor to the Registrant, AlliedSignal, New Hampshire Oak, Fisher Scientific
Group Inc. ("Fisher Group") and the Registrant, incorporated by reference to
Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989 as amended by the Assignment, Assumption and Indemnification
Agreement dated as of December 21, 1989, among the Registrant, Henley Group, New
Hampshire Oak, Fisher Group, WTI and AlliedSignal, incorporated by reference to
Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for 1989.
10.09 Environmental Expenditures Agreement dated as of July 28, 1989, among the
Registrant, WTI, New Hampshire Oak and Fisher Group, incorporated by reference to
Exhibit 10(b) to the Registrant's quarterly report on Form 10-Q for the quarter
ended June 30, 1989 as amended by Assignment and Assumption Agreement dated as of
January 1, 1990, among the Registrant, Henley Group, New Hampshire Oak, Fisher
Group, WTI and Henley Holdings, Inc., incorporated by reference to Exhibit 10.22 to
the Registrant's Annual Report on Form 10-K for 1989.
10.10 Tax Sharing Agreement dated as of June 10, 1992, between Henley Group and Abex
Inc., incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report
on Form 10-K for 1992.
10.11 Financing and Accounting Services Agreement dated as of September 30, 1993 between
the Registrant and The Koll Company, incorporated by reference to Exhibit 10.21 to
the Registrant's Annual Report on Form 10-K for 1993.
10.12 Management Information Systems and Human Resources Services Agreement dated as of
September 30, 1993 between the Registrant and Koll Management Services, Inc.,
incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for 1993.
10.13 License Agreement dated September 30, 1993 between the Registrant, The Koll Company
and Mr. Donald M. Koll, incorporated by reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
10.13A Amendment No. 1 to the License Agreement, incorporated by reference to Exhibit
10.19A to Amendment No. 2 to the Form S-4 Registration Statement, Registration No.
333-22121, filed April 29, 1997.
10.14 Asset Purchase Agreement ("Asset Agreement") dated as of September 30, 1993 between
the Registrant and The Koll Company, incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.14A Amendment No. 1 to the Asset Agreement dated as of December 20, 1993, incorporated
by reference to Exhibit 10.18A to the Registrant's Annual Report on Form 10-K for
1993.
10.14B Amendment No. 2 to the Asset Agreement, incorporated by reference to Exhibit 10.20B
to Amendment No. 2 to the Form S-4 Registration Statement, Registration No.
333-22121, filed April 29, 1997.
10.15 Sublease Agreement dated September 30, 1993 between the Registrant and the Koll
Company, incorporated by reference to Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for 1993.
10.16 Netting Agreement dated as of October 1, 1993 between a subsidiary of the
Registrant and an executive officer of the Registrant, together with a schedule
identifying five (5) substantially identical documents not filed therewith,
incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.
</TABLE>
14
<PAGE>
<TABLE>
<C> <S>
10.17 Agreement of Limited Partnership dated as of October 1, 1993 between a subsidiary
of the Registrant and an executive officer of the Registrant, together with a
schedule identifying five (5) substantially identical documents not filed
therewith, incorporated by reference to Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
10.18 Agreement Respecting Vesting of Rights dated as of October 1, 1993 between a
subsidiary of the Registrant and an executive officer of the Registrant, together
with a schedule identifying five (5) substantially identical documents not filed
therewith, incorporated by reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
10.19 Koll Asia Pacific Development Services Amended and Restated Pacific Rim Joint
Business Opportunity Agreement, dated as of May 24, 1996, incorporated by reference
to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
10.20 Bargain Purchase and Sale Agreement and Escrow Instructions dated as of February
14, 1997 between a subsidiary of the Registrant and the State of California, acting
by and through the State Lands Commission, incorporated by reference to Exhibit
10.26 to Registrant's Annual Report on Form 10-K for 1996.
10.21 Employment Agreement between the Registrant and Mr. Donald M. Koll, incorporated by
reference to Exhibit 10.28 to Amendment No. 2 to the Form S-4 Registration
Statement, Registration No. 333-22121, filed April 29, 1997.
10.22 Employment Agreement between the Registrant and Mr. Richard M. Ortwein,
incorporated by reference to Exhibit 10.29 to Amendment No. 2 to the Form S-4
Registration Statement, Registration No. 333-22121, filed April 29, 1997.
10.23 Employment Agreement between the Registrant and Mr. Raymond J. Pacini, incorporated
by reference to Exhibit 10.30 to Amendment No. 2 to the Form S-4 Registration
Statement, Registration No. 333-22121, filed April 29, 1997.
10.24 Consulting Agreement between the Registrant and Mr. Ray Wirta, incorporated by
reference to Exhibit 10.31 to Amendment No. 2 to Form S-4 Registration Statement,
Registration No. 333-22121, filed April 29, 1997.
10.25 KREG Operating Co. Stock Purchase Agreement dated as of March 30, 1998 between the
Registrant and Koll Development Company LLC and certain affiliates.*
21.01 Subsidiaries of the Registrant.*
27.01 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K:
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.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Date: March 30, 1998
KOLL REAL ESTATE GROUP, INC.
By /s/ RAYMOND J. PACINI
-----------------------------------------
Raymond J. Pacini
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
NAME TITLE DATE
- ------------------------------ ------------------------------ ---------------
Chairman of the Board and
/s/ DONALD M. KOLL Chief Executive Officer
- ------------------------------ (Principal Executive March 30, 1998
Donald M. Koll Officer)
Executive Vice President and
/s/ RAYMOND J. PACINI Chief Financial Officer
- ------------------------------ (Principal Financial and March 30, 1998
Raymond J. Pacini Accounting Officer)
/s/ PHILIP R. BURNAMAN II
- ------------------------------ Director March 30, 1998
Philip R. Burnaman II
/s/ JAMES J. GAFFNEY
- ------------------------------ Director March 30, 1998
James J. Gaffney
/s/ ROBERT J. GAGALIS
- ------------------------------ Director March 30, 1998
Robert J. Gagalis
/s/ THOMAS W. SABIN, JR.
- ------------------------------ Director March 30, 1998
Thomas W. Sabin, Jr.
/s/ J. THOMAS TALBOT
- ------------------------------ Director March 30, 1998
J. Thomas Talbot
/s/ MARCO F. VITULLI
- ------------------------------ Director March 30, 1998
Marco F. Vitulli
/s/ JOHN WICKSER II
- ------------------------------ Director March 30, 1998
John Wickser II
/s/ RAY WIRTA
- ------------------------------ Director March 30, 1998
Ray Wirta
/s/ PAUL M. ZELLER
- ------------------------------ Director March 30, 1998
Paul M. Zeller
16
<PAGE>
KOLL REAL ESTATE GROUP, INC.
SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Company and its
consolidated subsidiaries, which has been reclassified for prior periods to
present the commercial development business as discontinued operations (see Note
4 to the Company's Financial Statements). On September 2, 1997, the Company
completed a recapitalization under chapter 11 of the bankruptcy code (see Note 3
to the Company's Financial Statements). The following information should be read
in conjunction with the financial statements beginning on page F-10 of this Form
10-K.
<TABLE>
<CAPTION>
PREDECESSOR CO. SUCCESSOR CO.
--------------------------------------------------------- -------------
EIGHT-MONTH FOUR-MONTH
PERIOD PERIOD
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------------------------ SEPTEMBER 2, DECEMBER 31,
1993 1994 1995 1996 1997 1997(H)
--------- --------- --------- --------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments(a)........................... $ 43.5 $ 13.0 $ 4.8 $ 2.1 $ 7.2
Total assets(a)............................ 435.6 413.3 276.1 256.6 173.3
Bank debt(b)............................... 7.0 -- 16.6 8.2 --
Subordinated debentures and other
liabilities subject to compromise(b)..... 139.3 157.3 177.6 200.3 --
Total stockholders' equity(c).............. $ 163.5 $ 145.5 $ 29.6 $ 1.1 $ 140.1
Weighted average shares outstanding at end
of period(g)............................. N/A N/A N/A N/A N/A 11.9
Book value per common share-- basic(g)..... N/A N/A N/A N/A N/A $ 11.77
STATEMENT OF OPERATIONS DATA:
Revenues(d),(e)............................ $ 15.2 $ 15.5 $ 26.5 $ 34.5 $ 33.9 4.3
Loss from continuing operations(c),(f)..... (19.8) (17.5) (116.0) (29.3) (85.5) (1.3)
Net income (loss)(f)....................... 14.3 (18.0) (116.9) (28.9) 9.6 (.5)
PER COMMON SHARE--BASIC AND DILUTED:
Loss from continuing operations(g)......... N/A N/A N/A N/A N/A $ (.11)
Net loss(g)................................ N/A N/A N/A N/A N/A $ (.04)
WEIGHTED AVERAGE SHARES OUTSTANDING(G) N/A N/A N/A N/A N/A 11.9
</TABLE>
- ------------------------
(a) The decrease in total assets and cash, cash equivalents and short-term
investments at December 31, 1994 is primarily attributable to the funding of
project development costs and general and administrative expenses, as well
as funds deposited into a restricted cash account to secure a $25 million
letter of credit facility related to litigation with former affiliates
regarding tax sharing agreements. The decreases in cash, cash equivalents
and short-term investments at December 31, 1995 and 1996 are primarily
attributable to the funding of project development and infrastructure costs
and general and administrative expenses, partially offset by sales of real
estate held for development or sale. The decrease in total assets at
December 31, 1995 is primarily due to the asset revaluation of the Bolsa
Chica lowlands and Warner Mesa properties (see Note 5 to the Company's
Financial Statements) and the decrease in cash described above. The increase
in cash, cash equivalents and short-term investments at December 31, 1997
primarily reflects the February 1997 sale of the Bolsa Chica lowlands
partially offset by repayments of bank debt and other 1997 costs. The
decrease in total assets at December 31, 1997 primarily reflects Fresh-Start
Reporting adjustments recorded in connection with the Recapitalization on
September 2, 1997 (see Note 3 to the Company's Financial Statements).
F-1
<PAGE>
(b) The increase in bank debt at December 31, 1995 reflects borrowings under
credit agreements to settle litigation with former affiliates regarding tax
sharing agreements and construct infrastructure improvements at Rancho San
Pasqual. The decrease in bank debt at December 31, 1996 reflects principal
repayments in excess of borrowings for construction of infrastructure
improvements at Rancho San Pasqual partially offset by borrowings from a
bank for a Signal Landmark build-to-suit project. The decrease in bank debt
at December 31, 1997 reflects the repayment of the outstanding loan balances
in the first quarter of 1997. The decrease in subordinated debentures and
other liabilities subject to compromise reflects the Recapitalization on
September 2, 1997.
(c) The decrease in equity at December 31, 1995 reflects the net loss for the
year then ended, including the asset revaluation of the Bolsa Chica lowlands
and Warner Mesa properties. The decrease in equity at December 31, 1996
reflects the net loss for the year then ended, primarily due to interest
expense on the subordinated debentures. The increase in equity at December
31, 1997 reflects the issuance of new Common Stock in exchange for the
subordinated debentures and other liabilities subject to compromise upon
completion of the Recapitalization, partially offset by Fresh-Start
Reporting adjustments.
(d) The increase in 1995 revenues is due to an increase in land sales and
residential and marina sales at Wentworth By The Sea. The increase in 1996
revenues reflects the sale of residential lots and the Eagle Crest Golf
Course at Rancho San Pasqual, the formation of the Fairbanks Highlands joint
venture and the sale of resort/residential lots in Michigan. The increase in
1997 revenues primarily reflects the sale of the Bolsa Chica lowlands,
partially offset by the absence of the Eagle Crest Golf course sale and the
formation of the Fairbanks Highlands joint venture.
(e) Amounts have been reclassified to present the commercial development
business as discontinued operations (see Note 4 to the Company's Financial
Statements). Amounts for 1993 have also been reclassified to present Lake
Superior and Deltec as discontinued operations.
(f) The loss from continuing operations and net loss for the year ended December
31, 1995 reflect approximately $121.1 million of charges related to
write-downs of real estate properties, including the Bolsa Chica lowlands
and Warner Mesa properties. The loss from continuing operations and net loss
for the year ended December 31, 1996 are primarily the result of non-cash
interest charged on the subordinated debentures. The net income for the year
ended December 31, 1993 reflects an extraordinary gain on extinguishment of
debt. The net income for the eight-month period ended September 2, 1997
reflects the extraordinary gain on extinguishment of debt as a result of the
Recapitalization, partially offset primarily by Fresh-Start Reporting
adjustments, Reorganization costs and non-cash interest charged on the
subordinated debentures.
(g) The new Common Stock began trading on September 2, 1997 concurrent with the
Recapitalization and the one for one hundred (1:100) reverse stock split.
Accordingly, per share information for the old common shares is not shown as
it would not be comparable.
(h) See page F-4 for the pro forma impact of the pending sale of the commercial
development business, which is further described in Note 4 to the Company's
Financial Statements.
F-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is a residential land development and homebuilding company with
properties located primarily in Southern California. The principal activities of
the Company and its consolidated subsidiaries include: (i) obtaining zoning and
other entitlements for land it owns and improving the land for residential
development; (ii) single-family residential construction in Southern California;
and (iii) providing residential real estate development services to third
parties. Once the residential land owned by the Company is entitled, the Company
may sell unimproved land to other developers or homebuilders; sell improved land
to homebuilders; or participate in joint ventures with other developers,
investors or homebuilders to finance and construct infrastructure and homes. On
March 30, 1998, the Company executed an agreement to sell its commercial
development business as further described in Note 4 to the Company's Financial
Statements. The transaction is scheduled to close, subject to various
conditions, on April 30, 1998 unless extended by agreement of the parties, and
accordingly the Financial Statements have been reclassified to present the
commercial development business as discontinued operations. The Company's
immediate strategic goals are to (i) successfully appeal the February 20, 1998
court decision which ordered a third hearing before the California Coastal
Commission (the "Coastal Commission") to approve the Warner Mesa (formerly known
as the Bolsa Chica mesa) project; (ii) complete the permitting for development
of Warner Mesa; and (iii) commence infrastructure construction on Warner Mesa as
soon as possible; however, the Company may also consider other strategic and
joint venture opportunities. There can be no assurance that the Company will
accomplish, in whole or in part, all or any of these strategic goals.
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 Warner Mesa property. At the time of
the 1989 spin-off from The Henley Group, Inc., the Company expected that the
Warner Mesa 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 Warner Mesa. With
the February 1998 court decision which ordered a third hearing before the
Coastal Commission to approve the LCP, the Company is faced with further delays
in implementing its plans for residential development on Warner Mesa.
Furthermore, due to the uncertainties associated with the appeals process, the
Company is unable to predict the length of such delays at this time.
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 is
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 Warner
Mesa to fair value (which will reduce future costs of sales) and therefore, once
the litigation delays are overcome and the entitlement process is completed, the
Company expects to begin generating profits from the Warner Mesa project.
Real estate held for development or sale and land held for development (real
estate properties) are carried at fair value as of September 2, 1997, following
adoption of Fresh-Start Reporting as discussed in Note 3, as adjusted by
subsequent activity. 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
F-3
<PAGE>
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 California has resulted in
improvement in the residential real estate market, and 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 California
economy and the strength and longevity of current conditions affecting the
residential real estate market.
LIQUIDITY AND CAPITAL RESOURCES
The principal assets in the Company's portfolio are residential land which
must be held over an extended period of time in order to be developed to a
condition that, in management's opinion, will ultimately maximize the return to
the Company. Consequently, the Company requires significant capital to finance
its real estate development operations.
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 1997 results
which included an extraordinary gain on extinguishment of debt, and expects to
report losses until such time as sales can commence at Warner Mesa. In addition,
the Company's capital expenditures for project development and infrastructure
are significant. If the Company completes the sale of the commercial development
business, which is scheduled to close, subject to various conditions, on April
30, 1998 unless extended by agreement of the parties, as further described in
Note 4 to the Company's Financial Statements, the Company expects to have a cash
balance in excess of $35.0 million to provide substantial liquidity. If the sale
does not occur, the Company will continue to be dependent primarily on real
estate asset sales (including sales of assets being developed by the commercial
development business), and cash and cash equivalents on-hand to fund project
development costs for Warner Mesa and general and administrative expenses during
1998. The Company's unrestricted cash and cash equivalents aggregated $7.2
million at December 31, 1997 and $4.4 million at February 28, 1998.
The following pro forma financial data as of December 31, 1997 gives effect
to the pending sale of the commercial development business, including accruals
for estimated fees of the Company's investment bankers and legal counsel, and
estimated taxes payable as if the transaction occurred on December 31, 1997 (in
millions):
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Assets:
Cash............................................................. $ 7.2 $ 30.0 $ 37.2
Discontinued operations.......................................... 19.3 (19.3) --
All other assets................................................. 146.8 -- 146.8
----------- ------ -----------
$ 173.3 $ 10.7 $ 184.0
----------- ------ -----------
----------- ------ -----------
Total liabilities.................................................. $ 33.2 $ 1.0 $ 34.2
Stockholders' equity............................................... 140.1 9.7 149.8
----------- ------ -----------
$ 173.3 $ 10.7 $ 184.0
----------- ------ -----------
----------- ------ -----------
</TABLE>
The remaining 35 phase I residential lots at Rancho San Pasqual in
Escondido, California are scheduled to be sold in April, 1998 to a homebuilder
for approximately $1.6 million. During the year ended
F-4
<PAGE>
December 31, 1997, the Company completed sales of 215 residential lots at Rancho
San Pasqual to homebuilders for approximately $9.8 million. The Company is
evaluating its alternatives with respect to the 112 lots remaining in phase II
at Rancho San Pasqual and expects either to build such homes or sell these lots
to another homebuilder.
FINANCIAL CONDITION
DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996.
The $5.1 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 Asset Capital
Corporation, payments of certain liabilities, spending for project development
costs primarily at Warner Mesa, general and administrative expenses, and
reorganization costs during the year ended December 31, 1997, as well as other
activity presented in the Statements of Cash Flows.
The $9.8 million decrease in real estate held for development or sale
primarily reflects the sales of residential lots at Rancho San Pasqual.
The $90.3 million decrease in land held for development (Warner Mesa)
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 Warner Mesa of $130 million as of September 2, 1997. These
decreases were partially offset by investments in the Warner Mesa project during
the year ended December 31, 1997, including the acquisition of an adjacent
40-acre parcel.
The $3.1 million of Reorganization Value in Excess of Amounts Allocated to
Net Assets of continuing operations arose from the adoption of Fresh-Start
Reporting upon completion of the Company's recapitalization on September 2,
1997, as discussed in Note 3.
The $9.7 million increase in discontinued operations primarily reflects the
effects of Fresh-Start Reporting adjustments recorded as of September 2, 1997,
with an increase in Reorganization Value in Excess of Amounts Allocated to Net
Assets, partially offset by the write-off of remaining Goodwill recorded upon
the Company's acquisition of the commercial development business in 1993.
The $2.8 million decrease in accounts payable and accrued liabilities
primarily reflects payments of accrued expenses during 1997 related to the sale
of the Bolsa Chica lowlands and reorganization costs incurred during 1996.
The $8.2 million decrease in bank debt primarily reflects the repayment of
the outstanding loan balance due to Nomura Asset Capital Corporation, as well as
repayment of a $2.0 million construction loan upon the sale of Signal Landmark's
build-to-suit project in Signal Hill, California, partially offset by borrowings
prior to the sale.
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 3.
The $11.0 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 $139.0 million increase in stockholders' equity primarily reflects the
exchange of equity for subordinated debentures and other liabilities subject to
compromise upon completion of the Recapitalization 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 3, as well as other
activity presented in the Statements of Operations.
F-5
<PAGE>
DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995.
The $3.9 million decrease in cash and cash equivalents primarily reflects
spending for Warner Mesa project development costs, and general and
administrative expenses, partially offset by approximately $3.6 million in
proceeds from land sales at the Company's resort/residential property in
Michigan during the year ended December 31, 1996, as well as other activity
presented in the Statement of Cash Flows.
The $14.3 million decrease in real estate held for development or sale
primarily reflects the sales of residential lots at Rancho San Pasqual,
formation of the Fairbanks Highlands joint venture and the disposition of
Oceanside Hills, partially offset by construction costs for a Signal Landmark
build-to-suit project in Signal Hill, California. The Company sold this building
upon completion of construction in the first quarter of 1997.
The $4.8 million decrease in operating properties reflects the June 1996
sale of the Eagle Crest Golf Course at Rancho San Pasqual.
The $2.1 million increase in other assets primarily reflects the Company's
$3.6 million joint venture interest in Fairbanks Highlands, offset by
collections of receivables, recovery of deposits and reduced prepaid insurance.
The $2.8 million increase in accounts payable and accrued liabilities in
1996 primarily reflects accruals related to the sale of the Bolsa Chica lowlands
and the Recapitalization.
The $10.6 million decrease in bank debt primarily reflects net prepayments
on the Nomura loans, resulting primarily from sales of 218 residential lots and
the Eagle Crest Golf Course at Rancho San Pasqual and formation of the Fairbanks
Highlands joint venture, partially offset by construction borrowings for Rancho
San Pasqual and a Signal Landmark build-to-suit project during the year ended
December 31, 1996.
The $8.1 million decrease in other liabilities primarily reflects a $4.3
million decrease in accrued pensions and benefits and a $4.2 million decrease
related to the disposition of the Company's interest in the Oceanside Hills
partnership.
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 Warner Mesa, while increasing amortization expense related to
discounted liabilities and Reorganization Value in Excess of Amounts Allocated
to Net Assets.
1997 COMPARED WITH 1996.
The increase in revenues from asset sales of $33.6 million in 1996 to $38.2
million in 1997 and the increase in the related costs of sales from $30.2
million to $37.9 million primarily reflect the 1997 sale of the Bolsa Chica
lowlands for $25.0 million, partially offset by the absence in 1997 of 1996
sales of the Fairbanks Highlands residential land for $7.6 million, the Eagle
Crest Golf Course at Rancho San Pasqual for $6.1 million, and homes at Oceanside
Hills for $4.9 million, as well as a $3.3 million decrease in sales of Michigan
residential land.
The $.9 million decrease in revenues from operations during the year ended
December 31, 1997 as compared with the same period of 1996 reflects the absence
in 1997 of 1996 revenues from golf course operations at Eagle Crest.
F-6
<PAGE>
The $3.0 million decrease in gross operating margins from the 1996 to 1997
period primarily reflects a $2.9 million decrease in margins on sales of
Michigan residential land.
The $1.5 million decrease in general and administrative expenses from 1996
to 1997 primarily reflects reduced costs of liability insurance premiums,
reduced overhead expense related to residential operations, and the absence in
1997 of bonus amounts charged in 1996 related to the sale of the Bolsa Chica
lowlands, partially offset by a $2.0 million increase in costs incurred in
connection with the exchange offer for the Company's subordinated debentures.
The $7.7 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 $3.9 million in other income, net for the year ended December 31, 1997
primarily reflects an aggregate of $3.1 million of nonrecurring income from (i)
the sale of a minority interest in a privately held company and (ii) gains
recognized in connection with the settlement of certain claims.
The benefits for deferred income taxes for the eight-month period ended
September 2, 1997 and the four-month period ended December 31, 1997 have been
offset by corresponding valuation allowances.
The Company adopted Fresh-Start Reporting upon completion of its
Recapitalization on September 2, 1997 resulting in $(57.1) million of net
Fresh-Start adjustments. Approximately $(63.8) million, resulting primarily from
a write-down in the value of Warner Mesa partially offset by the discount on
liabilities, is reflected in continuing operations. In addition, $13.6 million
of Reorganization Value in Excess of Amounts Allocated to Net Assets, partially
offset by the write-off of Goodwill, resulted in $6.7 million of net Fresh-Start
adjustments included in discontinued operations.
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.
1996 COMPARED WITH 1995.
The $10.1 million increase in asset sales revenues from $23.5 million in
1995 to $33.6 million in 1996 and the related $8.6 million increase in costs of
asset sales from $21.6 million in 1995 to $30.2 million in 1996 primarily
reflect the sale of residential lots and the Eagle Crest Golf Course at Rancho
San Pasqual, formation of the Fairbanks Highlands joint venture and sales of
resort/residential lots in Michigan during the year ended December 31, 1996.
These increases were partially offset by the absence in 1996 of Wentworth
residential sales as a result of the sale of the entire Wentworth project in the
fourth quarter of 1995. The $1.5 million improvement in gross margin on asset
sales primarily reflects gains on sales of Michigan lots, partially offset by
the absence in 1996 of the gains on sales of the Coronado wharfage rights and a
leasehold interest in 1995.
The $2.1 million and $1.7 million decreases in revenues and gross margin,
respectively, from operations primarily reflect the absence of Wentworth marina
revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June
1996.
The $1.4 million increase in general and administrative expenses in 1996
primarily reflects costs incurred in connection with the sale of the Bolsa Chica
lowlands and the exchange offer for the Company's subordinated debentures.
The $2.3 million increase in interest expense from $22.6 million in 1995 to
$24.9 million in 1996 principally reflects compounded non-cash interest on the
Company's subordinated debentures.
F-7
<PAGE>
The $4.0 million decrease in other expense, net primarily reflects the
absence in 1996 of a $3.0 million reserve recorded in 1995 related to the
Company's investment in AV Partnership, and a decrease in accrued pensions and
benefits approximating $4.3 million, primarily due to termination of certain
group annuity contracts for the pension plan of a discontinued operation,
partially offset by a $1.5 million reserve for environmental clean up costs for
the Bolsa Chica lowlands.
The benefit for income taxes for the year ended December 31, 1996 has been
offset by a corresponding valuation allowance.
1995 COMPARED WITH 1994.
The $11.0 million increase in revenues from $15.5 in 1994 to $26.5 in 1995
and the increase in cost of sales from $14.3 million in 1994 to $24.3 million in
1995 was primarily due to the sale of residential property and the marina at
Wentworth, along with the sale of industrial property in Murietta, California,
and the sale of wharfage rights in Coronado, California.
The write-down of real estate properties of $121.1 million in 1995 reflects
the valuation adjustments recorded to reflect estimates of net realizable value
for the Company's Bolsa Chica lowlands and Warner Mesa properties (see Note 5 of
Notes to Financial Statements) as well as the Wentworth project and the golf
course at Rancho San Pasqual.
The change in other expense (income), net from $1.2 million of expense in
1994 to $2.6 million of expense for 1995 primarily reflects a loss reserve of
approximately $3 million related to the Company's investment in AV Partnership
(see Note 4 of Notes to Financial Statements).
The improvement in provision (benefit) for income taxes of $25.2 million in
1995 primarily reflects the benefit related to the write-down of real estate
properties (see Note 9 of Notes to Financial Statements).
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain of the foregoing information is forward looking in nature and
involves risks and uncertainties that could significantly impact the ability of
the Company to achieve its currently anticipated goals and objectives. These
risks and uncertainties include, but are not limited to, litigation or appeals
of regulatory approvals (including appeals of the trial court decisions in the
CEQA Lawsuit and the Coastal Act Lawsuit related to the Company's principal
asset, Warner Mesa), injunctions prohibiting implementation of approved
development plans pending the outcome of litigation, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, schedules and supplementary data of the Company and
its subsidiaries, listed under Item 14, are submitted as a separate section of
this Annual Report, commencing on page F-10.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of Koll Real Estate Group, Inc.:
We have audited the accompanying balance sheets of Koll Real Estate Group,
Inc. (the Company) as of December 31, 1997 (Successor Company) and December 31,
1996 (Predecessor Company) and the related statements of operations, cash flows
and changes in stockholders' equity for the four-month period ended December 31,
1997 (Successor Company), the eight-month period ended September 2, 1997 and the
years ended December 31, 1996 and 1995 (Predecessor Company). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the financial statements, on August 19, 1997, the
Bankruptcy Court confirmed the Plan of Reorganization which became effective on
September 2, 1997. Accordingly, the accompanying financial statements have been
prepared in conformity with AICPA Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code," for the
Successor Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods, as described
in Note 3.
In our opinion, the Successor Company financial statements present fairly,
in all material respects, the financial position of Koll Real Estate Group, Inc.
as of December 31, 1997 and the results of its operations and its cash flows for
the four-month period ended December 31, 1997, in conformity with generally
accepted accounting principles. Further, in our opinion, the Predecessor Company
financial statements referred to above present fairly, in all material respects,
the financial position of the Predecessor Company as of December 31, 1996, and
the results of its operations and its cash flows for the eight-month period
ended September 2, 1997 and the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles
The Company carries its real estate properties at cost, net of impairment
losses. As discussed in Note 2, the estimation process is inherently uncertain
and relies to a considerable extent on future events and market conditions. As
discussed in Note 5, the development of the Company's Warner Mesa project is
dependent upon various governmental approvals and various economic factors.
Accordingly, the amount ultimately realized from such project may differ
materially from the current estimate of fair value.
Deloitte & Touche LLP
Costa Mesa, California
February 24, 1998 (except for Note 10
as to which this date is March 23, 1998
and except for Note 4
as to which the date is March 30, 1998)
F-9
<PAGE>
KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
----------- -----------
DECEMBER 31,
------------------------
1996 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 2.1 $ 7.2
Restricted cash........................................................................... .2 --
Real estate held for development or sale.................................................. 13.8 4.0
Land held for development................................................................. 223.5 133.2
Reorganization value in excess of amounts allocated to net assets......................... -- 3.1
Discontinued operations................................................................... 9.6 19.3
Other assets.............................................................................. 7.4 6.5
----------- -----------
$ 256.6 $ 173.3
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities................................................ $ 6.3 $ 3.5
Bank debt............................................................................... 8.2 --
Subordinated debentures and other liabilities subject to compromise under reorganization
proceedings........................................................................... 200.3 --
Other liabilities....................................................................... 40.7 29.7
----------- -----------
Total liabilities..................................................................... 255.5 33.2
----------- -----------
Commitments and Contingencies
Stockholders' equity:
Common Stock--$.05 par value; 18,000,000 shares authorized; no shares and 11,906,378
shares outstanding, respectively...................................................... -- .6
Series A (convertible redeemable nonvoting) Preferred Stock--$.01 par value; 42,505,504
shares authorized; 38,886,626 and no shares outstanding, respectively................. .4 --
Class A (voting) Common Stock--$.05 par value; 625,000,000 shares authorized; 48,938,543
and no shares outstanding, respectively............................................... 2.4 --
Class B (convertible nonvoting) Common Stock--$.05 par value;
25,000,000 shares authorized and no shares outstanding................................ -- --
Capital in excess of par value............................................................ 229.2 140.0
Deferred proceeds from stock issuance..................................................... (.4) --
Minimum pension liability................................................................. (.6) --
Accumulated deficit....................................................................... (229.9) (.5)
----------- -----------
Total stockholders' equity............................................................ 1.1 140.1
----------- -----------
$ 256.6 $ 173.3
----------- -----------
----------- -----------
</TABLE>
See independent auditors' report and the accompanying notes to financial
statements.
F-10
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR
------------------------------------------ COMPANY
---------------
FOR THE YEARS ENDED EIGHT-MONTH FOUR-MONTH
--------------------------- PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 2, DECEMBER 31,
1995 1996 1997 1997
------------ ------------- ------------- ---------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Asset sales........................................... $ 23.5 $ 33.6 $ 33.9 $ 4.3
Operations............................................ 3.0 .9 -- --
------------ ------ ------ -----
26.5 34.5 33.9 4.3
------------ ------ ------ -----
Costs of:
Asset sales........................................... 21.6 30.2 33.6 4.3
Operations............................................ 2.7 1.0 -- --
------------ ------ ------ -----
24.3 31.2 33.6 4.3
------------ ------ ------ -----
Gross operating margin.................................. 2.2 3.3 .3 --
General and administrative expenses..................... 7.0 8.4 5.5 1.4
Interest expense........................................ 22.6 24.9 17.1 .1
Write-down of real estate properties.................... 121.1 -- -- --
Other expense (income), net............................. 2.6 (1.4) (3.7) (.2)
------------ ------ ------ -----
Loss from continuing operations before reorganization
items and income taxes................................. (151.1) (28.6) (18.6) (1.3)
Reorganization items:
Fresh-start adjustments............................... -- -- 63.8 --
Reorganization costs.................................. -- .6 2.8 --
------------ ------ ------ -----
Loss from continuing operations before income taxes..... (151.1) (29.2) (85.2) (1.3)
Provision (benefit) for income taxes.................... (35.1) .1 .3 --
------------ ------ ------ -----
Loss from continuing operations......................... (116.0) (29.3) (85.5) (1.3)
Income (loss) from discontinued operations, net of
income tax benefit of $.4, $0, $0 and $0,
respectively........................................... (.9) .4 5.6 .8
------------ ------ ------ -----
Loss before extraordinary gain.......................... (116.9) (28.9) (79.9) (.5)
Extraordinary gain on extinguishment of debt, net of
income taxes of $0..................................... -- -- 89.5 --
------------ ------ ------ -----
Net income (loss)....................................... $ (116.9) $ (28.9) $ 9.6 $ (.5)
------------ ------ ------ -----
------------ ------ ------ -----
Earnings (loss) per common share--basic and diluted:
Continuing operations................................. N/A N/A N/A $ (.11)
Discontinued operations............................... N/A N/A N/A .07
Extraordinary gain.................................... N/A N/A N/A --
-----
Net loss per common share--basic and diluted............ N/A N/A N/A $ (.04)
-----
-----
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-11
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR
------------------------------------------ COMPANY
---------------
FOR THE YEARS ENDED EIGHT-MONTH FOUR-MONTH
--------------------------- PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 2, DECEMBER 31,
1995 1996 1997 1997
------------ ------------- ------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (116.9) $ (28.9) $ 9.6 $ (.5)
Adjustments to reconcile to cash provided (used) by
operating activities:
Fresh-start adjustments............................. -- -- 63.8 --
Extraordinary gain on extinguishment of debt........ -- -- (89.5) --
Non-cash reorganization costs....................... -- -- 1.9 --
Depreciation and amortization....................... .5 .2 .1 .1
Non-cash interest expense........................... 20.5 23.2 17.1 .1
Write-down of real estate properties................ 121.1 -- -- --
Gains on asset sales................................ (1.9) (3.4) (.3) --
Proceeds from asset sales, net...................... 22.5 31.5 33.5 4.2
Investments in real estate held for development or
sale.............................................. (18.2) (9.0) (2.4) (.2)
Investment in land held for development............. (7.8) (3.5) (4.2) (3.2)
Decrease (increase) in other assets................. 7.9 (2.8) .9 (.2)
Decrease in accounts payable, accrued and other
liabilities....................................... (58.2) (5.3) (6.8) (1.7)
Other, net.......................................... 1.0 .4 -- .5
------------ ------ ------ -----
Cash provided (used) by operating activities of
continuing operations........................... (29.5) 2.4 23.7 (.9)
------------ ------ ------ -----
Cash provided (used) by operating activities of
discontinued operations......................... .1 (10.5) (37.6) (35.4)
------------ ------ ------ -----
Cash flows from investing activities:
Acquisitions.......................................... (.3) -- -- --
------------ ------ ------ -----
Cash used by investing activities................... (.3) -- -- --
------------ ------ ------ -----
Cash flows from financing activities:
Borrowings of bank debt............................... 21.6 9.8 .9 --
Repayments of bank debt............................... (5.0) (18.2) (9.1) --
Use of restricted cash................................ 10.0 2.3 .2 --
Deposits of restricted cash........................... (5.0) -- -- --
------------ ------ ------ -----
Cash provided (used) by financing activities of
continuing operations............................. 21.6 (6.1) (8.0) --
------------ ------ ------ -----
Cash provided by financing activities of
discontinued operations........................... -- 11.4 27.1 36.2
------------ ------ ------ -----
Net increase (decrease) in cash and cash equivalents (8.1) (2.8) 5.2 (.1)
Cash and cash equivalents--beginning of period.......... 13.0 4.9 2.1 7.3
------------ ------ ------ -----
Cash and cash equivalents--end of period................ $ 4.9 $ 2.1 $ 7.3 $ 7.2
------------ ------ ------ -----
------------ ------ ------ -----
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-12
<PAGE>
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFERRED RETAINED
SERIES A CLASS A CAPITAL IN PROCEEDS FROM MINIMUM EARNINGS
PREFERRED COMMON EXCESS OF STOCK PENSION (ACCUMULATED
STOCK STOCK COMMON STOCK PAR VALUE ISSUANCE LIABILITY DEFICIT)
------------- ----------- ------------- ----------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994.... $ .4 $ 2.3 -- $ 230.5 $ (1.6) $ (2.0) $ (84.1)
Net loss................... -- -- -- -- -- -- (116.9)
Minimum pension
liability................ -- -- -- -- -- 1.0 --
Valuation adjustment to
deferred proceeds from
stock issuance........... -- -- -- (.5) .5 -- --
Conversion of preferred to
common stock............. -- .1 -- (.1) -- -- --
--
--- ----- ----------- ----- ----- -------------
Balance December 31, 1995.... .4 2.4 -- 229.9 (1.1) (1.0) (201.0)
Net loss................... -- -- -- -- -- -- (28.9)
Minimum pension
liability................ -- -- -- -- -- .4 --
Valuation adjustment to
deferred proceeds from
stock issuance........... -- -- -- (.7) .7 -- --
--
--- ----- ----------- ----- ----- -------------
Balance December 31, 1996.... .4 2.4 -- 229.2 (.4) (.6) (229.9)
Net income (Eight-month
period--Predecessor
Company)................. -- -- -- -- -- -- 9.6
--
--- ----- ----------- ----- ----- -------------
Predecessor Company Balance
at September 2, 1997........ .4 2.4 -- 229.2 (.4) (.6) (220.3)
Recapitalization and
Fresh-Start Adjustments:
Cancel Class A Common and
Series A Preferred
Shares................... (.4) (2.4) -- -- -- -- --
Issue New Common Shares.... -- -- $ .6 -- .4 -- --
Fresh-Start Adjustments.... -- -- -- (89.2) -- -- 220.3
--
--- ----- ----------- ----- ----- -------------
Successor Company Balance at
September 3, 1997........... -- -- .6 140.0 -- (.6) --
Net loss (Four-month period--
Successor Company).......... -- -- -- -- -- -- (.5)
Minimum pension liability.... -- -- -- -- -- .6 --
--
--- ----- ----------- ----- ----- -------------
Successor Company Balance at
December 31, 1997........... $ -- $ -- $ .6 $ 140.0 $ -- $ -- $ (.5)
--
--
--- ----- ----------- ----- ----- -------------
--- ----- ----------- ----- ----- -------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance December 31, 1994.... $ 145.5
Net loss................... (116.9)
Minimum pension
liability................ 1.0
Valuation adjustment to
deferred proceeds from
stock issuance........... --
Conversion of preferred to
common stock............. --
---------
Balance December 31, 1995.... 29.6
Net loss................... (28.9)
Minimum pension
liability................ .4
Valuation adjustment to
deferred proceeds from
stock issuance........... --
---------
Balance December 31, 1996.... 1.1
Net income (Eight-month
period--Predecessor
Company)................. 9.6
---------
Predecessor Company Balance
at September 2, 1997........ 10.7
Recapitalization and
Fresh-Start Adjustments:
Cancel Class A Common and
Series A Preferred
Shares................... (2.8)
Issue New Common Shares.... 1.0
Fresh-Start Adjustments.... 131.1
---------
Successor Company Balance at
September 3, 1997........... 140.0
Net loss (Four-month period--
Successor Company).......... (.5)
Minimum pension liability.... .6
---------
Successor Company Balance at
December 31, 1997........... $ 140.1
---------
---------
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-13
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BASIS OF PRESENTATION
The principal activities of Koll Real Estate Group, Inc. and its
consolidated subsidiaries (the "Company", formerly known as The Bolsa Chica
Company and Henley Properties Inc.) include: (i) obtaining zoning and other
entitlements for land it owns and improving the land for residential
development; (ii) single-family residential construction in Southern California;
and (iii) providing residential real estate development services to third
parties. Once the residential land owned by the Company is entitled, the Company
may sell unimproved land to other developers or homebuilders; sell improved land
to homebuilders; or participate in joint ventures with other developers,
investors or homebuilders to finance and construct infrastructure and homes. On
September 2, 1997, the Company completed a recapitalization under Chapter 11 of
the bankruptcy code (see Note 3). On March 30, 1998, the Company executed an
agreement to sell its commercial development business as further described in
Note 4. The transaction is scheduled to close, subject to various conditions, on
April 30, 1998, unless extended by agreement of the parties. Accordingly, the
financial results of the commercial development business have been treated as
discontinued operations in the accompanying financial statements.
On December 31, 1989, The Henley Group, Inc. separated its business into two
public companies through a distribution to its Class A and Class B common
stockholders of all of the common stock of a newly formed Delaware corporation
to which The Henley Group, Inc. had contributed its non-real estate development
operations, assets and related liabilities. The new company was named The Henley
Group, Inc. ("Henley Group") immediately following the distribution. The
remaining company was renamed Henley Properties Inc. ("Henley Properties") and
consisted of the real estate development business and assets of Henley Group,
including its principal subsidiary Signal Landmark.
On July 16, 1992, a subsidiary of Henley Properties merged with and into
Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of
Henley Properties. In the Merger, Henley Properties, through its Henley Group
subsidiary, received net assets having a book value as of July 16, 1992 of
approximately $45.3 million, consisting of approximately $103.6 million of
assets, including $58.3 million of cash and a 44% interest in Deltec Panamerica
S.A. ("Deltec"), and $58.3 million of liabilities. In connection with the
Merger, Henley Properties was renamed The Bolsa Chica Company.
On September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the
domestic real estate development business and related assets of The Koll
Company. In connection with this acquisition, The Bolsa Chica Company was
renamed Koll Real Estate Group, Inc.
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts have been reclassified to
conform with the current year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
REAL ESTATE
Real estate held for development and land held for development (real estate
properties) are carried at cost net of impairment losses based on undiscounted
cash flows. Real estate held for sale is carried at cost, net of impairment
losses and selling costs 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
F-14
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. On September 2, 1997,
the Company completed its recapitalization pursuant to court confirmation of a
Prepackaged Plan of Reorganization, and the Company applied the principles
required by the American Institute of Certified Public Accountant's Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh Start Accounting") and the carrying value of real
estate properties was adjusted to fair value (Note 3).
The cost of sales of multi-unit projects is generally computed using the
relative sales value method, with direct construction costs and property taxes
accumulated by phase, using the specific identification method. Interest cost is
capitalized to real estate projects during their development and construction
period.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO NET ASSETS
Reorganization Value in Excess of Amounts Allocated to Net Assets arose from
the adoption of Fresh-Start Reporting upon completion of the Company's
recapitalization on September 2, 1997 (Note 3) and is being amortized on a
straight-line basis over 15 years. The Company evaluates the recoverability of
this intangible asset at each balance sheet date. The recoverability of this
intangible is determined by comparing the carrying value of the intangible to
the estimated income of the Company on an undiscounted cash flow basis. Any
impairment is recorded at the date of determination. Approximately $13.6 million
of such value has been allocated to the commercial development business, which
has been reflected in discontinued operations as of December 31, 1997, net of
related amortization (Note 4).
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company accounted for the cost of post-retirement benefits other than
pensions, which are primarily health care related, during each employee's active
working career under a plan which was frozen in 1993. As of December 31, 1996
and 1997 the accrued unfunded costs totaled $.9 million and $.4 million,
respectively.
INCOME TAXES
The Company accounts for income taxes on the liability method. Deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect in the years in which these differences are expected to reverse.
F-15
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECOGNITION OF REVENUES
Sales are recorded using the full accrual method when title to the real
estate sold is passed to the buyer and the buyer has made an adequate financial
commitment. When it is determined that the earning process is not complete,
income is deferred using the installment, cost recovery or percentage of
completion methods of accounting.
EARNINGS (LOSS) PER COMMON SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". Earnings per share is computed using the weighted average
number of outstanding shares of the Successor Company's (defined in Note 3
below) Common Stock, including the conversion rights of all Debenture holders,
which expire on September 2, 1998, for periods commencing September 2, 1997. For
the period ended December 31, 1997 the weighted average common shares
outstanding was 11.9 million shares. Earnings per share assuming dilution is
computed using the weighted average number of common shares outstanding and the
dilutive effect of potential common shares outstanding. Diluted earnings per
share is not presented for the period ended December 31, 1997 due to the
antidilutive effect on earnings per share. Per share data for periods prior to
September 2, 1997 have been omitted as these amounts are not comparable to the
Successor Company's current capital structure.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", were
issued and are effective for fiscal years beginning after December 15, 1997. The
Company is reviewing the impact of these statements on its financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 -- 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.
F-16
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Company's 12% Senior Subordinated Pay-In-Kind Debentures due March
15, 2002 ("Senior Debentures"), (b) the Company's 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 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. Approximately $(63.8)
million of such adjustments relate to continuing operations and are partially
offset by $6.7 million related to discontinued operations. The results of
operations and cash flows for the eight-month period 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
four-month period ended December 31, 1997 include operations subsequent to the
Company's Recapitalization and reflect the effects of Fresh-Start Reporting.
Operations for the four-month period ended December 31, 1997 and the balance
sheet as of December 31, 1997 are 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 $3.1 million is amortized on a
straight-line basis over 15 years. In connection with the pending sale of the
commercial development business, $13.6 million of Reorganization Value in Excess
of
F-17
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Amounts Allocated to Net Assets has been allocated to such business, which is
reflected in discontinued operations as of December 31, 1997 net of related
amortization.
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 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.
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS
On March 30, 1998 the Company executed a definitive agreement with Koll
Development Company LLC ("KDC") and an affiliate regarding the sale of the
Company's commercial development business for (1) $30 million in cash plus
adjustments for 1998 activity; and (2) the assumption by KDC of all liabilities
related to the business. KDC is a newly formed limited liability company, whose
members include the Company's current Chairman and Chief Executive Officer,
Donald M. Koll and its President, Richard M. Ortwein, along with an affiliate of
NorthStar Capital Investment Corp. Upon completion of the transaction, Messrs.
Koll and Ortwein will resign from their current positions with the Company, and
the Company will change its name to discontinue use of the "Koll" name. The
Company also announced that, effective upon completion of the transaction,
Raymond J. Pacini, its Chief Financial Officer since 1992, will be appointed as
the Company's new President and Chief Executive Officer.
The Company received a deposit of $1 million from KDC upon execution of the
stock purchase agreement, which is nonrefundable except under limited
circumstances, including if a higher offer for the commercial development
business ultimately is accepted by the Company, in which case KDC also would be
paid a break-up fee of $2 million plus up to $500,000 for legal and other
advisory fees. The transaction is scheduled to close, subject to various
conditions, on April 30, 1998, unless extended by agreement of the parties. The
Company expects to realize a gain on this transaction of approximately $9.5
million; however, there can be no assurance that the transaction with KDC will
ultimately be completed or close on schedule.
The following pro forma financial data as of December 31, 1997 gives effect
to the pending sale of the commercial development business, including accruals
for estimated fees of the Company's investment bankers and legal counsel, and
estimated taxes payable, as if the transaction occurred on December 31, 1997 (in
millions):
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Assets:
Cash............................................................. $ 7.2 $ 30.0 $ 37.2
Discontinued operations.......................................... 19.3 (19.3) --
All other assets................................................. 146.8 -- 146.8
----------- ------ -----------
$ 173.3 $ 10.7 $ 184.0
----------- ------ -----------
----------- ------ -----------
Total liabilities.................................................. $ 33.2 $ 1.0 $ 34.2
Stockholders' equity............................................... 140.1 9.7 149.8
----------- ------ -----------
$ 173.3 $ 10.7 $ 184.0
----------- ------ -----------
----------- ------ -----------
</TABLE>
F-18
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Discontinued operations is comprised of the following at December 31, 1996
and 1997 (in millions):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Restricted cash............................................................ $ -- $ .2
Real estate held for development or sale................................... 11.4 82.1
Reorganization value in excess of amounts allocated to net assets.......... -- 13.3
Other assets............................................................... 13.8 7.4
Accounts payable and other liabilities..................................... (4.2) (6.2)
Bank debt.................................................................. (11.4) (74.6)
Minority interest.......................................................... -- (2.9)
--------- ---------
Net assets......................................................... $ 9.6 $ 19.3
--------- ---------
--------- ---------
</TABLE>
Revenues related to discontinued operations were $7.5 million, $10.3
million, $26.9 million and $17.3 million for the years ended December 31, 1995,
1996, the eight-month period ended September 2, 1997 and the four-month period
ended December 31, 1997, respectively. The net loss from discontinued operations
for the year ended December 31, 1995 was $.9 million. Net income from
discontinued operations for the year ended December 31, 1996, the eight-month
period ended September 2, 1997 and the four-month period ended December 31, 1997
was $.4 million, $5.6 million and $.8 million, respectively. The net income for
the eight-month period ended September 2, 1997 reflects the recording of $13.6
million in Reorganization Value in Excess of Amounts Allocated to Net Assets,
partially offset by a $6.9 million write-off of goodwill as required by
Fresh-Start Reporting.
In November 1994, the Company acquired the stock of Kathryn G. Thompson
Company ("KGTC") and related assets. The principal activities of the acquired
business are residential land development and homebuilding, focusing on the
entry-level and first time move-up market segments. The principal project of the
acquired business is a 49% general partnership interest in a 230-acre project
planned for approximately 1,200 residential units in Aliso Viejo in southern
Orange County ("AV Partnership"). In connection with the acquisition, the
Company paid $1.2 million in cash and a $.5 million note, issued 2 million
shares (pre-reverse split) of Class A Common Stock and warrants to purchase an
additional 2 million shares (pre-reverse split). The Company guaranteed
approximately $4.8 million of capital contribution notes related to the Aliso
Viejo partnership interest, which notes are primarily payable out of positive
net cash flow to be generated by the partnership interest and are not due until
the earlier of the completion of the project or April 1999. Due to a significant
shortfall in sales during 1995 (following the Orange County bankruptcy) versus
forecast, the highly leveraged capital structure of the partnership and the
significant amount of participating mortgages with preference to the Company's
equity interest, the Company does not expect to receive a financial return from
this partnership and in 1995 reserved for its guaranty of $4.8 million of
capital contribution notes. In 1996, certain information came to the Company's
attention concerning the enforceability of the Company's guarantee of $4.8
million of capital contribution notes. While the Company has reserved for this
guaranty, the Company intends to dispute the enforceability of the guaranty.
Nevertheless, a reserve relating to the guaranteed capital contribution notes,
including accrued interest thereon, of $6.0 million and $6.5 million at December
31, 1996 and 1997, respectively, for this partnership is included in other
liabilities. In addition, in November 1994, Ms. Kathryn G. Thompson, who was
appointed as a director of the Company, entered into a covenant not to compete
with the Company with respect to real estate development, subject to certain
limited exceptions. Ms. Thompson resigned as an officer and director of the
Company effective November 1, 1996. In conjunction with her resignation, the
covenant of Ms. Thompson was released. The warrants issued in 1994 were
cancelled upon completion of the Company's Recapitalization in September 1997.
F-19
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Summarized financial information of AV Partnership is presented below at
December 31, 1996 and 1997 and for the years then ended (in millions):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Balance Sheet Data:
Total assets....................................................................... $ 101.5 $ 83.1
Total project debt and other liabilities........................................... 109.7 101.8
--------- ---------
Partners' capital (deficit)........................................................ $ (8.2) $ (18.7)
--------- ---------
--------- ---------
Statement of Operations Data:
Revenues........................................................................... $ 44.3 $ 85.3
Expenses........................................................................... (55.5) (95.9)
--------- ---------
Net loss........................................................................... $ (11.2) $ (10.6)
--------- ---------
--------- ---------
</TABLE>
The Company uses the equity method to account for its investment in AV
Partnership and accordingly, the statement of operations includes losses of $2.0
million and $1.2 million, respectively, for the years ended December 31, 1995
and 1996. The losses recorded in 1996 and 1997 reflect accrued interest on
guaranteed capital contribution notes, as the Company's net investment is $0 and
the recorded liability reflects the Company's guaranty of capital contribution
notes due to the partnership discussed above.
NOTE 5 -- LAND HELD FOR DEVELOPMENT
The Company owns approximately 340 acres located in Orange County,
California, adjacent to the Pacific Ocean and the Bolsa Chica lowlands (which
were sold by the Company to the State of California as described below),
surrounded by the City of Huntington Beach and approximately 35 miles south of
downtown Los Angeles. The Company's holdings include approximately 200 acres to
be developed on a mesa north of the Bolsa Chica lowlands ("Warner Mesa"),
approximately 100 acres on, or adjacent to, the Huntington mesa and
approximately 40 acres of lowlands which were acquired in September 1997.
The planned community at Warner Mesa is expected to offer a broad mix of
home choices, including primarily single-family homes, as well as townhomes, at
a wide range of prices. A Local Coastal Program ("LCP") for development of up to
3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica
lowlands, which were subsequently sold as discussed below) was approved by the
Orange County Board of Supervisors in December 1994 and by the California
Coastal Commission (the "Coastal Commission") in January 1996.
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.
F-20
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Warner Mesa ("Warner Pond") and
development of any homes in the Bolsa Chica 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 and February 3, 1998, the Orange County Board of Supervisors
accepted the Coastal Commission's suggested modifications.
On February 20, 1998, the court ruled that the Coastal Commission should not
have narrowed the scope of public comments during the Coastal Commission's
October 1997 hearing, and ordered the Coastal Commission to hold a third hearing
on the LCP. The Company intends to appeal the court's latest decision, as well
as pursue all other available legal and administrative options. The court's
ruling will delay the previously planned start of infrastructure construction
beyond December 31, 1998; however, the Company is unable to predict the length
of such delay at this time. The Company does not believe that the recent court
decision will permanently prevent the Company from completing the Warner Mesa
project; however, there can be no assurance in that regard or that further
delays will not result.
On February 14, 1997, the Company completed the sale of its approximately
880-acre Bolsa Chica lowlands, which had previously been planned for the
development of up to 900 homes, to the California State Lands Commission for $25
million. Under an interagency agreement among various state and federal
agencies, these agencies have agreed to restore the Bolsa Chica wetlands habitat
utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve
of $1.5 million was included in the Company's Balance Sheet as of December 31,
1996, with respect to potential costs payable by the Company under agreements
negotiated with the State Lands Commission and certain oil field operators
regarding environmental clean-up at the Bolsa Chica lowlands. In connection with
the sale of the Bolsa Chica lowlands, the Company paid $833,333 of these costs
at closing, leaving a reserve balance of $700,000 on its December 31, 1997
balance sheet for potential additional clean-up costs.
Upon completion of the Company's Recapitalization as discussed in Note 3,
the Company applied the principles required by Fresh-Start Reporting and the
carrying value of land held for development (Warner Mesa) was adjusted to fair
value as of September 2, 1997, after consideration of the October 9, 1997
Coastal Commission action discussed above. 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 Warner Mesa to no more than 1,235 homes in its determination
of the Warner Mesa project's fair value as of September 2, 1997 and as reflected
in the Company's balance sheet as of December 31, 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 Warner Mesa development should not be materially lessened by the reduction
in developable units as compared to previous estimates,
F-21
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The Company believes that the lower number of residential units will not
materially reduce the Warner Mesa project's fair value; however, there can be no
assurance in this regard.
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.
In 1995, in accordance with Statement of Financial Accounting Standard No.
67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects"
("SFAS 67"), the Company carried real estate properties, including the Bolsa
Chica lowlands and Warner Mesa, at the lower of cost or net realizable value,
with net realizable value defined as the undiscounted estimated future cash
flows from the project. As of December 31, 1995, the Company's review of the
estimated cash flows for the Bolsa Chica lowlands and Warner Mesa indicated that
a reserve of approximately $113.6 million was required to adjust the carrying
value of these properties to their then estimated net realizable value of $220
million pursuant to SFAS 67. The valuation reserve primarily reflects
management's decision in the fourth quarter of 1995 (following the approval of
additional funding by the Ports) to make completing the sale of the Bolsa Chica
lowlands to a government agency a strategic goal of the Company, along with
updated estimates of future cash flows reflecting market conditions for the
Warner Mesa portion of the project. During 1995, the Southern California
residential real estate market continued to decline, affecting estimated sales
pricing, housing mix and number of units planned. The Company's decision in 1995
to pursue a sale of the Bolsa Chica lowlands was expected to, and subsequently
has, resulted in the elimination of up to 900 units previously planned in the
lowlands, which, in turn, resulted in a significant reduction as of December 31,
1995 in projected future cash flows previously anticipated from the project.
NOTE 6 -- BANK DEBT
In August 1996, Signal Landmark, a subsidiary of the Company, entered into a
construction loan agreement, guaranteed by the parent, to fund $2.0 million for
construction of a build-to-suit project in Signal Hill, California. As of
December 31, 1996, $1.1 million was drawn and $.9 million was available under
this agreement. The loan was repaid in March 1997 upon sale of the project.
In December 1994, the Company entered into a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation ("Nomura") to fund
payment of the settlement of litigation with former affiliates regarding tax
sharing agreements in excess of $7.5 million to be funded by the Company.
F-22
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In February 1995, the Company paid an aggregate of $22 million to settle the
litigation, of which $15.5 million was funded by borrowings under the letter of
credit and reimbursement agreement and the balance of $6.5 million from
restricted cash. The Company repaid $8.4 million and $7.1 million of such
borrowings during 1996 and 1997, respectively. In December 1994, the Company
also entered into a construction loan agreement with Nomura to partially fund
infrastructure construction at Rancho San Pasqual, the Company's
golf/residential property in San Diego County. The Company borrowed and repaid
an aggregate of $10.0 million during 1995 and 1996, under this loan agreement.
On February 18, 1997 the outstanding Nomura loan balance was fully repaid with a
portion of the proceeds from a sale of Rancho San Pasqual lots and the sale of
the Bolsa Chica lowlands and the loan agreements were terminated.
In December 1994, the Company entered into a $6.5 million construction loan
agreement with the Bank of Boston, principally secured by resort and residential
property in New Hampshire ("Wentworth"). The Company borrowed $4.8 million under
this loan agreement and applied $4.2 million in proceeds from sales of
residential homes from Wentworth to satisfy required prepayments, resulting in
an outstanding balance of $.6 million on November 2, 1995, when this credit
facility was terminated in conjunction with the Company's sale of all of its
interest in the Wentworth residential land.
The Company made cash payments for interest on bank debt of $1.4 million,
$1.5 million and $.2 million for the years ended December 31, 1995, 1996 and the
eight-month period ended September 2, 1997, respectively.
NOTE 7 -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise represent liabilities which were exchanged
for equity upon completion of the Recapitalization (as discussed in Note 3) and
consisted of the following as of December 31, 1996 (in millions):
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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
F-23
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 8 -- OTHER LIABILITIES
Other liabilities were comprised of the following as of December 31 (in
millions):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net deferred taxes and other tax liabilities........................................... $ 14.5 $ 14.5
Accrued pensions and benefits.......................................................... 5.6 3.0
Guaranty of capital contribution notes................................................. 6.0 6.5
Accrued indemnity obligations.......................................................... 14.6 11.3
Unamortized discount................................................................... -- (5.6)
--------- ---------
$ 40.7 $ 29.7
--------- ---------
--------- ---------
</TABLE>
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 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. Assuming Section
382(1)(5) applies, the NOLs available as of December 31, 1997 would be
approximately $219 million.
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 which existed as of September 2, 1997.
F-24
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 post-Recapitalization equity market value of
approximately $140 million, and the long-term tax exempt rate for September 1997
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
as of September 2, 1997, which the Company has estimated could be fully utilized
over the next ten years (1998-2007), whereas under Section 382(l)(6) only
approximately $76 million of NOLs would be available to the Company during that
time frame, due to the annual limitation described above.
The tax effects of items that gave rise to significant portions of the
deferred tax accounts are as follows for the years ended December 31 (in
millions):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Real estate held for development or sale and operating properties (due to asset
revaluations and interest capitalized for tax purposes).......................... $ 13.8 $ 7.5
Accruals/reserves not deductible until paid........................................ 6.1 5.7
Net operating loss carryforwards................................................... 94.1 78.8
Other.............................................................................. .4 3.8
Valuation allowance................................................................ (71.3) (71.2)
--------- ---------
$ 43.1 $ 24.6
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Land held for development (principally due to accounting for a prior business
combination, partially offset by the asset revaluations in 1995 and 1997)........ $ 51.2 $ 19.2
Other.............................................................................. 1.9 9.4
--------- ---------
$ 53.1 $ 28.6
--------- ---------
--------- ---------
</TABLE>
Net deferred tax liabilities at December 31, 1997 are comprised entirely of
state net deferred tax liabilities.
F-25
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the income tax provision (benefit) applicable
to losses from continuing operations (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, EIGHT-MONTH FOUR-MONTH
---------------------- PERIOD ENDED PERIOD ENDED
1995 1996 SEPT. 2, 1997 DEC. 31, 1997
--------- ----- ------------- ---------------
<S> <C> <C> <C> <C>
Income tax provision (benefit):
Current................................................... $ (10.1) $ .1 $ 6.3 $ --
Deferred.................................................. (25.4) -- (6.0) --
--
--------- ----- ---
$ (35.5) $ .1 $ .3 $ --
--
--
--------- ----- ---
--------- ----- ---
</TABLE>
Cash payments for federal, state and local income taxes were approximately
$.3 million, $.2 million, $.2 million and $.1 million for the years ended
December 31, 1995 and 1996, the eight-month period ended September 2, 1997 and
the four-month period ended December 31, 1997, respectively. Tax refunds
received for the years ended December 31, 1995 and 1996, the eight-month period
ended September 2, 1997 and the four-month period ended December 31, 1997 were
approximately $.4 million, $.2 million, $0 and $.1 million, respectively.
The principal items accounting for the difference in taxes on income
computed at the statutory rate and as recorded are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, EIGHT-MONTH FOUR-MONTH
-------------------- PERIOD ENDED PERIOD ENDED
1995 1996 SEPT. 2, 1997 DEC. 31, 1997
--------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
(Provision) benefit for income taxes at statutory rate... $ (53.3) $ (10.1) $ 3.4 $ (.2)
State income taxes, net.................................. .6 (.1) (5.7) --
Increase (decrease) in valuation allowance............... 28.3 12.1 (.3) .1
(Reduction) increase in other tax liabilities............ (10.0) -- 6.0 --
All other items, net..................................... (1.1) (1.8) (3.1) .1
--------- --------- ----- ---
$ (35.5) $ .1 $ .3 $ --
--------- --------- ----- ---
--------- --------- ----- ---
</TABLE>
TAX SHARING AGREEMENTS
Henley Group and MAFCO Consolidated Group Inc. ("MAFCO"; formerly known as
Abex Inc.), a former subsidiary of Henley Group whose stock was distributed to
stockholders of Henley Group in July 1992, entered into a tax sharing agreement
in 1992 prior to the Distribution to provide for the payment of taxes for
periods during which Henley Group and MAFCO were included in the same
consolidated group for federal income tax purposes, the allocation of
responsibility for the filing of tax returns, the cooperation of the parties in
realizing certain tax benefits, the conduct of tax audits and various related
matters.
1989-1992 INCOME TAXES. The Company is generally charged with
responsibility for all of its federal, state, local or foreign income taxes for
this period and, pursuant to the tax sharing agreement with MAFCO, all such
taxes attributable to Henley Group and their consolidated subsidiaries,
including any additional liability resulting from adjustments on audit (and any
interest or penalties payable with respect thereto), except that MAFCO is
generally charged with responsibility for all such taxes attributable to it and
its subsidiaries for 1990-1992. In addition, under a separate tax sharing
agreement between Henley Group and a former subsidiary of Henley Group, Fisher
Scientific International Inc. ("Fisher"), Fisher is generally charged with
responsibility for its own income tax liabilities for this period.
F-26
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 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
still 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.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
See Note 5 for a discussion of certain litigation relating to the Orange
County Board of Supervisors' and California Coastal Commission's approvals of
the LCP.
There are various other lawsuits and claims pending against the Company and
certain subsidiaries. In the opinion of the Company's management, ultimate
liability, if any, will not have a material adverse effect on the Company's
financial condition or results of operations.
In October 1997, the Company entered into a mutual settlement and release
agreement with Svedala Industries, Inc. ("Svedala") to settle the Svedala
litigation, 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. 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. The lawsuit was filed on March 31,
1994, in New Jersey Superior Court in Morris County, New Jersey. Svedala filed a
Second Amended Complaint on August 16, 1994. 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 lawsuit alleges that
Nichols, which is a wholly-owned subsidiary of New Henley Holdings Inc., which
is a direct wholly-owned subsidiary of the Company, is responsible, in whole or
in part, for contaminating the property with hazardous substances during
Nichols' operations there from the 1940's to the 1970's. Nichols has not engaged
in business operations since approximately 1983. New Henley Holdings Inc.
acquired the stock of Nichols in 1989, after Nichols was no longer operational.
On February 9, 1995, Nichols filed for Chapter 7 bankruptcy protection. On July
19, 1995, the Nichols' bankruptcy plan was approved and the case was closed. On
or about October 11, 1995, Svedala served a Third Amended Complaint on New
Henley Holdings Inc. and The Henley Group, Inc., which was the parent company of
New Henley Holdings Inc. and was a direct wholly-owned subsidiary of the
Company, alleging that they are liable for the purported acts of Nichols that
allegedly resulted in whole or in part, in Svedala's cleanup costs. In April
1997, The Henley Group, Inc. was merged into the Company. Neither the Company,
The Henley Group, Inc. nor New
F-27
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Henley Holdings Inc. (collectively, "Henley") has been ordered by any federal,
state or local agency to undertake any remediation at the Property. On December
15, 1995, Henley moved to dismiss Svedala's action for lack of jurisdiction and
on the basis that Henley is not liable as a successor for Nichols' liability.
The Superior Court denied the motion without prejudice and ordered discovery on
these defenses. Attorneys for both Svedala and the Company have agreed to
suspend discovery pending action by the court on the proposed bar order required
under the settlement agreement.
On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a
lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division,
naming, among others, the Company and WT/ HRC Corporation, a direct subsidiary
of the Company, as defendants in a complaint for declaratory relief and breach
of contract and indemnification. The complaint alleges that WT/HRC owes Whiting
a defense and indemnity for several hundred asbestos cases pending in several
states, as well as for similar asbestos claims which may be filed in the future.
The complaint states no specified amount of damages. All claims against the
Company were dismissed in early 1998, and WT/HRC is now the only named
defendant. The lawsuit is based on a 1983 Asset Purchase Agreement in which the
seller, Whiting-Illinois (now named WT/HRC), sold assets and the business of its
"Whiting Engineered Products Group" to plaintiff's predecessor in interest.
Whiting contends that the seller agreed in the Asset Purchase Agreement to
indemnify Whiting for personal injury, sickness, death or property damages
claims which arise from occurrences predating the closing date (December 30,
1983). The Company has denied the allegations in the complaint and has
vigorously defended the action. At present, no claims are asserted against the
Company itself; instead, the only remaining claims are directed against its
subsidiary, WT/HRC.
On July 14, 1995, the Grandview/Crest Homeowners Association, representing
owners of 341 condominium units, filed a lawsuit in the Orange County Superior
Court naming as defendants Lake Forest Properties, Signal Landmark, Inc., now
known as Signal Landmark ("Signal"), and Onyx Land Company, as well as various
unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a
California joint venture which was the developer of the subject 341-unit
condominium project. Lake Forest Properties had two joint venture partners,
Signal, an indirect subsidiary of the Company, and Onyx Land Company which was a
wholly-owned subsidiary of Signal, which was dissolved and its assets
transferred to Signal on December 31, 1988. Lake Forest Properties also was
dissolved effective December 31, 1988. The original complaint for construction
defects alleges warranty, liability, negligence and breaches of covenants,
conditions and restrictions, and of fiduciary duties. On June 25, 1996, the
Plaintiff filed a First Amended Complaint alleging that structural distress,
life-safety hazards, and extensive water intrusion have resulted from the
alleged defects in construction estimated in September 1997 at a preliminary
cost of approximately $20.4 million. On March 23, 1998 the Company entered into
a mutual settlement agreement with the plaintiff as well as with the Company's
insurance carriers which have responsibility for the claims. The Company and its
insurance carriers have agreed that the insurance carriers will bear primary
responsibility for the $4.6 million settlement and related legal and other costs
of defense, subject to the Company's approximately $.6 million contribution for
deductibles, which does not exceed previously established reserves in the
Company's balance sheet.
On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class
action complaint in San Diego Superior Court for breach of warranties, strict
liability, negligence, breach of contract, products liability, intentional
misrepresentation, fraud and deceit, and negligent representation against
Signal, and a former subsidiary of Signal, for damages allegedly arising out of
construction deficiencies at the plaintiffs' homes in Coronado, California (the
"Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al.,
filed a first amended complaint against Signal and its former subsidiary for the
same causes of action. On September 17, 1997, plaintiffs filed a second amended
complaint for construction deficiencies in the names of 126 of the homeowners in
Coronado, California, as well as the Homeowners Association. On
F-28
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 3, 1998 the plaintiffs asserted a claim of $13.0 million. The Company is
vigorously contesting this lawsuit and is holding discussions with its insurance
carriers with responsibility for the claims. The Company expects its insurance
carriers to bear primary responsibility for such claims, subject to deductibles;
however, there can be no assurances in that regard. The Company believes that
any liability not covered by insurance for the Coronado Lawsuit will not exceed
previously established reserves with respect to such uninsured liability which
is reflected in the Company's balance sheet.
GUARANTEES OF COMMERCIAL PROJECT DEBT
As of December 31, 1997, the Company has guaranteed approximately $288.9
million of the commercial development business' project loans from various banks
for construction of commercial projects. If the sale of the commercial
development business is completed as described in Note 4, these guarantees would
be assumed by the purchaser, subject to approval by the banks. To the extent the
Company is not released by certain banks from such guarantees upon completion of
the transaction, the purchaser will fully indemnify the Company against any and
all liability with respect to these guarantees.
CORPORATE INDEMNIFICATION MATTERS
The Company and its predecessors have, through a variety of transactions
effected since 1986, disposed of several assets and businesses, many of which
are unrelated to the Company's current operations. By operation of law or
contractual indemnity provisions, the Company has retained liabilities relating
to certain of these assets and businesses. Many of such liabilities are
supported by insurance or by indemnities from certain of the Company's
predecessor and currently or previously affiliated companies. The Company
believes its balance sheet reflects adequate reserves for these matters.
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 AlliedSignal Inc., ("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
F-29
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Related party transactions reflected in continuing operations are as
follows:
CONSTRUCTION MANAGEMENT AGREEMENTS
In 1993, the Company entered into a construction management agreement with
Koll Construction, a wholly owned subsidiary of The Koll Company, for demolition
of bunkers at Bolsa Chica. In 1995, the Company also entered into a construction
management agreement with Koll Construction for infrastructure construction at
Rancho San Pasqual. During 1995, 1996 and the eight-month period ended September
2, 1997 the Company incurred fees aggregating approximately $500 thousand, $400
thousand and $100 thousand, respectively, to Koll Construction for these
services and related reimbursements.
SERVICE AGREEMENTS
The Company also entered into a Management Information Systems and Human
Resources Services Agreement in September 1993 with Koll Management Services,
Inc., also known as Koll Real Estate Services ("KRES"), a company formerly owned
by a subsidiary of The Koll Company, and acquired by CB Commercial Real Estate
Services Group Inc. ("CB") on August 31, 1997. Under this agreement, KRES
provides computer programming, data processing organization and retention and
other related services until 30 days' prior written notice of termination is
given by one company to the other. Also under this agreement, KRES provided
payroll, human resources and other related services through August 31, 1997.
Fees and related reimbursements incurred were approximately $200 thousand for
each of the years ended December 31, 1995, 1996 and the eight-month period ended
September 2, 1997.
SUBLEASE AGREEMENTS
In September 1993, the Company entered into an annual Sublease Agreement
with The Koll Company to sublease a portion of The Koll Company affiliate's
office building located in Newport Beach, California. Lease costs were
approximately $100 thousand for each of the years ended December 31, 1995, 1996,
the eight-month period ended September 2, 1997 and four-month period ended
December 31, 1997, respectively, under this lease.
STOCK PLEDGE BY DIRECTOR
In December of 1995, the Company accepted pledges of all of the common stock
and warrants convertible into the common stock of the Company owned by Ms.
Kathryn G. Thompson as security against any potential construction liability
which could be asserted against the Company as a result of the 1994 acquisition
by the Company of KGTC and in exchange for the Company releasing Ms. Thompson
from a covenant to maintain insurance with respect to such potential liability.
Ms. Thompson resigned as a director of the Company and as an officer of certain
wholly-owned subsidiaries of the Company effective November 1, 1996. Ms.
Thompson received compensation of $300,000 during each of the years ended
December 31, 1995 and 1996 for her services rendered as an officer of these
subsidiaries. In connection with her resignation, Ms. Thompson received a
release from certain non-competition covenants and a release of the stock pledge
described above.
F-30
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Related party transactions reflected in discontinued operations are as
follows:
SALE OF COMMERCIAL DEVELOPMENT BUSINESS
See Note 4 for a description of this related party transaction.
GENERAL CONTRACTOR AGREEMENTS
In 1996 and 1997, the Company entered into general contractor agreements
with Koll Construction in conjunction with a build-to-suit project for a
third-party corporate office building in Nevada and four build-to-suit projects
in California owned by the Company. During 1996, the eight-month period ended
September 2, 1997 and the four-month period ended December 31, 1997 the Company
incurred fees aggregating approximately $1.7 million, $9.6 million and $5.1
million, respectively, to Koll Construction in consideration for these services
and related reimbursements.
SERVICE AGREEMENTS
In September 1993, the Company entered into a Financing and Accounting
Services Agreement to provide The Koll Company with financing, accounting,
billing, collections and other related services until 30 days' prior written
notice of termination is given by one company to the other. Fees earned for the
years ended December 31, 1995, 1996, the eight-month period ended September 2,
1997 and the four-month period ended December 31, 1997, were approximately $100
thousand, $100 thousand, $21 thousand and $11 thousand, respectively.
In addition, under the Service Agreement for Management Information Services
and Human Resource Services described above, fees and related reimbursements
incurred by discontinuing operations were approximately $100 thousand for each
of the years ended December 31, 1995, 1996 and the eight-month period ended
September 2, 1997.
SUBLEASE AGREEMENTS
Under the Sublease Agreement with The Koll Company described above, as well
as under month-to-month lease agreements which were terminated in 1996, for
office space in Northern California and San Diego, California with KRES,
combined lease costs were approximately $300 thousand, $300 thousand, $100
thousand and $100 thousand for the years ended December 31, 1995, 1996, the
eight-month period ended September 2, 1997 and the four-month period ended
December 31, 1997.
DEVELOPMENT FEES
For the years ended December 31, 1995, 1996, the eight-month period ended
September 2, 1997 and the four-month period ended December 31, 1997, the Company
earned fees of approximately $2.7 million, $1.9 million, $2.3 million and $3.1
million respectively, for real estate development and disposition services
provided to partnerships in which The Koll Company and certain directors and
officers of the Company have an ownership interest.
JOINT BUSINESS OPPORTUNITY AGREEMENTS
The Company and The Koll Company entered into an agreement to jointly
develop business opportunities in the Pacific Rim effective February 1, 1994.
Effective February 1, 1995 The Koll Company assigned its interests under this
agreement to KRES. Under the terms of the agreement, the Company and KRES shared
on a 50%-50% basis all income and loss from the venture. The Company's share of
net loss
F-31
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
was approximately $300 thousand, $100 thousand and less than $100 thousand for
the years ended December 31, 1995 and 1996, and the period ended April 5, 1997,
at which date the venture terminated, respectively. Service contracts entered
into under this agreement in 1995 included construction services from Koll
Construction, for which the venture paid approximately $100 thousand to Koll
Construction for services rendered for each of the years ended December 31, 1995
and 1996.
In March 1995, the Company and The Koll Company entered into an agreement to
jointly develop commercial development business opportunities in Mexico. Under
the terms of the agreement, the Company and The Koll Company share on a 50%-50%
basis all costs and expenses incurred in connection with identifying and
obtaining business opportunities and will share in all revenues generated from
such opportunities on a 50%-50% basis. The Company's share of such net costs and
expenses was approximately $300 thousand and $100 thousand for the ten months
ended December 31, 1995 and for the year ended December 31, 1996, respectively.
During the first quarter of 1996, the Company determined that, given current
economic conditions in Mexico, it could more efficiently service opportunities
in Mexico from its offices in California and Dallas and closed its Mexico City
office. The Koll Company informed the Company that effective March 1, 1996 it
would no longer fund costs and expenses related to the pursuit of commercial
development opportunities in Mexico, and The Koll Company's interest was diluted
accordingly.
Effective April 1, 1994, the Company and KRES entered into an agreement to
combine operations in the Northwest Region in order to become a full service
real estate company in that region. This agreement was terminated effective June
30, 1996. Operating profits and losses were split on a 50%-50% basis at the end
of each calendar year or portion thereof. The Company's share of profits was
approximately $600 thousand and $200 thousand for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively.
NOTE 12 -- RETIREMENT PLAN
The Company has a noncontributory defined benefit retirement plan covering
substantially all employees of the Company prior to September 30, 1993 who had
completed one year of continuous employment. The benefit accrual for all
participants was terminated on December 31, 1993. In November 1996, the assets
held in trust under the Company's supplemental and executive retirement plan
were paid to participants in exchange for each participant's release of any
future benefit claims under this plan, resulting in termination of the executive
plan and the curtailment gain recorded in 1996. Net periodic pension cost was as
follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, EIGHT-MONTH FOUR-MONTH
-------------------- PERIOD ENDED PERIOD ENDED
1995 1996 SEPT. 2, 1997 DEC. 31, 1997
--------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
Service cost............................................... $ -- $ -- $ -- $ --
Interest cost.............................................. .5 .5 .2 .1
Actual return on assets.................................... (1.4) (.8) (.8) (.4)
Net amortization and deferral.............................. 1.0 .4 .5 .3
Gain on curtailment........................................ -- (.3) --
--------- --- --- ---
Net periodic pension cost (income)......................... $ .1 $ (.2) $ (.1) $ --
--------- --- --- ---
--------- --- --- ---
</TABLE>
F-32
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The funded status and accrued pension cost at December 31, 1996 and 1997 for
defined benefit plans were as follows (in millions):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................................................ $ (5.3) $ (5.4)
Nonvested............................................................................. -- --
--------- ---------
Accumulated benefit obligation.......................................................... $ (5.3) $ (5.4)
--------- ---------
--------- ---------
Projected benefit obligation............................................................ $ (5.3) $ (5.4)
Plan assets at fair value............................................................... 5.0 5.7
--------- ---------
Projected benefit obligation (in excess of) less than plan assets....................... (.3) .3
Unrecognized net loss................................................................... .7 --
Adjustment required to recognize additional minimum liability........................... (.7) --
--------- ---------
(Accrued) prepaid pension cost.......................................................... $ (.3) $ .3
--------- ---------
--------- ---------
</TABLE>
The development of the projected benefit obligation for the plans at
December 31, 1996 and 1997 is based on the following assumptions: a discount
rate of 7%, and an expected long-term rate of return on assets of 9%. Assets of
the plans are invested primarily in stocks, bonds, short-term securities and
cash equivalents.
NOTE 13 -- CAPITAL STOCK
COMMON STOCK
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.
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.
F-33
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- STOCK PLANS
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan ("1993 Plan") was approved at the
1994 Annual Meeting of Stockholders as the successor equity incentive program to
the Company's 1988 Stock Plan. Outstanding options under the 1988 Stock Plan
were incorporated into the 1993 Plan upon its approval. Under the 1993 Plan, 7.5
million shares each (including 3 million shares each originally authorized under
the 1988 Stock Plan) of Series A Preferred Stock and Class A Common Stock were
reserved for issuance to officers, key employees and consultants of the Company
and its subsidiaries and the non-employee members of the Board. No options have
been exercised, and all options outstanding at December 31, 1996 were canceled
during 1997 in connection with the Recapitalization.
On April 28, 1997, in connection with the Recapitalization, 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 to be issued upon completion of the Recapitalization. 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 were issued at a price of $11.99 per share based on the 20-day
average closing price following completion of the Recapitalization. In
connection with the pending sale of the commercial development business
described in Note 4, options for an aggregate of 569,988 shares will be
terminated upon completion of such sale.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
its plan. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for performance-based awards. The fair
value of the options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 17%, risk-free interest rate of 5.75% and an expected life
of 4 years. Had compensation cost for the Company's stock option plan been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation", the Successor Company's 1997 net loss would have
been as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------- -----------
<S> <C> <C>
Net income (loss) from:
Continuing operations.................................................................. $ (1.3) $ (1.5)
Discontinued operations................................................................ .8 .4
----- -----
Net loss $ (.5) $ (1.1)
----- -----
----- -----
Earnings (loss) per share-basic and diluted:
Continuing operations.................................................................. $ (.11) $ (.12)
Discontinued operations................................................................ .07 .03
----- -----
Net loss per common share-basic and diluted.......................................... $ (.04) $ (.09)
----- -----
----- -----
</TABLE>
F-34
<PAGE>
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for 1996 and
1997 (in millions, except per share amounts):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------- SUCCESSOR COMPANY
FULL ------------------------
FIRST SECOND THIRD FOURTH PERIOD THIRD FOURTH
--------- ----------- --------- ----------- --------- ----- -----------
(JULY 1- (SEPT. 3-
SEPT. 2) SEPT. 30)
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Revenues (a),(d)............................ $ 28.9 $ 4.5 $ .5 -- $ 33.9 $ 1.6 $ 2.7
Cost of sales (a),(d)....................... 28.6 4.5 .5 -- 33.6 1.6 2.7
Loss from continuing operations (a),(d)..... (4.1) (9.5) (71.9) -- (85.5) (.3) (1.0)
Net income (loss) (a)....................... (4.9) (9.5) 24.0 -- 9.6 .2 (.7)
Income (loss) per common share (b).......... N/A N/A N/A N/A N/A $ .02 $ (.06)
Weighted average common shares outstanding
(b)........................................ N/A N/A N/A N/A N/A 11.9 11.9
<CAPTION>
FULL PERIOD
-----------
<S> <C>
1997
Revenues (a),(d)............................ $ 4.3
Cost of sales (a),(d)....................... 4.3
Loss from continuing operations (a),(d)..... (1.3)
Net income (loss) (a)....................... (.5)
Income (loss) per common share (b).......... $ (.04)
Weighted average common shares outstanding
(b)........................................ 11.9
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------
FULL
FIRST SECOND THIRD FOURTH PERIOD
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Revenues (c),(d)............................ $ .8 $ 14.1 $ 3.6 $ 16.0 $ 34.5
Cost of sales (c),(d)....................... .5 13.1 2.3 15.3 31.2
Loss from continuing operations (c),(d)..... (7.6) (7.0) (7.1) (7.6) (29.3)
Net loss (c)................................ (7.9) (6.7) (7.6) (6.7) (28.9)
Loss per common share (b)................... N/A N/A N/A N/A N/A
Weighted average common shares outstanding
(b)........................................ N/A N/A N/A N/A N/A
<CAPTION>
<S> <C>
1996
Revenues (c),(d)............................
Cost of sales (c),(d).......................
Loss from continuing operations (c),(d).....
Net loss (c)................................
Loss per common share (b)...................
Weighted average common shares outstanding
(b)........................................
</TABLE>
- ------------------------
(a) The Company recorded revenues and cost of sales of $25.0 million from the
sale of approximately 880 lowland acres at Bolsa Chica during the first
quarter. Revenues and cost of sales of approximately $9.8 million were
recorded from residential lot sales at Rancho San Pasqual, primarily in the
last three quarters of the year.
(b) Per share and weighted average common shares outstanding data for periods
prior to September 2, 1997 have been omitted as these amounts do not reflect
the Successor Company's current capital structure.
(c) The Company recorded revenues and cost of sales of approximately $10.1
million from residential lot sales at Rancho San Pasqual primarily during
the second and fourth quarters. In addition, the second quarter includes the
sale of the Eagle Crest golf course at Rancho San Pasqual, and the fourth
quarter includes the sale of Fairbanks Highlands as a result of the
formation of a joint venture in which the Company has a continuing interest.
(d) Amounts have been reclassified to present the commercial development
business as a discontinued operation.
F-35
<PAGE>
EXHIBIT 10.25
KREG OPERATING CO. STOCK PURCHASE AGREEMENT
BETWEEN AND AMONG
KOLL REAL ESTATE GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY,
KREG HOLDINGS INC.,
AND
KN HOLDING CORP.
AND KOLL DEVELOPMENT COMPANY LLC
AND
DONALD M. KOLL AND
RICHARD M. ORTWEIN
MARCH 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
I. SALE AND PURCHASE OF STOCK . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 AGREEMENT TO SELL AND PURCHASE STOCK . . . . . . . . . . . . . . 1
1.2 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
II. REPRESENTATIONS AND WARRANTIES OF KREG AND KHI . . . . . . . . . . . . . 3
2.1 CAPITALIZATION; OWNERSHIP OF KOC SHARES. . . . . . . . . . . . . 3
2.2 SUBSIDIARIES AND OTHER INVESTMENTS . . . . . . . . . . . . . . . 3
2.3 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . . . 4
2.4 AUTHORIZATION AND VALIDITY . . . . . . . . . . . . . . . . . . . 4
2.5 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS . . . . . 4
2.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 5
2.7 EMPLOYEE BENEFIT PLANS; ERISA. . . . . . . . . . . . . . . . . . 6
2.8 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.9 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . 9
2.10 ENVIRONMENTAL LIABILITY. . . . . . . . . . . . . . . . . . . . . 9
2.11 COMPLIANCE WITH APPLICABLE LAWS. . . . . . . . . . . . . . . . . 10
2.12 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.13 STATEMENTS TRUE AND CORRECT. . . . . . . . . . . . . . . . . . . 10
2.14 FINDERS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . . 11
III. REPRESENTATIONS AND WARRANTIES OF KNHC AND KDC. . . . . . . . . . . . 11
3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. . . . . . . . . . 11
3.2 AUTHORIZATION AND VALIDITY . . . . . . . . . . . . . . . . . . . 11
3.3 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS . . . . . 11
3.4 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 NO CONTINUING INTEREST . . . . . . . . . . . . . . . . . . . . . 12
3.6 STATEMENTS TRUE AND CORRECT. . . . . . . . . . . . . . . . . . . 12
3.7 FINDER'S FEES. . . . . . . . . . . . . . . . . . . . . . . . . . 12
IV. COVENANTS OF KREG AND KHI. . . . . . . . . . . . . . . . . . . . . . . 13
4.1 OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 CONDUCT OF BUSINESS BY KOC . . . . . . . . . . . . . . . . . . . 14
4.3 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . . 15
4.4 CONSUMMATION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . 16
V. COVENANTS OF KNHC AND KDC. . . . . . . . . . . . . . . . . . . . . . . 16
5.1 CONSUMMATION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . 16
5.2 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . . 16
5.3 RESPONSIBILITY FOR ACCRUED EMPLOYEE BENEFITS . . . . . . . . . . 16
5.4 MEDICAL PREMIUMS AND COSTS . . . . . . . . . . . . . . . . . . . 17
5.5 RELEASE OF GUARANTEES. . . . . . . . . . . . . . . . . . . . . . 17
i
<PAGE>
VI. CONDITIONS TO OBLIGATIONS OF KREG AND KHI . . . . . . . . . . . . . . . 17
6.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 17
6.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.3 PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.4 GOVERNMENT APPROVALS . . . . . . . . . . . . . . . . . . . . . . 17
6.5 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . 17
6.6 OTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 18
VII. CONDITIONS TO OBLIGATIONS OF KNHC. . . . . . . . . . . . . . . . . . . 18
7.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 18
7.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.3 PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.4 GOVERNMENT APPROVALS AND REQUIRED CONSENTS . . . . . . . . . . . 18
7.5 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . 18
7.6 OTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 18
VIII. CLOSING DELIVERIES BY THE PARTIES . . . . . . . . . . . . . . . . . . 19
8.1 DELIVERIES OF KREG AND KHI . . . . . . . . . . . . . . . . . . . 19
8.2 DELIVERIES OF KNHC. . . . . . . . . . . . . . . . . . . . . . . 20
IX. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.1 INDEMNIFICATION BY KDC . . . . . . . . . . . . . . . . . . . . . 21
9.2 INDEMNIFICATION BY KREG. . . . . . . . . . . . . . . . . . . . . 22
9.3 CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.4 TAX INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . 25
9.5 PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS . . . . . . 26
X. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . 27
10.1 NON -DISCLOSURE COVENANT OF KDC AND THE INDIVIDUAL
PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.2 NON-DISCLOSURE COVENANT OF KREG AND KHI. . . . . . . . . . . . . 28
10.3 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
XI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.1 AMENDMENT; WAIVERS . . . . . . . . . . . . . . . . . . . . . . . 28
11.2 ASSIGNMENT; CONTRIBUTION AND SUBSEQUENT TRANSFERS. . . . . . . . 28
11.3 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. . . . . . . . 29
11.4 SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.5 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 29
11.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. . . . . . 29
11.8 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.9 CAPTIONS AND REFERENCES. . . . . . . . . . . . . . . . . . . . . 30
11.10 GENDER AND NUMBER. . . . . . . . . . . . . . . . . . . . . . . . 30
11.11 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.12 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES . . . . . . . . . . . 30
ii
<PAGE>
11.13 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.14 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.15 TERMINATION PRIOR TO CLOSING . . . . . . . . . . . . . . . . . . 32
11.16 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . . 33
11.17 REMEDIES NOT EXCLUSIVE . . . . . . . . . . . . . . . . . . . . . 33
11.18 COSTS, EXPENSES AND LEGAL FEES . . . . . . . . . . . . . . . . . 33
11.19 EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.20 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.21 SECTION 338(h)(10) ELECTION. . . . . . . . . . . . . . . . . . . 33
11.22 SURVIVAL OF TAX PROVISIONS . . . . . . . . . . . . . . . . . . . 34
11.23 REAL AND PERSONAL PROPERTY TAXES . . . . . . . . . . . . . . . . 34
11.24 TRANSFER TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.25 RETURN FILINGS, REFUNDS AND CREDITS. . . . . . . . . . . . . . . 34
11.26 CONSISTENT TAX POSITIONS . . . . . . . . . . . . . . . . . . . . 36
11.27 TERMINATION OF TAX SHARING AGREEMENTS. . . . . . . . . . . . . . 36
XII. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
EXHIBITS
EXHIBIT A
EXHIBIT B
SCHEDULES
SCHEDULE 1.2
SCHEDULE 2.2
SCHEDULE 2.5
SCHEDULE 2.7A
SCHEDULE 2.7B
SCHEDULE 2.8
SCHEDULE 2.9
SCHEDULE 2.12
SCHEDULE 5.5
SCHEDULE 8.1(h)
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("AGREEMENT") is entered into as of this 30th
day of March, 1998 between and among Koll Real Estate Group, Inc., a Delaware
corporation ("KREG"), KREG Holdings Inc., a Delaware corporation which is a
wholly -owned subsidiary of KREG ("KHI"), KN Holding Corp., a New York
corporation ("KNHC"), Koll Development Company LLC, a Delaware limited liability
company ("KDC"), and, solely for purposes of SECTION 10.1, Donald M. Koll and
Richard M. Ortwein (collectively , the "INDIVIDUAL PARTIES") and solely for the
purpose of SECTION 4.1, Donald M. Koll. Capitalized terms not otherwise defined
when first used herein shall have the meaning assigned to them in ARTICLE XII
of this Agreement.
R E C I T A L S
WHEREAS, KHI owns all 1,000 shares of Common Stock (the "STOCK") of KREG
Operating Co., a Delaware corporation ("KOC");
WHEREAS, KREG desires to cause KHI to sell to KNHC, and KNHC desires to
purchase from KHI, the Stock; and
WHEREAS, KNHC desires to cause KOC to be liquidated and its assets and
liabilities to be contributed to KDC (such liquidation and contribution,
collectively, the "Contribution"); following which KNHC shall be relieved of any
further obligation under this Agreement, provided that all of its assets and
obligations hereunder have been transferred to and assumed by KDC, pursuant to
the Contribution, to the same extent as if KDC had originally purchased the
Stock pursuant to this Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the preceding recitals and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
I. SALE AND PURCHASE OF STOCK
1.1 AGREEMENT TO SELL AND PURCHASE STOCK. For the consideration
hereinafter provided and subject to the terms and conditions of this Agreement,
at the Closing (as defined in SECTION 1.3), KHI shall sell, assign, transfer,
convey and deliver to KNHC, free and clear of all liens, charges, claims or
encumbrances, and KNHC shall purchase and acquire from KHI, the Stock. At the
Closing, KHI shall cause to be delivered to KNHC
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a certificate representing the Stock, together with an accompanying signed stock
power or instrument of assignment, duly endorsed in blank for the transfer of
the Stock to KNHC.
1.2 PURCHASE PRICE. Subject to the terms and conditions of this
Agreement and in addition to the other deliverables of KNHC as set forth in
SECTION 8.2, KNHC agrees to pay to KHI the collective purchase price (the
"PURCHASE PRICE") for the Stock as follows:
(a) $1 million of the Purchase Price shall be delivered to KHI in
immediately available funds upon the execution of this Agreement (the
"INITIAL CONSIDERATION"), which shall not be subject to return to KNHC
except to the extent provided for in accordance with the provisions of
SECTION 4.1 or SECTION 11.15;
(b) $29 million of the Purchase Price shall be delivered to KHI in
immediately available funds at the Closing (the "CLOSING CONSIDERATION");
and
(c) such additional amount shall be delivered to KHI in immediately
available funds at the Closing as is determined no later than one (1) day
prior to the Closing in accordance with the methodology set forth on
SCHEDULE 1.2 (the "1998 ACTIVITY CONSIDERATION"). As a clarification to
the methodology set forth on SCHEDULE 1.2, it is the intention of the
parties hereto that all 1998 revenue through and including the Closing Date
received by KOC shall decrease the Purchase Price and all 1998 expenses
through, and including the Closing Date paid by KOC shall increase the
Purchase Price. The dollar amounts set forth on SCHEDULE 1.2 are based
upon reasonably available information as of the date of this Agreement,
however, such amounts shall be updated on the basis of the best available
information prior to the Closing and the amount of the 1998 Activity
Consideration shall then be recalculated for the purpose of determining the
amount to be paid on the Closing Date. Within thirty (30) days after the
Closing Date, a final accounting of KOC's consolidated financial activity
from January 1, 1998 through the Closing Date shall be completed and
reviewed by the accounting staffs of KDC and KREG. Thereafter, the amount
of the 1998 Activity Consideration shall be calculated for the final time
and (i) if the amount paid on the Closing Date is determined to be less
than the amount of the final calculation then KNHC shall pay the
incremental amount to KREG in immediately available funds within five (5)
days of such determination, or (ii) if the amount paid on the Closing Date
is determined to be more than the amount of the final calculation then KREG
shall repay the incremental amount to KNHC in immediately available funds
within five (5) days of such determination.
The amount of all cash balances in the various bank accounts of KOC and the
Investments, as reflected on the books and records of KOC and the Investments,
but subject to adjustment for month-end bank account reconciliations to the book
balance, shall be delivered to KREG on the Closing Date as a partial repayment
of intercompany debt owed to KREG by KOC and its Affiliates. Following the
final calculation and payment in full of the 1998 Activity Consideration, the
balance of the amount of intercompany debt of
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KOC and the Investments that is reflected as being outstanding on the books of
KREG shall be deemed a capital contribution made as of the Closing Date.
1.3 CLOSING. The closing of the sale and purchase of the Stock under and
in accordance with this Agreement (the "CLOSING") shall take place at the
offices of McDermott, Will & Emery, 1301 Dove Street, Suite 500, Newport Beach,
California, on (a) April 30, 1998, (b) such later date determined in accordance
with the provisions of SECTION 4.1, (c) such later date determined by KNHC
pursuant to the proviso in SECTION 7.4, or (d) such earlier or later date as may
be mutually agreed to in writing by the parties hereto (the "CLOSING DATE").
II. REPRESENTATIONS AND WARRANTIES OF KREG AND KHI
As an inducement to KNHC and KDC to enter into this Agreement and to
purchase the Stock, KREG and KHI jointly and severally represent and warrant to
KNHC and KDC as set forth below in this ARTICLE II; provided, however, that no
such representation or warranty which is qualified as being subject to the
Knowledge of the Individual Parties shall be deemed to have been made in the
event that such representation or warranty was not, to the Knowledge of the
Individual Parties, true and correct at the time(s) made:
2.1 CAPITALIZATION; OWNERSHIP OF KOC SHARES. The authorized capital
stock of KOC consists of the Stock, all of which shares are issued and
outstanding and owned beneficially and of record by KHI. Subject to the
Knowledge of the Individual Parties, there are no securities convertible into or
exchangeable or exercisable for shares of capital stock of KOC and no warrants,
calls, options or other rights to acquire from KOC or KHI, or any obligation of
KOC or KHI to issue, any securities of KOC.
2.2 SUBSIDIARIES AND OTHER INVESTMENTS. SCHEDULE 2.2 identifies KOC's
equity or other interests in all of its direct and indirect subsidiaries and the
KOC Employee Affiliates (collectively, the "INVESTMENTS") as of the date of this
Agreement, but no representation or warranty is made as to any of the assets
held by any of the KOC Employee Affiliates or Project Partnerships, including
any of their respective equity or other interests in any other entity, joint
venture or project. All the outstanding shares of capital stock of, or other
equity interests in, each Investment are: duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights; are (subject to the
Knowledge of the Individual Parties) owned directly or indirectly by KOC free
and clear of all pledges, claims, liens, charges, encumbrances and security
interests securing indebtedness or similar obligations (collectively "Liens");
and are (subject to the Knowledge of the Individual Parties) free of any other
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests that would prevent the operation by KOC of
such Investment's business as currently conducted, provided that although the
partnership agreements of each KOC Employee Affiliate do not contain any
restrictions on transfer, the organizational documents of certain Project
Partnerships may contain restrictions on transfer of KOC's interests in the KOC
Employee Affiliates. Other than as
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set forth on SCHEDULE 2.2, there are no securities convertible into or
exchangeable or exercisable for shares of capital stock of, or other interests
in, any Investment and (subject to the Knowledge of the Individual Parties) no
warrants, calls, options or other rights to acquire from KOC or any Investment,
or (subject to the Knowledge of the Individual Parties) any obligation of KOC or
any Investment to issue, any securities of any Investment. There are no
agreements, commitments, understandings, arrangements, facts or circumstances
which create or would give rise to the creation of any direct, contingent or
other economic or beneficial interest being held by KREG or KHI or their
respective lower tier Affiliates after the Closing which relates directly or
indirectly to any of the Investments or their assets including, without
limitation, the Project Partnerships (collectively the "Interests") and to the
extent any such Interests exist, KREG disclaims any legal or beneficial interest
in the Project Partnerships and agrees that if it receives any proceeds with
respect thereto to promptly remit such proceeds to KDC.
2.3 ORGANIZATION AND GOOD STANDING. Each of KREG, KHI, KOC and each
Investment is a corporation, or limited partnership duly organized, validly
existing and in good standing under the laws of the state of its organization
and has the requisite corporate or other power and authority to carry on its
business as now conducted. KOC and each Investment is duly qualified or
licensed to do business and is in good standing (with respect to jurisdictions
which recognize such concept) in (subject to the Knowledge of the Individual
Parties) each jurisdiction in which the nature of its business or the ownership,
leasing or operation of its properties makes such qualification or licensing
necessary except where the failure to be qualified or licensed would not have a
Material Adverse Effect. KREG has made available to KNHC prior to the execution
of this Agreement complete and correct copies of the certificate of
incorporation and by-laws of KOC and the certificates of incorporation, by-laws,
partnership agreements, or similar organizational documents of each Investment,
in each case as amended to date.
2.4 AUTHORIZATION AND VALIDITY. KREG and KHI have all requisite
corporate power to enter into this Agreement and all other agreements entered
into in connection with the transactions contemplated hereby and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance by KREG and KHI of this Agreement and the transactions contemplated
hereby have been duly authorized by all necessary action on the part of the
respective Board of Directors or stockholders of KREG and KHI. This Agreement
has been duly executed by each of KREG and KHI, and this Agreement and all other
agreements and obligations entered into and undertaken in connection with the
transactions contemplated hereby to which KREG or KHI is a party constitute, or
upon execution will constitute, valid and binding agreements of KREG or KHI, as
the case may be, enforceable against it in accordance with their respective
terms, except as enforceability may be limited by bankruptcy or other laws
affecting the enforcement of creditors' rights generally, or by general equity
principles, or by public policy.
2.5 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS. Neither the
execution, delivery and performance of this Agreement by KREG and KHI and any
other
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documents contemplated hereby (with or without the giving of notice, the lapse
of time, or both): (a) requires the consent of any governmental or regulatory
body or authority or any other third party except for such consents which have
been identified on SCHEDULE 2.5 (the "Required Consents"), excluding the
consents of (i) constituent partners or members of Project Partnerships, (ii)
lenders to KOC Employee Affiliates, Project Partnerships or their respective
lower tier Affiliates, or (iii) any other party with respect to any act or
omission by the KOC Employee Affiliates, Project Partnerships or their
respective lower tier Affiliates (collectively (i) through (iii) being referred
to herein as the "Project Consents" a complete list of which has been prepared
by the Individual Parties and is set forth on SCHEDULE 2.5); (b) will conflict
with any provision of KREG's, KHI's, KOC's or any Investment's organizational
documents; (c) other than with respect to the properties of the KOC Employee
Affiliates, Project Partnerships or their respective lower tier Affiliates, will
conflict with, result in a violation of, or constitute a default under any law,
ordinance, regulation, ruling, judgment, order or injunction of any court or
governmental instrumentality to which KREG or KHI or (subject to the Knowledge
of the Individual Parties) KOC or any Investment is a party or by which KREG or
KHI or (subject to the Knowledge of the Individual Parties) KOC, any Investment
or their respective properties are subject or bound; (d) other than with respect
to the properties of the KOC Employee Affiliates, Project Partnerships or their
respective lower tier Affiliates, will conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under, require any
notice under, or accelerate or permit the acceleration of any performance
required by the terms of any agreement, instrument, license or permit, material
to this transaction, to which KREG or KHI or (subject to the Knowledge of the
Individual Parties) KOC or any Investment is a party or by which KREG, KHI, or
(subject to the Knowledge of the Individual Parties) KOC, any Investment or any
of their respective properties are bound except for such conflict, termination,
breach or default, the occurrence of which would not result in a Material
Adverse Effect on KOC; and (e) other than with respect to the properties of the
KOC Employee Affiliates, Project Partnerships or their respective lower tier
Affiliates, will create (subject to the Knowledge of the Individual Parties) any
Encumbrance or restriction upon any of the assets or properties of KOC or any
Investment.
2.6 FINANCIAL STATEMENTS. A true and complete copy of KOC's consolidated
balance sheet as of December 31, 1997 and KOC's consolidated balance sheet as of
February 28, 1998, each of which is attached hereto as EXHIBIT A (collectively,
the "Balance Sheet") have been prepared on an accrual basis as of the dates
indicated (except as may be indicated in the notes thereto) and, subject to the
Knowledge of the Individual Parties, fairly present the consolidated financial
position of KOC as of the dates thereof, are complete and correct and consistent
with the books and records of KOC, which books and records are complete and
correct, (subject to adjustments for (i) possible non-recovery of KOC's
approximately $317,000 investment in C.P. Koll Investment Company, Ltd. as of
December 31, 1997; (ii) possible non-collection of a $115,000 receivable as of
December 31, 1997, and $155,000 as of February 28, 1998, from Lin with respect
to the Mall of Taiwan Project, a $83,250 receivable from C.P. Koll Investment
Company, Ltd., and a $23,000 receivable from the LAX Project, or any other
non-collectible receivable not within the Knowledge of KREG; and (iii)
threatened litigation regarding a commission claims dispute
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with respect to KOC's EPA project in Kansas City, Kansas). While treatment of
various Balance Sheet items for tax return purposes may differ from financial
reporting, the numbers reflected in the Balance Sheet as of December 31, 1997
are consistent with data to be used in preparation of KREG's tax returns.
2.7 EMPLOYEE BENEFIT PLANS; ERISA
(a) SCHEDULE 2.7A contains a true and complete list (subject to the
Knowledge of the Individual Parties) of each material bonus, incentive
compensation, severance, change-in-control, or termination pay, profit-sharing,
pension, or retirement plan, program, agreement or arrangement and each other
material employee benefit plan, program, agreement or arrangement, sponsored,
maintained or contributed to or required to be contributed to by KOC or any of
its subsidiary corporations or KREG or any subsidiary corporations of KREG, all
of which are set forth in SCHEDULE 2.7B (an "ERISA AFFILIATE"), that together
with KOC would be deemed a "single employer" within the meaning of SECTION
4001(b)(1) of ERISA, for the benefit of any current or former employee or
director of KOC, or any ERISA Affiliate (the "PLANS"). Included in SCHEDULE
2.7A are the Plans that are "employee welfare benefit plans," or "employee
pension benefit plans" as such terms are defined in Sections 3(1) and 3(2) of
ERISA (such plans being hereinafter referred to collectively as the "ERISA
PLANS"). None of KOC nor any ERISA Affiliate has (subject to the Knowledge of
the Individual Parties) any formal plan or commitment, whether legally binding
or not, to create any additional Plan or modify or change any existing Plan that
would affect any current or former employee or director of KOC or any ERISA
Affiliate.
(b) With respect to each of the Plans, KREG or KOC has heretofore made
available to KNHC true and complete copies of (i) each of the Plan documents
(including all amendments thereto) for each written Plan or a written
description of any Plan that is not otherwise in writing, (ii) if the Plan is
funded through a trust or any other funding vehicle, a copy of the trust or
other funding agreement (including all amendments thereto) and the latest
financial statements thereof, if any, and (iii) the most recent determination
letter received from the IRS with respect to each Plan that is intended to be
qualified under section 401(a) of the Internal Revenue Code of 1986, as amended
(the "CODE").
(c) No liability under Title IV of ERISA has been incurred by KOC or any
ERISA Affiliate (except for the Pullman Inc. Non-contributory Pension Plan which
is the responsibility of MAFCO Consolidated Group, Inc., and the current status
of which KREG is not aware) that has not been satisfied in full, and no
condition exists that presents a material risk to KOC or any ERISA Affiliate of
incurring any liability under such Title, other than liability for premiums due
the Pension Benefit Guaranty Corporation (the "PBGC"), which payments have been
or will be made when due. To the extent this representation applies to Sections
4064, 4069 or 4204 of Title IV of ERISA, it is made not only with respect to the
ERISA Plans but also with respect to any employee benefit plan, program,
agreement or arrangement subject to Title IV of ERISA to which KOC or any ERISA
Affiliate made, or was required to make, contributions during the past six
years.
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(d) The PBGC has not instituted proceedings pursuant to Section 4042
of ERISA to terminate any of the ERISA Plans subject to Title IV of ERISA,
and no condition exists that presents a material risk that such proceedings
will be instituted by the PBGC.
(e) With respect to each of the ERISA Plans that is subject to Title
IV of ERISA, the present value of accumulated benefit obligations under such
Plan, as determined by the Plan's actuary based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such Plan's actuary with respect to such Plan, did not, as of its
latest valuation date, exceed the then current value of the assets of such
Plan allocable to such accumulated benefit obligations (excluding the Pullman
Inc. Non-contributory Pension Plan which is the responsibility of MAFCO
Consolidated Group, Inc., and the current status of which KREG is not aware).
(f) None of KOC, any ERISA Affiliate, any of the ERISA Plans, any
trust created thereunder, nor to the Knowledge of KREG, any trustee or
administrator thereof has engaged in a transaction or has taken or failed to
take any action in connection with which KOC or any ERISA Affiliate could be
subject to any material liability for either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to
section 4975(a) or (b), 4976 or 4980B of the Code.
(g) All contributions and premiums which KOC or any ERISA Affiliate is
required to pay under the terms of each of the ERISA Plans and section 412 of
the Code, have, to the extent due, been paid in full or properly recorded on
the financial statements or records of KOC and none of the ERISA Plans or any
trust established thereunder has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and section 412 of the Code),
whether or not waived, as of the last day of the most recent fiscal year of
each of the ERISA Plans ended prior to the date of this Agreement. No lien
has been imposed under section 412(n) of the Code or Section 302(f) of ERISA
on the assets of KOC or any ERISA Affiliate, and no event or circumstance has
occurred that is reasonably likely to result in the imposition of any such
lien on any such assets on account of any ERISA Plan.
(h) No ERISA Plan is a "multiemployer plan," as such term is defined
in Section 3(37) of ERISA.
(i) Each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not
limited to ERISA and the Code.
(j) With regard to each of the ERISA Plans that is intended to be
"qualified" within the meaning of Section 401(a) of the Code, the sponsor of
the Plan has applied for a currently effective determination letter from the
IRS stating that it is so qualified, and to the Knowledge of KREG, no event
has occurred which would affect such qualified status except for a recent
amendment to The Koll Company 401(k) Plan.
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(k) Any fund established under an ERISA Plan that is intended to
satisfy the requirements of section 501(c)(9) of the Code has received an IRS
letter confirming satisfaction of such requirements, and no event has
occurred which, to the Knowledge of KREG, would affect such satisfaction.
(l) No amounts payable under any of the Plans or any other contract,
agreement or arrangement with respect to which KOC or any ERISA Affiliate may
have any liability could fail to be deductible for federal income tax
purposes by virtue of section 162(m) or section 280G of the Code.
(m) Except for the KREG Retiree Medical Plan, no Plan provides
benefits, including without limitation death or medical benefits (whether or
not insured), with respect to current or former employees of KOC or any ERISA
Affiliate after retirement or other termination of service (other than (i)
coverage mandated by applicable laws, (ii) death benefits or retirement
benefits under any "employee pension plan," as that term is defined in
Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as
liabilities on the books of KOC or an ERISA Affiliate, or (iv) benefits, the
full direct cost of which is borne by the current or former employee (or
beneficiary thereof)).
(n) The consummation of the transactions contemplated by this
Agreement (including the Contribution) will not, either alone or in
combination with any other event, (i) entitle any current or former employee,
officer or director of KOC or any ERISA Affiliate except for employees
remaining with KREG after the Closing Date to continued participation in any
ERISA Plan, to severance pay, unemployment compensation or any other similar
termination payment, or (ii) accelerate the time of payment or vesting, or
increase the amount of or otherwise enhance any benefit due any such
employee, officer or director.
2.8 TAXES. (a) KOC and any affiliated group, within the meaning of
SECTION 1504 of the Code of which KOC is or has been a member (the "KREG
CONSOLIDATED GROUP"), has filed or caused to be filed in a timely manner (within
any applicable extension periods) all federal and state income and other
material Tax Returns required to be filed on or prior to the Closing Date, and
all such Tax Returns (subject to the Knowledge of the Individual Parties with
respect to the operations of KOC, KOC Employee Affiliates, Project Partnerships
and their respective lower tier Affiliates) are true, correct and complete in
all respects and were prepared in accordance with applicable laws and
regulations and properly reflect in all respects the Taxes of KOC and the KREG
consolidated group; (b) all Taxes shown to be due and payable on such Tax
Returns have been fully paid and discharged and all Taxes not yet due and
payable by KOC with respect to all periods prior to and through the date hereof
have been properly accrued on the books and records of KOC (subject to the
Knowledge of the Individual Parties with respect to the operations of KOC, KOC
Employee Affiliates, Project Partnerships and their respective lower tier
Affiliates) in accordance with generally accepted accounting principles and in
amounts sufficient for the payment of all unpaid Taxes required to be paid by
KOC with respect to such periods; (c) all Taxes that KOC is or was required to
withhold or collect have (subject to the
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Knowledge of the Individual Parties with respect to the operations of KOC, KOC
Employee Affiliates, Project Partnerships and their respective lower tier
Affiliates) been duly and timely withheld or collected and, to the extent
required by law, have been paid to the proper governmental body or other person
or entity; (d) no liens for unpaid Taxes have been filed and no material claims
are being asserted in writing by any taxing authority with respect to any Taxes,
except as disclosed in SCHEDULE 2.8; (e) there are no outstanding agreements or
waivers extending the statutory period of limitations applicable to any federal
or state income or other material Tax Returns required to be filed with respect
to KOC; (f) there is no material unpaid tax deficiency, determination or
assessment currently outstanding against KOC, except as disclosed in SCHEDULE
2.8; (g) no amounts are or will be due to or from KOC, KOC Employee Affiliates,
Project Partnerships or their respective lower tier Affiliates under any tax
sharing or tax allocation agreement; (h) none of the Tax Returns of KOC is
currently being audited or examined by any taxing authority; (i) the
consolidated federal income Tax Returns of the affiliated group which includes
KOC have been audited by the Internal Revenue Service or are closed by the
applicable statute of limitations for all taxable periods through December 31,
1993; and (j) KOC has been a member of such groups since September 30, 1993.
True and complete copies of the "pro-forma" federal and state income tax returns
for the last three tax-years of KOC have been provided to KNHC. For purposes of
this SECTION 2.8 and SECTIONS 9.4, 9.5, 11.23, 11.24 and 11.25, references to
KOC shall include KOC and any Person in which KOC has a direct or indirect
ownership interest.
2.9 TRANSACTIONS WITH AFFILIATES. Other than as identified on SCHEDULE
2.9 and excluding the KOC Employee Affiliates, the Project Partnerships and
their respective lower tier Affiliates, (a) there are no outstanding amounts
payable to or receivable from, or advances by KOC or any Investment and none of
KOC or any Investment is otherwise a creditor of or debtor to, KREG, KHI, any
Affiliate thereof or any officer, director, employee of KREG, KHI or any
Affiliate thereof, and (b) except for the partnership agreements of the KOC
Employee Affiliates, the Vesting Agreements and Netting Agreements with
employees (subject to the Knowledge of the Individual Parties) none of KOC or
any Investment is a party to any transaction, agreement, arrangement or
understanding with KREG, KHI, any Affiliate thereof or any officer, director or
employee of KREG, KHI or any Affiliate thereof. Except for amounts relating to
the items set forth on SCHEDULE 2.9 or as otherwise provided in this Agreement,
prior to or contemporaneously with the Closing, any and all amounts owing under
any agreements, arrangements or understandings between KOC, KOC Employee
Affiliates, Project Partnerships or their respective lower tier Affiliates, on
the one hand, and KREG, KHI or any other Affiliate thereof, on the other hand,
shall be deemed an additional contribution of capital and all such agreements,
arrangements and understandings shall be terminated as of the Closing Date
without any further liability.
2.10 ENVIRONMENTAL LIABILITY. There are no legal, administrative,
arbitral or other proceedings, or, as to which KREG has received written notice,
any claims, actions, causes of action, private environmental investigations or
remediation activities or governmental investigations of any nature seeking to
impose on KOC or any Investment (excluding the
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KOC Employee Affiliates, the Project Partnerships and their respective lower
tier Affiliates), or that could be expected to result in the imposition on KOC
or any Investment (excluding the KOC Employee Affiliates, the Project
Partnerships and their respective lower tier Affiliates) of, any liability or
obligation arising under any Environmental Laws, pending or, to the Knowledge of
KREG, and, subject to the Knowledge of the Individual Parties, threatened,
against KOC or any Investment (excluding the KOC Employee Affiliates, the
Project Partnerships and their respective lower tier Affiliates). Excluding the
KOC Employee Affiliates, the Project Partnerships and their respective lower
tier Affiliates, and, subject to the Knowledge of the Individual Parties, none
of KOC or any Investment is subject to any agreement (including any
indemnification agreement), order, judgment, decree, letter or memorandum by or
with any court, governmental authority, regulatory agency or third party
imposing any material liability or obligation pursuant to or under any
Environmental Law that would reasonably be expected to have a Material Adverse
Effect on KOC.
2.11 COMPLIANCE WITH APPLICABLE LAWS. KOC and the Investments (excluding
the KOC Employee Affiliates, the Project Partnerships and their respective lower
tier Affiliates) hold, subject to the Knowledge of the Individual Parties, all
material permits, licenses, variances, exemptions, orders, registrations and
approvals of all governmental entities which are necessary for the lawful
operation of the businesses of KOC and the Investments (excluding the KOC
Employee Affiliates, the Project Partnerships and their respective lower tier
Affiliates) (the "Permits"), and are not, subject to the Knowledge of the
Individual Parties, in material default under the Permits or under applicable
statutes, laws, ordinances, rules and regulations, except where the failure to
hold such Permits or to comply with such statutes, laws, ordinances, rules or
regulations or Permits would not, individually or in the aggregate, have a
Material Adverse Effect on KOC.
2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no
claim, litigation, action, suit or proceeding, administrative or judicial,
pending, or to the Knowledge of KREG and subject to the Knowledge of the
Individual Parties, threatened against KOC or the Investments, at law or in
equity, before any federal, state, local or foreign court or regulatory agency,
or other governmental authority which could have a Material Adverse Affect on
(i) the ability of KREG or KHI to perform their respective obligations under
this Agreement; (ii) the assets or the condition, financial or otherwise, or
operation of KOC or the Investments; or (iii) the consummation of the
transactions contemplated by this Agreement.
2.13 STATEMENTS TRUE AND CORRECT. Subject to the various qualifications
and exceptions made therein, no representation or warranty made herein by KHI or
KREG, or any statement, certificate, information, exhibit or instrument to be
furnished pursuant to this Agreement by KHI or KREG, or any of their respective
representatives (other than representatives who are the Individual Parties or
persons who will be employees or Affiliates of KOC, KOC Employee Affiliates,
Project Partnerships and their respective lower tier Affiliates after the
Closing Date) contains as of the date hereof or will contain as of the Closing
Date any untrue statement of material fact or omit or will omit to state
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a material fact necessary to make the statements contained herein and therein
not misleading.
2.14 FINDERS' FEES. No investment banker, broker, finder or other
intermediary has been retained by or is authorized to act on behalf of KREG or
KHI who is entitled to any fee or commission upon consummation of the
transactions contemplated by this Agreement or referred to herein.
III. REPRESENTATIONS AND WARRANTIES OF KNHC AND KDC
As an inducement to KREG and KHI to enter into this Agreement and to sell
the Stock, KNHC and KDC hereby jointly and severally represent and warrant as
follows:
3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. KDC is a limited
liability company and KNHC is a corporation, both of which are duly organized,
validly existing and in good standing under the laws of their states of
organization, with all requisite power and authority to own, operate and lease
their assets and properties and to carry on their business as currently
conducted.
3.2 AUTHORIZATION AND VALIDITY. Each of KNHC and KDC has all requisite
power to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by KNHC and KDC
of this Agreement and the agreements provided for herein, and the consummation
by KNHC and KDC of the transactions contemplated hereby and thereby are within
KNHC's and KDC's powers and have been duly authorized by all necessary action on
the part of KNHC's Board of Directors and stockholders and KDC's management and
its members. This Agreement has been duly executed by KNHC and KDC. This
Agreement and all other agreements and obligations entered into and undertaken
in connection with the transactions contemplated hereby and thereby to which
KNHC or KDC is a party constitute, or upon execution will constitute, valid and
binding agreements of each of KNHC and KDC enforceable against it in accordance
with their respective terms, except as may be limited by bankruptcy or other
laws affecting creditors' rights generally, or by general equity principles, or
by public policy.
3.3 ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED CONSENTS. The
execution, delivery and performance of this Agreement by KNHC and KDC and
any other documents contemplated hereby (with or without the giving of
notice, the lapse of time, or both): (a) does not require the consent of any
governmental or regulatory body or authority or any other third party ; (b)
will not conflict with any provision of KNHC's or KDC's charter documents,
organization or operating agreements, or any agreement or understanding among
its members; (c) will not conflict with, result in a violation of, or
constitute a default under any law, ordinance, regulation, ruling, judgment,
order or injunction of any court or governmental instrumentality to which
KNHC or KDC is a party or by which KNHC or KDC or their respective
properties are subject or bound; (d) will not conflict with,
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constitute grounds for termination of, result in a breach of, constitute a
default under, require any notice under, or accelerate or permit the
acceleration of any performance required by the terms of any agreement,
instrument, license or permit, material to this transaction, to which KNHC or
KDC is a party or by which KNHC or KDC or any of their respective properties
are bound except for such conflict, termination, breach or default, the
occurrence of which would not result in a Material Adverse Effect on KNHC or
KDC; and (e) will not create any Encumbrance or restriction upon any of the
assets or properties of KNHC or KDC.
3.4 LITIGATION. There is no claim, litigation, action, suit or
proceeding, administrative or judicial, pending, or to the Knowledge of KNHC or
KDC, threatened against KNHC or KDC, at law or in equity, before any federal,
state, local or foreign court or regulatory agency, or other governmental
authority which could have a Material Adverse Affect on (i) the ability of KNHC
or KDC to perform their respective obligations under this Agreement; (ii) the
assets or the condition, financial or otherwise, or operation of KNHC or KDC; or
(iii) the consummation of the transactions contemplated by this Agreement.
3.5 NO CONTINUING INTEREST. There are no agreements, commitments,
understandings, arrangements, facts or circumstances which create or would give
rise to the creation of any direct, contingent or other economic or beneficial
interest being held after the Closing by KOC, the KOC Employee Affiliates,
Project Partnerships or their respective lower tier Affiliates which relates
directly or indirectly to any of KREG's assets including, without limitation,
the development project at Bolsa Chica (collectively, the "Continuing Interests"
it being understood that interests in the Investments and interests in the
Project Partnerships are not Continuing Interests) and to the extent any such
Continuing Interests exist, KDC, KOC, KOC Employee Affiliates, Project
Partnerships and their respective lower tier Affiliates disclaim any legal or
beneficial interest in such Continuing Interests and agree that if they receive
any proceeds with respect thereto, to promptly remit such proceeds to KREG.
3.6 STATEMENTS TRUE AND CORRECT. No representation or warranty made
herein by KNHC or KDC, or any statement, certificate, information, exhibit or
instrument to be furnished pursuant to this Agreement by KNHC or KDC or any of
their respective representatives, contains as of the date hereof or will contain
as of the Closing Date any untrue statement of material fact or omit or will
omit to state a material fact necessary to make the statements contained herein
and therein not misleading.
3.7 FINDER'S FEES. No investment banker, broker, finder or other
intermediary has been retained by or is authorized to act on behalf of KNHC or
KDC who is entitled to any fee or commission upon consummation of the
transactions contemplated by this Agreement or referred to herein.
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IV. COVENANTS OF KREG AND KHI
4.1 OTHER OFFERS. Neither KREG nor KHI shall directly or indirectly
solicit or initiate any negotiations or discussions with respect to any offer or
proposal to acquire all or a substantial portion of the business, properties or
capital stock of KOC, whether by merger, consolidation, share exchange, business
combination, purchase of assets, sale of capital stock or otherwise; provided,
however, that the foregoing shall in no way limit KREG or KHI with regard to
unsolicited offers received following the public announcement of the
transactions contemplated hereby a copy of which is attached hereto as EXHIBIT
B. Following the receipt of any such offer which it determines in good faith
following advice from its financial and legal advisors to provide superior value
to KHI to the transactions contemplated by this Agreement, KREG shall promptly
provide written notice to KNHC and KDC of the terms of such offer and shall,
thereafter, have the right, exercisable in its sole discretion upon two (2) days
prior written notice to KNHC and KDC, to terminate this Agreement at any time
prior to the expiration of thirty (30) days from the date this Agreement is
executed (unless such notice is delivered on the thirteeth (30th) day in which
case the termination would occur on the thirty-second (32nd) day); provided that
if KNHC or KDC notifies KREG in writing prior to the date of such termination
that it is interested in making a higher offer, KREG will extend the termination
date for an additional fifteen (15) days and, to the extent necessary, the
Closing Date would also be extended and, unless otherwise agreed to in writing
by the parties hereto, at the end of such fifteen (15) day period KREG shall
either close the transactions contemplated herein or terminate this Agreement.
Any termination of this Agreement by KREG pursuant to this SECTION 4.1 shall be
without any liability or obligation on the part of KREG or any of its Affiliates
to KNHC or KDC or any of their Affiliates, subject only to the requirement that
KREG deliver the following to KNHC not later than on the date of such
termination:
(a) the amount of the Initial Consideration in immediately available
funds, plus interest thereon from the date hereof at a rate equal to 5% per
annum;
(b) $2 million in immediately available funds; and
(c) the aggregate amount of up to $ 500,000 for the legal,
accounting or consultant fees incurred by KNHC, KDC or the members thereof
in connection with the transactions contemplated hereby for the services of
Allen, Matkins, Leck, Gamble & Mallory, LLP, Skadden, Arps, Slate, Meagher
& Flom LLP, Ernst & Young LLP and Arthur Andersen LLP during the period of
February 2, 1998 through the date of any such termination, subject to
KREG's prior receipt of invoices therefor.
In the event KREG terminates this Agreement pursuant to the provisions of
this SECTION 4.1, Donald M. Koll shall have the immediate right, upon delivery
of written notice to terminate his employment agreement and his covenant-not-
to-compete with KREG, subject to the cancellation of all of his outstanding
options (including vested options) for KREG common stock and the surrender of
any shares (or the sales proceeds therefrom)
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which were issued upon the exercise of any option, which termination,
cancellation and surrender shall provide for a complete waiver and release of
KREG with respect to the payment of any severance or other form of compensation.
In addition, the license granted to KREG to use the "Koll" name shall be
terminated thirty (30) days thereafter, other than with respect to the use of
the "Koll" name from a historical perspective. For a period of thirty (30) days
following any such termination of his employment, Donald M. Koll agrees to
cooperate with KREG with respect to the orderly transition of his prior powers
and responsibilities to the successor Chairman of the Board and Chief Executive
Officer.
4.2 CONDUCT OF BUSINESS BY KOC. Except as otherwise expressly
contemplated by this Agreement or as consented to by KNHC in writing, such
consent not to be unreasonably withheld or delayed, during the period from the
date of this Agreement to the Closing Date, neither KREG nor KHI shall take any
action to cause KOC and the Investments to fail to carry on their respective
businesses in the ordinary course consistent with past practice and in
compliance in all material respects with all applicable laws and regulations and
shall use reasonable efforts to preserve intact their current business
organizations, use reasonable efforts to keep available the services of their
current officers and other employees and use reasonable efforts to preserve
their relationships with those persons having business dealings with them .
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Closing Date, neither KREG nor KHI shall cause or
permit KOC or any of the Investments to:
(a) declare, set aside or pay any dividends on, make any other
distributions or payments in respect of, or enter into any agreement with
respect to the voting of, any of its capital stock or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(b) amend its certificate of incorporation, by-laws, partnership
agreement or other comparable organizational documents;
(c) acquire any business (whether by merger, consolidation, purchase
of assets or otherwise) or acquire any equity interest in any person not an
affiliate (whether through a purchase of stock, establishment of a joint
venture or otherwise), except in the ordinary course of business of
establishing Project Partnerships, consistent with past practice;
(d) sell, lease, joint venture, license, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any of its material
properties or assets, except in the ordinary course of business of the
Project Partnerships, consistent with past practice, provided that in no
event shall KOC or any of the Investments enter into or modify any lease or
occupancy agreement for office space occupied by KOC or any of the
Investments;
(e) except for borrowings under existing credit facilities or lines
of credit, incur any indebtedness for borrowed money or issue any debt
securities or assume,
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guarantee or endorse, or otherwise become responsible for the obligations
of any person, or make any loans, advances or capital contributions to, any
person other than its wholly owned subsidiaries, except in the ordinary
course of business of the Project Partnerships, consistent with past
practice;
(f) change its methods of accounting (or underlying assumptions) in
effect at December 31, 1997, except as required by changes in GAAP or law
or regulation, or change any of its methods of reporting income and
deductions for federal income Tax purposes from those employed in the
preparation of the federal income Tax returns of KOC for the taxable years
ending December 31, 1996, except as required by changes in law or
regulation;
(g) create, renew, amend, terminate or cancel, or take any other
action that could reasonably be expected to result in the creation,
renewal, amendment, termination or cancellation, of any material contract
of KOC or any Investment, except in the ordinary course of business of the
Project Partnerships, consistent with past practice;
(h) grant to any such current or former director, executive officer
or other employee any increase in severance or termination pay, or amend or
adopt any employment, deferred compensation, consulting, severance,
termination or indemnification agreement with any such current or former
director, executive officer or employee;
(i) amend or modify any of the Netting Agreements or Vesting
Agreements or waive compliance with any of the material terms of any of
these agreements; or
(j) authorize, or commit or agree to take, any of the foregoing actions.
4.3 NOTICE OF CERTAIN EVENTS. KREG and KHI shall promptly notify KNHC
and KDC of:
(a) any notice or other communication from any Person or entity
alleging that the consent of such Person or entity is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; or
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise
affecting the transactions contemplated hereby.
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4.4 CONSUMMATION OF AGREEMENT. Subject to the terms and conditions
hereof, KREG and KHI will take all action reasonably necessary to cause the
consummation of the transactions contemplated by this Agreement in accordance
with their terms and conditions and take all corporate and other action
necessary to approve the transactions contemplated herein.
V. COVENANTS OF KNHC AND KDC
KNHC and KDC agree that between the date hereof and the Closing:
5.1 CONSUMMATION OF AGREEMENT. Subject to the terms and conditions
hereof, KNHC and KDC will take all action reasonably necessary to cause the
consummation of the transactions contemplated by this Agreement in accordance
with their terms and conditions and take all corporate and other action
necessary to approve the transactions contemplated herein.
5.2 NOTICE OF CERTAIN EVENTS. KNHC and KDC shall promptly notify KREG
and KHI of:
(a) any notice or other communication from any Person or entity
alleging that the consent of such Person or entity is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; or
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise
affecting the transactions contemplated hereby.
5.3 RESPONSIBILITY FOR ACCRUED EMPLOYEE BENEFITS. KDC hereby covenants
and agrees that it will take whatever steps are necessary to cause to be paid
when due any accrued benefits for which KOC or any other KREG affiliated entity
might have any liability arising from any Plan that has been disclosed to KDC
on or prior to the date of this Agreement to the extent that such liabilities
(a) relate to any employees of KOC or the Investments or any employees of KREG
who KDC has agreed will become employees of KOC or the Investments on or after
the Closing Date and (b) have been properly reflected on the Balance Sheet in
accordance with GAAP and are otherwise consistent with representations made by
KREG and KHI pursuant to this Agreement. KNHC and KDC acknowledge that the
purpose and intent of this covenant is to assure that KREG and its Affiliates
shall have no responsibility whatsoever at any time on or after the Closing
Date with respect to any such liabilities. KREG and KHI shall retain all
liabilities with respect
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to the foregoing matters to the extent that they relate to any employees of
KREG and KHI who will not be employed by KDC after the Closing.
5.4 MEDICAL PREMIUMS AND COSTS. KDC shall for such period as is
necessary (but not beyond December 31, 1998) for it to establish a separate
health insurance program, promptly reimburse KREG with respect to any and all
health insurance premiums and other expenditures made on behalf of employees of
KOC or its Affiliates from and after the Closing Date.
5.5 RELEASE OF GUARANTEES. KNHC and KDC shall use reasonable efforts to
obtain full releases from all obligations (the "RELEASES") under the corporate
guarantees and other contractual obligations set forth on SCHEDULE 5.5 (the
"GUARANTEES") which represent all of the Guarantees to which KREG or any of its
Affiliates are parties as of the date hereof and, except to the extent of any
Releases, as of the Closing Date.
VI. CONDITIONS TO OBLIGATIONS OF KREG AND KHI
The obligations of KREG and KHI to sell and transfer the Stock pursuant
to this Agreement are subject to the satisfaction, at or prior to Closing, of
each of the following conditions, any one or more of which may be waived at the
sole option of KREG or KHI:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of KNHC and KDC contained herein shall have been true and correct in all
material respects when initially made and shall be true and correct in all
material respects as of the Closing Date.
6.2 COVENANTS. KNHC and KDC shall have performed and complied in all
material respects with all covenants required by this Agreement to be performed
and complied with by KNHC and KDC prior to the Closing Date.
6.3 PROCEEDINGS. No action, proceeding or order by any court or other
governmental agency or body shall have been instituted, threatened whether
orally or in writing, or entered concerning KREG, KHI, KOC or any of their
respective Affiliates or their respective business or restraining any of the
transactions contemplated hereby.
6.4 GOVERNMENT APPROVALS. All filings with any governmental authority or
agency or other Person relating to the consummation of the transactions
contemplated herein shall have been made and no action or proceeding shall have
been instituted or threatened which could materially affect, restrain or
prohibit any of the transactions contemplated hereby.
6.5 CLOSING DELIVERIES. KREG and KHI shall have received all documents,
certificates, instruments, assignments and agreements referred to in SECTION
8.2, duly executed and delivered in form reasonably satisfactory to KREG and
KHI.
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6.6 OTHER DOCUMENTS. KREG and KHI shall have received all such other
certificates, instruments or documents that are reasonably required by KREG, KHI
or their counsel in order to consummate the transactions contemplated herein,
including but not limited to those documents and required deliveries set forth
in ARTICLE VIII.
VII. CONDITIONS TO OBLIGATIONS OF KNHC
The obligation of KNHC to acquire the Stock pursuant to this Agreement is
subject to the satisfaction, at or prior to Closing, of each of the following
conditions, any one or more of which may be waived at the sole option of KNHC:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of KREG and KHI contained herein shall have been true and correct in all
material respects when initially made and shall be true and correct in all
material respects as of the Closing Date.
7.2 COVENANTS. KREG and KHI shall have performed and complied in all
material respects with all covenants required by this Agreement to be performed
and complied with by KREG and KHI, respectively, prior to the Closing Date.
7.3 PROCEEDINGS. No action, proceeding or order by any court or other
governmental agency or body shall have been instituted, threatened whether
orally or in writing, or entered concerning KOC or its business or restraining
any of the transactions contemplated hereby.
7.4 GOVERNMENT APPROVALS AND REQUIRED CONSENTS. The Required Consents
and Project Consents shall have been obtained and all necessary consents of and
filings with any governmental authority or agency or other Person relating to
the consummation of the transactions contemplated hereby shall have been
obtained and made by KNHC and no action or proceeding shall have been
instituted or threatened which could materially affect, restrain or prohibit any
of the transactions; provided, that KNHC may at its election defer the Closing
Date for up to thirty (30) days in order to obtain the Required Consents and/or
Project Consents.
7.5 CLOSING DELIVERIES. KNHC shall have received all documents,
certificates, instruments, assignments and agreements referred to in SECTION
8.1, duly executed and delivered in form reasonably satisfactory to KNHC.
7.6 OTHER DOCUMENTS. KNHC and KDC shall have received all such other
certificates, instruments or documents that are reasonably required by KNHC, KDC
or their counsel in order to consummate the transactions contemplated herein,
including but not limited to those documents and required deliveries set forth
in ARTICLE VIII.
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VIII. CLOSING DELIVERIES BY THE PARTIES
8.1 DELIVERIES OF KREG AND KHI. At or prior to the Closing Date, KREG
and KHI shall deliver to KNHC the following, all of which shall be in a form
reasonably satisfactory to KNHC:
(a) a certificate representing the Stock, together with accompanying
signed stock powers or instruments of assignment, duly endorsed in blank
for the transfer of the Stock to KNHC;
(b) all of KOC's and the Investments' books and records, including
without limitation the certificates evidencing KOC's ownership interest in
the Investments and their respective minute books, accounting records, tax
records and other corporate records;
(c) a certificate of the Chief Financial Officer of KREG and the
Chief Financial Officer of KHI, dated the Closing Date, certifying that the
representations and warranties of KREG and KHI contained in this Agreement
are true and correct on and as of the Closing Date, which certificate shall
include a complete and accurate copy of the resolutions evidencing the due
authorization of the execution, delivery and performance of this Agreement
by KREG and KHI;
(d) a certificate of the Chief Financial Officer of KREG and the
Chief Financial Officer of KHI dated the Closing Date, (i) as to the
performance of and compliance in all material respects by KREG and KHI with
all covenants contained in this Agreement on and as of the Closing Date and
(ii) certifying that all conditions precedent required by KREG and KHI to
be satisfied shall have been satisfied;
(e) certificates of KREG and KHI certifying the incumbency of
officers and other duly authorized agents of KREG and KHI and as to the
signatures of such officers and agents who have executed documents
delivered at the Closing on behalf of KREG and KHI;
(f) executed copies of any Required Consents;
(g) an agreement providing for the termination of (i) the license
granted to KREG to use the "Koll" name other than with respect to the use
of the "Koll" name from a historical perspective, such termination to be
implemented not later than thirty (30) days after the Closing, and (ii) the
covenant-not-to-compete by Donald M. Koll, such termination to be effective
immediately;
(h) assignments of all of KREG's and KHI's right title and interest
in and to (i) all items of personal property of KREG and KHI other than the
items of personal property set forth on SCHEDULE 8.1(h), and (ii) all
agreements running in
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favor of such parties in connection with the operation of the Project
Partnerships or any pre-development activities in relation to future
project partnerships;
(i) the resignations effective as of the Closing Date from Raymond
J. Pacini, Christine Rush and Sandra Sciutto in each of their respective
capacities as officers or directors of KOC or any of the Investments
provided that Sandra Sciutto shall be available for consultation as
reasonably requested by KDC until December 31, 1998, however, such
availability shall not exceed four (4) hours per week after August 31,
1998; and
(j) such other instrument or instruments executed by KREG or KHI as
shall be necessary or appropriate, as KNSH and KDC or their counsel shall
reasonably request, to carry out and effect the purpose and intent of this
Agreement and the transactions contemplated hereby and, to the extent
necessary, KREG and KHI shall execute and deliver any such instruments on a
post-Closing basis.
8.2 DELIVERIES OF KNHC. At or prior to the Closing Date, KNHC shall
deliver to KREG and KHI the following, all of which shall be in a form
reasonably satisfactory to KREG and KHI:
(a) a certificate of KNHC and KDC, dated the Closing Date,
certifying that the representations and warranties of KNHC and KDC
contained in this Agreement are true and correct on and as of the Closing
Date, which certificate shall include a complete and accurate copy of the
resolutions evidencing the due authorization of the execution, delivery and
performance of this Agreement by KNHC and KDC;
(b) a certificate of KNHC and KDC, dated the Closing Date, (i) as
to the performance of and compliance in all material respects by KNHC and
KDC with all covenants contained in this Agreement on and as of the Closing
Date and (ii) certifying that all conditions precedent required by KNHC
and KDC to be satisfied shall have been satisfied;
(c) certificates of KNHC and KDC certifying the incumbency of
officers, managers and other duly authorized agents of KNHC and KDC and as
to the signatures of such officers, managers and agents who have
executed documents delivered at the Closing on behalf of KNHC and KDC;
(d) the Closing Consideration and 1998 Activity Consideration;
(e) executed copies of the Releases of Guarantees and the Project
Consents;
(f) the Letter of Credit;
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(g) resignations effective as of the Closing Date from Donald M.
Koll, Richard M. Ortwein, Ray Wirta, Denise Kenneally, Jobe Dubbs and Mary
Roylance collectively, (the "KNHC Individuals") in each of their respective
capacities as officers, directors or employees of KREG and its Affiliates;
(h) the written agreements of the KNHC Individuals to the
termination of their respective employment agreements with KREG and the
cancellation of all of their outstanding options (including vested options)
for KREG common stock and the surrender of any shares (or the sales
proceeds therefrom) which were issued upon the exercise of any option,
which terminations, cancellations and surrender shall provide for a
complete waiver and release of KREG with respect to the payment of any
severance or other form of compensation;
(i) the written agreement of Ray Wirta to the termination of his
consulting agreement with KREG and the cancellation of all of his
outstanding options (including vested options) for KREG common stock and
the surrender of any shares (or the sales proceeds therefrom) which were
issued upon the exercise of any option, which termination, cancellation and
surrender shall provided for a complete waiver and release of KREG and its
Affiliates with respect to the payment of any severance or other form of
compensation;
(j) a sublease agreement with respect to the office space, two (2)
parking garage spaces and the amenities (including, but not limited to
copiers, telephones, fax machines and conference rooms) currently being
occupied and enjoyed by the six (6) KREG employees who will continue in the
employ of KREG or its Affiliates following the Closing, which sublease
shall be at a rental rate equal to the amount currently charged for such
space and amenities, and which sublease shall have a term expiring August
31, 1998 unless sooner terminated in the sole discretion of KREG and
without payment of any premium or penalty, subject to fifteen (15) days
prior written notice to KDC; and
(k) such other instrument or instruments executed by KNHC or KDC as
shall be necessary or appropriate, as KREG and KHI or their counsel shall
reasonably request, to carry out and effect the purpose and intent of this
Agreement and the transactions contemplated hereby and, to the extent
necessary, KNHC and KDC shall execute and deliver any such instruments on a
post-Closing basis.
IX. INDEMNIFICATION
9.1 INDEMNIFICATION BY KDC. Subject to the terms and conditions of
this ARTICLE IX, KDC hereby agrees to indemnify, defend and hold harmless KREG,
KHI and their respective directors, officers (other than the KNHC Individuals),
shareholders, employees, agents, attorneys, consultants and Affiliates from and
against all losses, claims, obligations, demands, assessments, penalties,
liabilities, costs, damages, attorneys' fees and expenses
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(including, without limitation, all costs of experts and all costs incidental to
or in connection with any appellate process) (collectively, "DAMAGES") asserted
against or incurred by such individuals and/or entities arising out of, in
connection with or resulting from:
(a) a breach by KNHC or KDC of any representation or warranty
(without giving effect to any "material adverse effect" qualifier or
qualifier of like import contained as part of any such representation or
warranty that was breached) or covenant of KNHC or KDC contained in this
Agreement or in any schedule, exhibit, certificate or other instrument
delivered pursuant to or as a part of this Agreement;
(b) any act or omission or strict liability relating to the business
or operations of KOC or its Affiliates occurring on or after the Closing
Date; and
(c) any acts or omissions of KOC or its Affiliates that result in any
action being threatened or pursued against KREG or any of its Affiliates
pursuant to any of the Guarantees.
9.2 INDEMNIFICATION BY KREG. Subject to the terms and conditions of this
ARTICLE IX, KREG hereby agrees to indemnify, defend and hold harmless KDC, KNHC
and their respective managers, members, directors, officers, shareholders,
employees, agents, attorneys, consultants and Affiliates from and against all
Damages asserted against or incurred by such individuals and/or entities
arising out of, in connection with or resulting from (a) a breach by KREG or KHI
of any representation or warranty (without giving effect to any "material
adverse effect" qualifier or qualifier of like import contained as part of any
such representation or warranty that was breached) or covenant of KREG or KHI
contained in this Agreement or in any schedule, exhibit, certificate or other
instrument delivered pursuant to or as a part of this Agreement; (b) the case of
WHITING CORPORATION V. WT/HRC CORPORATION AND KREG-OC, INC. filed March 25,
1997, Circuit Court, Cook County, Illinois; or (c) the Pullman Inc. Non-
contributory Pension Plan.
9.3 CLAIMS. All claims for indemnification pursuant to this ARTICLE IX
shall be asserted and resolved as follows:
(a) any party claiming indemnification pursuant to this ARTICLE IX
(an "INDEMNIFIED PARTY") shall promptly (and, in any event at least ten
days prior to the due date for any responsive pleadings, filings or other
documents) (i) notify the party for whom indemnification is sought (the
"INDEMNIFYING PARTY") of any third -party claim or claims asserted against
the Indemnified Party (a "THIRD PARTY CLAIM") that could give rise to a
right of indemnification pursuant to this ARTICLE IX and (ii) transmit to
the Indemnifying Party a written notice ("CLAIM NOTICE") describing in
reasonable detail the nature of the Third Party Claim, a copy of all papers
served with respect to such claim (if any), an estimate of the amount of
Damages attributable to the Third Party Claim and the basis of the
Indemnified Party's request for indemnification under this Agreement. The
failure to promptly deliver a Claim Notice shall not relieve any
Indemnifying Party of its obligations to any
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Indemnified Party with respect to the related Third Party Claim except to
the extent that the resulting delay is materially prejudicial to the
defense of such claim. Within 30 days after receipt of any Claim Notice
(the "ELECTION PERIOD"), the Indemnifying Party shall notify the
Indemnified Party (x) whether the Indemnifying Party disputes its potential
liability to the Indemnified Party under this ARTICLE IX with respect to
such Third Party Claim and (y) whether the Indemnifying Party desires, at
the sole cost and expense of such Indemnifying Party, to defend the
Indemnified Party against such Third Party Claim;
(b) If the Indemnifying Party notifies the Indemnified Party within
the Election Period that the Indemnifying Party elects to assume the
defense of the Third Party Claim, then the Indemnifying Party shall have
the right to defend, at its sole cost and expense, with counsel reasonably
acceptable to such Indemnified Party, such Third Party Claim by all
appropriate proceedings, which proceedings shall be prosecuted diligently
by the Indemnifying Party to a final conclusion or settled at the
discretion of the Indemnifying Party in accordance with this SECTION
9.3(b). Except as set forth in SECTION 9.3(f) hereof, the Indemnifying
Party shall have full control of such defense and proceedings, including
any compromise or settlement thereof. The Indemnified Party is hereby
authorized, at the sole cost and expense of the Indemnifying Party (but
only if the Indemnified Party is entitled to indemnification hereunder), to
file, during the Election Period, any motion, answer or other pleadings
that the Indemnified Party shall deem necessary or appropriate to protect
its interests or those of the Indemnifying Party and not prejudicial to the
Indemnifying Party. If requested by the Indemnifying Party, the
Indemnified Party agrees, at the sole cost and expense of the Indemnifying
Party, to cooperate with the Indemnifying Party and their counsel in
contesting any Third Party Claim that the Indemnifying Party elects to
contest, including, without limitation, the making of any related
counterclaim against the Person asserting the Third Party Claim or any
cross -complaint against any Person. The Indemnified Party may participate
in, but not control, any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this SECTION 9.3(b) and
shall bear its own costs and expenses with respect to such participation;
provided, however, that if the named parties to any such action (including
any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel
that there may be one or more legal defenses available to it that are
different from or additional to those available to the Indemnifying Party,
then the Indemnified Party may employ separate counsel at the expense of
the Indemnifying Party, and upon written notification thereof, the
Indemnifying Party shall not have the right to assume the defense of such
action on behalf of the Indemnified Party; provided further that the
Indemnifying Party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate
firm of attorneys at any time for the Indemnified Party, which firm shall
be designated in writing by the Indemnified Party. Notwithstanding the
foregoing, the Indemnifying Party shall be prohibited from
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confessing or settling any criminal allegations brought against the
Indemnified Party without the express written consent of the Indemnified
Party.
(c) If the Indemnifying Party fails to notify the Indemnified Party
within the Election Period that the Indemnifying Party elects to defend the
Indemnified Party pursuant to SECTION 9.3(b), or if the Indemnifying Party
elects to defend the Indemnified Party pursuant to SECTION 9.3(b) but fails
diligently and promptly to prosecute or settle the Third Party Claim, then
the Indemnified Party shall have the right to defend, at the sole cost and
expense of the Indemnifying Party (if the Indemnified Party is entitled to
indemnification hereunder), the Third Party Claim by all appropriate
proceedings, which proceedings shall be promptly and vigorously prosecuted
by the Indemnified Party to a final conclusion or settled. The Indemnified
Party shall have full control of such defense and proceedings, provided,
however, that the Indemnified Party may not enter into, without the
Indemnifying Party's consent, which shall not be unreasonably withheld, any
compromise or settlement of such Third Party Claim. Notwithstanding the
foregoing, if the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes their
potential liability to the Indemnified Party under this ARTICLE IX and if
such dispute is resolved in favor of the Indemnifying Party, the
Indemnifying Party shall not be required to bear the costs and expenses of
the Indemnified Party's defense pursuant to this SECTION 9.3 or of the
Indemnifying Party's participation therein at the Indemnified Party's
request, and the Indemnified Party shall reimburse the Indemnifying Party
in full for all reasonable costs and expenses of such litigation. The
Indemnifying Party may participate in, but not control, any defense or
settlement controlled by the Indemnified Party pursuant to this SECTION
9.3(c), and the Indemnifying Party shall bear its own costs and expenses
with respect to such participation; provided, however, that if the named
parties to any such action (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party, and the Indemnifying
Party has been advised by counsel that there may be one or more legal
defenses available to it that are different from or additional to those
available to the Indemnified Party, then the Indemnifying Party may employ
separate counsel and upon written notification thereof, the Indemnified
Party shall not have the right to assume the defense of such action on
behalf of the Indemnifying Party.
(d) In the event any Indemnified Party should have a claim against
any Indemnifying Party hereunder that does not involve a Third Party Claim,
the Indemnified Party shall transmit to the Indemnifying Party a written
notice (the "INDEMNITY NOTICE") describing in reasonable detail the nature
of the claim, an estimate of the amount of damages attributable to such
claim and the basis of the Indemnified Party's request for indemnification
under this Agreement. If the Indemnifying Party does not notify the
Indemnified Party within thirty (30) days from its receipt of the Indemnity
Notice that the Indemnifying Party disputes such claim, the claim specified
by the Indemnified Party in the Indemnity Notice shall be deemed a
liability of the Indemnifying Party hereunder. If the Indemnifying Party
has timely
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disputed such claim, as provided above, such dispute shall be resolved by
litigation in an appropriate court of competent jurisdiction if the parties
do not reach a settlement of such dispute within thirty (30) days after
notice of a dispute is given.
(e) Payments of all amounts owing by any Indemnifying Party pursuant
to this ARTICLE IX relating to a Third Party Claim shall be made within
thirty (30) days after the latest of (i) the settlement of such Third Party
Claim, (ii) the expiration of the period for appeal of a final adjudication
of such Third Party Claim, or (iii) the expiration of the period for appeal
of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement. Payments of all amounts owing by
the Indemnifying Party pursuant to SECTION 9.3(d) shall be made within ten
(10) days after the later of (i) the expiration of the 30 -day Indemnity
Notice period or (ii) the expiration of the period for appeal of a final
adjudication of the Indemnifying Party's liability to the Indemnified Party
under this Agreement.
(f) The Indemnifying Party shall provide the Indemnified Party with
written notice of any firm offer that is made to settle or compromise a
Third Party Claim against an Indemnified Party. If a firm offer is made to
settle such a claim solely by the payment of money damages and the
Indemnifying Party notifies the Indemnified Party in writing that the
Indemnifying Party agrees to such settlement, but the Indemnified Party
elects not to accept and agree to it, the Indemnified Party may continue to
contest or defend such Third Party Claim and, in such event, the total
maximum liability of the Indemnifying Party to indemnify or otherwise
reimburse the Indemnified Party hereunder with respect to such a claim
shall be limited to and shall not exceed the amount of such settlement
offer, plus reasonable out -of -pocket costs and reasonable expenses
(including reasonable attorneys' fees and disbursements) to the date of
notice that the Indemnifying Party desired to accept such settlement.
(g) Notwithstanding any provision herein to the contrary, the
obligation of an Indemnifying Party to provide indemnification to an
Indemnified Party for breach of any representation or warranty shall not
take effect unless and until the Damages asserted against or incurred in
the aggregate and on a collective basis by the Indemnified Parties pursuant
to either SECTION 9.1 or 9.2 (as applicable) as a result of such a breach
or breaches exceeds $15,000.
9.4 TAX INDEMNIFICATION.
(a) Notwithstanding anything in this Agreement to the contrary, each
of KREG and KHI shall indemnify KNHC, KDC and their Affiliates (including
KOC) and hold them harmless for, from and against (i) all liability for all
Taxes of KOC for all taxable periods ending on or before the Closing Date and
the portion ending on the Closing Date of any taxable period that includes
(but does not end on) the Closing Date ("PRE-CLOSING TAX PERIOD"), including,
without limitation, any liability for any Taxes imposed pursuant to Treasury
Regulation SECTION 1.1502-6 as a result of being a member of the affiliated
group, within the meaning of SECTION 1504 of the Code, of which KREG is a
member and liabilities for
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any Taxes imposed in respect of the matters set forth in SCHEDULE 2.8, (ii)
assuming a valid, timely and effective election under Sections 338(g) and
338(h)(10) of the Code is made, as contemplated by SECTION 11.21 of this
Agreement (the "ELECTION"), all liability for Taxes accruing on or before the
Closing Date which result from (A) the Election, (B) any comparable elections
under state or local tax laws and (C) any deemed assets sales resulting from
the Election in any jurisdictions, including jurisdictions in which KOC files
its Tax Returns on a separate company basis and (iii) any liability for Taxes
attributable to a breach by KREG or KHI of any of its obligations under this
Agreement.
(b) KDC shall indemnify KREG and its Affiliates and hold them harmless
for, from and against all liability for Taxes of KOC for any taxable period
commencing after the Closing Date.
(c) In the case of any taxable period that includes (but does not end on)
the Closing Date ("Straddle Period"), the Taxes of KOC for the Pre-Closing Tax
Period shall be computed as if such taxable period ended on and included the
Closing Date (and included any income from any deemed assets sale).
9.5 PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS.
(a) If a claim for Taxes shall be made by any taxing authority in writing,
which, if successful, might result in an indemnity payment pursuant to SECTION
9.4, the Indemnified Party shall promptly notify the Indemnifying Party in
writing of such claim (a "TAX CLAIM"). If notice of a Tax Claim (a "TAX
NOTICE") is not given to the Indemnifying Party within a reasonably sufficient
period of time to allow the Indemnifying Party effectively to contest such Tax
Claim, or in reasonable detail to apprize the Indemnifying Party of the nature
of the Tax Claim, taking into account the facts and circumstances with respect
to such Tax Claim, the Indemnifying Party shall not be liable to the Indemnified
Party or any of its affiliates to the extent that the Indemnifying Party's
position is actually prejudiced as a result thereof.
(b) With respect to any Tax Claim which might result in an indemnity
payment to KNHC, KDC or any of their Affiliates pursuant to SECTION 9.4 (other
than a Tax Claim relating to Taxes of KOC for a Straddle Period), and provided
that KREG shall first have admitted its liability to KNHC, KDC or any of their
Affiliates as the case may be, KREG shall control all proceedings taken in
connection with such Tax Claim (including, without limitation, selection of
counsel) and, without limitation of the foregoing, may in its sole discretion
and at its sole expense pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any taxing authority with respect
thereto, and may, in its sole discretion, either pay the Tax claimed and sue for
a refund where applicable law permits such refund suits or contest such Tax
Claim in any permissible manner. In no case shall KNHC, KDC or KOC settle or
otherwise compromise any Tax Claim referred to in the preceding sentence without
KREG's prior written consent. KNHC, KDC, KOC and their affiliates shall
cooperate with KREG in contesting such Tax Claim, which cooperation shall
include, without limitation, the reasonable retention and (upon KREG's
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request) the provision to KREG of records and information which are
reasonably relevant to such Tax Claim, and making employees reasonably
available to provide additional information or explanation of any material
provided hereunder or to testify at proceedings relating to such Tax Claim,
all at KREG's expense.
(c) The contest of any Tax Claim that relates to Taxes of KOC for a
Straddle Period shall be controlled by KDC (or, if required by law, KNHC) and
KREG agrees, and agrees to cause its affiliates, to cooperate with KNHC, KDC
(and their Affiliates) in pursuing such contest. KREG shall be kept informed of
any such contest and shall have the right to participate, or have its legal
counsel or advisors participate, at its expense. KDC shall not settle any claim
with any taxing authority with respect to taxes for a Straddle Period unless (i)
KREG shall have agreed in writing to such settlement, such agreement not to be
unreasonably withheld, and (ii) KREG and KDC shall have agreed on an
apportionment of the proposed settlement liability amongst the Pre-Closing Tax
Period and the portion of the Straddle Period commencing on the day after the
Closing Date. To the extent KDC is represented in any discussions with any
taxing authority with respect to taxes for a Straddle Period, such
representatives shall owe an equal duty to both KDC and KREG.
X. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
10.1 NON -DISCLOSURE COVENANT OF KDC AND THE INDIVIDUAL PARTIES. KDC and
the Individual Parties recognize and acknowledge that it and they have in the
past, currently have, and in the future may continue to have, access to certain
Confidential Information of KREG and its Affiliates that is valuable, special
and a unique asset of such entity's business. KDC and the Individual Parties,
on behalf of themselves and their Affiliates, agree that they will not disclose
such Confidential Information to any Person, firm, corporation, association or
other entity for any purpose or reason whatsoever, except (a) to authorized
representatives of KDC and (b) to counsel and other advisors to KNHC or KDC
provided that such advisors (other than counsel) agree to the confidentiality
provisions of this SECTION 10.1, unless (i) such information becomes available
to or known by the public generally through no fault of KDC and the Individual
Parties, (ii) disclosure is required by law or the order of any governmental
authority under color of law, provided, that prior to disclosing any information
pursuant to this clause (ii) KDC shall give prior written notice thereof to KREG
and provide KREG with the opportunity to contest such disclosure, (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party, or (iv)
the disclosing party is the sole and exclusive owner of such Confidential
Information as a result of the purchase and sale of the Stock or otherwise. In
the event of a breach or threatened breach by any party to this Agreement of the
provisions of this SECTION 10.1, then each other party to this Agreement shall
be entitled to an injunction restraining the party or parties involved in the
breach or threatened breach from disclosing, in whole or in part, such
Confidential Information, and the party against whom such injunction is sought
consents to such relief. Nothing herein shall be construed as prohibiting the
exercise of any other available remedy for such breach or threatened breach,
including the recovery of damages.
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10.2 NON-DISCLOSURE COVENANT OF KREG AND KHI. KREG and KHI recognize and
acknowledge that they have in the past, currently have, and in the future may
continue to have, access to certain Confidential Information of KDC, the
Investments, the Project Partnerships and the Individual Parties following the
Closing Date that is valuable, special and a unique asset of such parties
business. KREG and KHI, on behalf of themselves and their Affiliates, agree
that they will not disclose such Confidential Information of KDC and, following
the Closing Date, of the Investments, Project Partnerships, and the Individual
Parties to any Person, firm, corporation, association or other entity for any
purpose or reason whatsoever, except (a) to authorized representatives of KREG
and KHI and (b) to counsel and other advisers to KREG and KHI provided that such
advisers (other than counsel) agree to the confidentiality provisions of this
SECTION 10.2, unless (i) such information becomes available to or known by the
public generally through no fault of KREG and KHI, (ii) disclosure is required
by law or the order of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this clause (ii) KREG and
KHI shall give prior written notice thereof to KDC and the Individual Parties
and provide KDC and the Individual Parties with the opportunity to contest such
disclosure, (iii) the disclosing party reasonably believes that such disclosure
is required in connection with the defense of a lawsuit against the disclosing
party, or (iv) the disclosing party is the sole and exclusive owner of such
Confidential Information. In the event of a breach or threatened breach by any
party to this Agreement of the provisions of this SECTION 10.2, then each other
party to this Agreement shall be entitled to an injunction restraining the party
or parties involved in the breach or threatened breach from disclosing, in whole
or in part, such Confidential Information, and the party against whom such
injunction is sought consents to such relief. Nothing herein shall be construed
as prohibiting the exercise of any other available remedy for such breach or
threatened breach, including the recovery of damages.
10.3 SURVIVAL. Notwithstanding any other provision of this Agreement to
the contrary, the obligations of the parties under this ARTICLE X shall survive
the termination of this Agreement.
XI. MISCELLANEOUS
11.1 AMENDMENT; WAIVERS. This Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all the parties
hereto. Any waiver of any terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.
11.2 ASSIGNMENT; CONTRIBUTION AND SUBSEQUENT TRANSFERS. Neither this
Agreement nor any right created hereby or in any agreement entered into in
connection with the transactions contemplated hereby shall be assignable by any
party hereto without the consent of KREG and KDC, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing provision or any other
provision in this Agreement, KNHC's right to assign, transfer, convey,
hypothecate or otherwise dispose of the Stock immediately after the Closing
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to KDC in connection with the Contribution shall be unrestricted other than as
required by federal and state securities laws for compliance therewith.
Immediately following the Closing, KNHC shall liquidate KOC in connection with
the Contribution, and will contribute all of its assets and liabilities to KDC
and KNHC shall be released and relieved of any further obligation under this
Agreement; provided, however, that no subsequent transfers of the Stock or any
of the assets of KOC or any of its lower tier Affiliates shall in any way limit
or modify (a) the liabilities that are being transferred to and assumed by KNHC
and/or KDC as expressly set forth in this Agreement or by operation of law
pursuant to the stock sale transaction contemplated herein, the Contribution or
otherwise; or (b) the indemnification provisions in ARTICLE IX which run in
favor of KREG and KHI.
11.3 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. Except as
otherwise expressly provided herein, neither this Agreement nor any other
agreement contemplated hereby or by the transactions shall be deemed to confer
upon any Person not a party hereto or thereto any rights or remedies hereunder
or thereunder.
11.4 SCHEDULES. Any Schedules attached to this Agreement are by this
reference incorporated herein and made a part hereof.
11.5 ENTIRE AGREEMENT. This Agreement and transactions contemplated
hereby and thereby constitute the entire agreement of the parties regarding the
subject matter hereof, and supersede all prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
11.6 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance therefrom. Furthermore,
in lieu of such illegal, invalid or unenforceable provision, there shall be
added automatically as part of this Agreement a provision as similar in its
terms to such illegal, invalid or unenforceable provision as may be possible and
be legal, valid and enforceable.
11.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants contained herein shall survive the
Closing and all statements contained in any certificate, exhibit or other
instrument delivered by or on behalf of any party pursuant to this Agreement
shall be deemed to have been representations and warranties by such party,
respectively. Notwithstanding any provision in this Agreement to the contrary,
the representations and warranties contained herein shall survive the Closing
until the fifth (5th) anniversary of the Closing Date, except that the
representations
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contained in SECTION 2.1 shall survive indefinitely and the representations
contained in SECTION 2.8 shall survive for the applicable statutes of
limitations.
11.8 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereto shall be governed by, construed and enforced in accordance with
the laws of the State of Delaware, without giving effect to the conflicts of
laws rules of the State of Delaware.
11.9 CAPTIONS AND REFERENCES. The captions in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions hereof. References to Schedules, Sections and Articles
refer to those such items as set forth in this Agreement.
11.10 GENDER AND NUMBER. When the context requires, the gender of all
words used herein shall include the masculine, feminine and neuter and the
number of all words shall include the singular and plural.
11.11 CONSTRUCTION. The parties to this Agreement have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to
federal, state, local or foreign statute or law shall be deemed also to refer to
all rules and regulations promulgated thereunder, unless the context requires
otherwise. The parties to this Agreement intend that each representation,
warranty and covenant contained herein shall have independent significance. If
any party hereto has breached any representation, warranty or covenant contained
in this Agreement in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the party has not
breached shall not detract from or mitigate the fact that the party is in breach
of the first representation, warranty or covenant.
11.12 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. The parties on behalf
of themselves and their respective Affiliates shall keep this Agreement and its
terms confidential, and shall make no press release or public disclosure, either
written or oral, regarding the transactions contemplated by this Agreement
without the prior knowledge and reasonable consent of the other parties;
PROVIDED, that the foregoing shall not prohibit (a) such public announcements or
filing of public or administrative reports by KREG, KHI, KNHC, the ultimate
corporate parent of KNHC, or KDC as may be required or recommended on advice of
their respective counsel, or (b) any disclosure to attorneys, accountants,
investment bankers or other agents of the parties assisting the parties in
connection with the transactions contemplated by this Agreement. In the event
that the transactions contemplated hereby are not consummated for any reason
whatsoever, the parties hereto agree not to disclose or use any Confidential
Information they may have concerning the affairs of the other parties, except
for information that is required by law to be disclosed. The parties further
agree on behalf of themselves and their respective
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Affiliates not to disparage or create any negative inference as to
the reputation, prestige, value, image or impression of the other party, or any
of the other parties' officers, directors, personnel or related companies, by
words, actions or other communications, or by any omissions to speak, act or
otherwise communicate, or in any other manner whatsoever. This covenant shall
survive the Closing or the termination of this Agreement.
11.13 NOTICE. Whenever this Agreement requires or permits any notice,
request, or demand from one party to another, the notice, request or demand must
be in writing to be effective and shall be deemed to be delivered and received
(i) if personally delivered or if delivered by telex, telegram or courier
service, when delivered to the party to whom notice is sent, (ii) if delivered
by facsimile transmission, when so sent and receipt acknowledged by receipt or
(iii) if delivered by mail (whether actually received or not), at the close of
business on the third business day next following the day when placed in the
mail, postage prepaid, certified or registered, addressed to the appropriate
party or parties, at the address of such party set forth below (or at such other
address as such party may designate by written notice to all other parties in
accordance herewith):
If to KREG or KHI: Koll Real Estate Group, Inc.
4343 Von Karman Avenue
Newport Beach, CA 92660
Fax: (714) 261 -6550
ATTN: Raymond J. Pacini
with a copy to: McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, California 92660
Fax No.: (714) 851 -9348
ATTN: Gregory W. Preston, Esq.
If to KNHC, KDC or
the Individual Parties: Koll Development Company, LLC
4343 Von Karman Avenue
Newport Beach, CA 92660
Fax: (714) 250 -4344
ATTN: Donald M. Koll and
Richard M. Ortwein, and
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with copies to : Allen, Matkins, Leck, Gamble & Mallory, LLP
18400 Von Karman, Fourth Floor
Irvine, CA 92612 -1597
Fax No.: (714) 553 -8354
ATTN: S. Lee Hancock, Esq., and
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Fax No. (212) 735-2000
ATTN: Benjamin F. Needell, Esq.
11.14 NO WAIVER. No party hereto shall by any act (except by written
instrument pursuant to SECTION 11.1 ), delay, indulgence, omission or otherwise
be deemed to have waived any right or remedy hereunder or to have acquiesced in
any default in or breach of any of the terms and conditions hereof. No failure
to exercise, nor any delay in exercising, on the part of any party hereto, any
right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. No remedy set forth in this Agreement or otherwise
conferred upon or reserved to any party shall be considered exclusive of any
other remedy available to any party, but the same shall be distinct, separate
and cumulative and may be exercised from time to time as often as occasion may
arise or as may be deemed expedient.
11.15 TERMINATION PRIOR TO CLOSING. This Agreement and the transactions
contemplated hereby may be terminated (a) at any time prior to the Closing by
mutual agreement of all parties; or (b) by any party hereto if the Closing of
this Agreement and the consummation of the transactions contemplated hereby
shall not have occurred on or before April 30, 1998, unless such date is
extended pursuant to SECTION 4.1, by KNHC pursuant to SECTION 7.4 or is
otherwise mutually extended by all parties; (c) by KREG or KHI in the event of
any material breach of the representations, warranties or covenants of KNHC or
KDC or their respective failure to provide the deliveries set forth in ARTICLE
VIII; (d) by KREG or KHI pursuant to the provisions of SECTION 4.1; or (e) by
KNHC or KDC in the event of any material breach of the respective
representations, warranties or covenants of KREG or KHI or their respective
failure to provide the deliveries set forth in ARTICLE VIII. In the event of
any termination of this Agreement other than by reason of a material breach by
KNHC or KDC, KNHC shall be entitled to the return of the Initial Consideration
(and interest thereon in the amount specified in SECTION 4.1(a)) within five (5)
days after the date of such termination. In the event of a termination of this
Agreement pursuant to SECTION 4.1, KREG shall pay to KDC on the date of
termination the amounts contemplated by SECTION 4.1. All such amounts shall be
paid in immediately available funds without any further payment or obligation
with respect to any premium, penalty, other consideration or damages, or
reimbursement of any costs or expenses
32
<PAGE>
11.16 TIME OF ESSENCE. Time is of the essence with respect to this
Agreement.
11.17 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the specific
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute or otherwise. The election of anyone or more remedies by any party
hereto shall not constitute a waiver of the right to pursue other available
remedies.
11.18 COSTS, EXPENSES AND LEGAL FEES. Whether or not the transactions
contemplated hereby are consummated, each party hereto shall bear its own costs
and expenses (including attorneys' fees and expenses), except that (a) KNHC and
KDC shall be entitled to certain attorneys' fees and expenses to the extent
applicable pursuant to the provisions of SECTION 4.1; and (b) each party hereto
agrees to pay the costs and expenses (including reasonable attorneys' fees and
expenses) incurred by the other parties in successfully (i) enforcing any of the
terms of this Agreement, or (ii) proving that another party breached any of the
terms of this Agreement. The parties acknowledge that each party shall be
responsible for its own attorneys' fees, accountants' and other advisory fees
associated with the Closing, it being understood and agreed that none of KREG's
or KHI's expenses relating to the transactions contemplated by this Agreement
shall be paid or payable by KOC.
11.19 EXECUTION. Other than original stock certificates, this Agreement
and any other documents related hereto, including exhibits and/or certificates,
may be executed by facsimile signature page if promptly followed by delivery of
an executed original.
11.20 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
11.21 SECTION 338(h)(10) ELECTION.
(a) With respect to the acquisition of the Stock hereunder, if KNHC so
elects with respect to KOC and any corporate Affiliate of KOC that KNHC so
designates, (i) KNHC shall make a timely election under section 338(g) of the
Code (and any comparable election under state or local tax law), (ii) KREG and
KNHC shall jointly make the election provided for by SECTION 338(h)(10) of the
Code (the "Election") and KREG and KNHC shall, as promptly as practicable
following the Closing Date, cooperate with each other to take all actions
necessary and appropriate (including filing such forms, returns, elections,
schedules and other documents as may be required) to effect and preserve a
timely Election in accordance with the provisions of Treasury Regulation SECTION
1.338(h)(10)-1(d) (or any comparable provisions of state or local tax law) or
any successor provisions and (iv) KREG and KNHC shall report the sale of Stock
pursuant to this Agreement consistent with the Election (and any comparable
elections under state or local tax laws) and shall take no
33
<PAGE>
position to the contrary thereto in any Tax Return, any proceeding before any
taxing authority, or otherwise.
(b) In connection with the Election, KREG and KNHC shall act together in
good faith to agree on the Aggregate Deemed Sales Price and Adjusted Grossed-up
Basis (as defined under applicable Treasury Regulations) and the allocation of
such Adjusted Grossed-up Basis among the assets of KOC and any corporate
Affiliate of KOC for which an Election has been made. Such allocation of the
Adjusted Grossed-up Basis shall be made in accordance with section 338(b) of the
Code and any applicable Treasury Regulations. KREG and KNHC (i) shall be bound
by such allocation for purposes of determining any Taxes; (ii) shall prepare and
file all Tax Returns to be filed with any taxing authority in a manner
consistent with such allocation; and (iii) shall take no position inconsistent
with such allocation in any Tax Return, any proceeding before any taxing
authority or otherwise. In the event that such allocation is disputed by any
taxing authority, the party receiving notice of such dispute shall promptly
notify and consult with the other party hereto concerning resolution of such
dispute.
11.22 SURVIVAL OF TAX PROVISIONS. Any claim to be made pursuant to
Sections 9.4 or 11.21 hereof must be made before the expiration (with valid
extensions) of the applicable statutes of limitations relating to the Taxes at
issue.
11.23 REAL AND PERSONAL PROPERTY TAXES. KREG shall pay or cause to be
paid any and all liabilities of KOC for real and personal property taxes and
assessments relating to all periods ending on or prior to December 31, 1997.
KDC shall pay or cause to be paid any and all liabilities of KOC for real and
personal property taxes and assessments relating to taxable periods commencing
on or after January 1, 1998, provided that with respect to periods prior to the
Closing Date, personal property taxes and adjustments (but not real property
taxes and adjustments which are capitalized) shall be taken into account in
determining the 1998 Activity Consideration as set forth in SCHEDULE 1.2.
11.24 TRANSFER TAXES. Notwithstanding any other provisions of this
Agreement to the contrary, KDC and KREG shall pay, or cause to be paid, equal
shares of all sales, use, transfer, stamp, duties, recording and similar taxes,
if any, required to be paid in connection with KDC's purchase of the Stock
pursuant to this Agreement.
11.25 RETURN FILINGS, REFUNDS AND CREDITS.
(a) KREG shall prepare or cause to be prepared and file or cause to be
filed on a timely basis (in each case, at its own cost and expense and in a
manner consistent with past practice) all Tax Returns with respect to KOC for
taxable periods ending on or prior to the Closing Date. KREG shall provide KOC
with copies of such Tax Returns (which, with respect to Tax Returns that relate
to an affiliated or combined group that includes KOC, shall be "pro-forma"
returns) covering any taxable period beginning on January 1, 1998 and ending on
or prior to the Closing Date, on or prior to the due date thereof (including any
extensions thereto). KREG shall pay all Taxes shown on all such Tax Returns.
34
<PAGE>
(b) KDC shall prepare or cause to be prepared and shall file or cause to
be filed on a timely basis all other Tax Returns with respect to KOC. In
connection therewith, KDC shall be responsible for and shall pay any Taxes for
which KDC has agreed to indemnify KREG pursuant to SECTION 9.4 hereof. In filing
its return for purposes of Texas franchise tax, KDC shall treat any income from
the deemed sale of assets attributable to the sale of partnership interests
owned by KOC as a sale of intangible assets and net gain attributable to such
deemed sale shall be included only in the denominator of the gross receipts
apportionment formula because it is apportioned (attributed) to the location,
i.e. the legal domicile, of the payor in accordance with Texas Regulation, 34
TAC Sec. 3.549. KDC shall provide KREG with copies of any such Tax Returns
covering Taxes for which KREG has agreed to indemnify KNHC, KDC and their
Affiliates (including KOC) pursuant to SECTION 9.4 hereof at least ten (10) days
prior to the due date thereof (giving effect to the extensions thereto),
accompanied by a statement calculating KREG's indemnification obligation
pursuant to SECTION 9.4 hereof. KREG shall pay to KDC the amount of KREG's
indemnification obligation within ten (10) days of receiving copies of such Tax
Returns unless the parties are unable to agree on the amount of KREG's
indemnification obligation hereunder in which case such dispute shall be
resolved by independent accountants acceptable to both parties whose fees and
expenses shall be paid by KREG and KDC in proportion to each party's respective
liability for Taxes as determined by such accountants, and KREG shall pay the
amount determined by such accountants within ten (10) days of such
determination.
(c) KREG, KOC, KNHC and KDC shall reasonably cooperate, and shall cause
their respective affiliates, officers, employees, agents, auditors and
representatives reasonably to cooperate, in preparing and filing all Tax Returns
(including amended returns and claims for refund), including maintaining and
making available to each other all records necessary in connection with Taxes
and in resolving all disputes and audits with respect to all taxable periods
relating to Taxes. KDC and KREG recognize that KREG and its affiliates will
need access, from time to time, after the Closing Date, to certain accounting
and tax records and information held by KOC to the extent such records and
information pertain to events prior to the Closing Date; therefore, KDC agrees
that (i) from and after the Closing Date until the eighteenth anniversary of the
Closing Date, KDC shall, and shall cause KOC to, (A) use all reasonable efforts
to properly retain and maintain such records until such time as KREG agrees that
such retention and maintenance is no longer necessary, and (B) allow KREG and
its agents and representatives (and agents or representatives of any of its
affiliates), to inspect, review and make copies of such records as KREG may deem
necessary or appropriate from time to time, such activities to be conducted
during normal business hours and at KREG's sole expense and (ii) from and after
the eighteenth anniversary of the Closing Date, KDC shall not, and shall cause
KOC not to, dispose of any of such records without first providing KREG with an
opportunity to take possession of such records or to make copies thereof, at
KREG's sole expense, prior to any such disposal.
(d) Any refunds or credits of Taxes of KOC for any taxable period ending
on or before the Closing Date shall be for the account of KREG. Any refunds or
credits of Taxes of KOC for any taxable period beginning after the Closing Date
shall be for the account of
35
<PAGE>
KDC and shall be paid by KREG to KDC within 10 days after KREG receives such
refund. Any refunds or credits of Taxes of KOC for any Straddle Period shall be
apportioned between KREG and KDC on the basis of the "interim closing of the
books". If KDC in good faith determines that it will not have any adverse effect
on its Tax liability, KDC shall, if KREG so requests and at KREG's sole expense,
cause KOC to file for and obtain any refunds or credits which KREG is entitled
under this SECTION 11.23. If KDC makes such good faith determination, KDC shall
cause KOC to forward to KREG any such refund within 10 days after the refund is
received (or reimburse KREG for any such credit within 10 days after the
relevant Tax Return is filed in which the credit is actually applied against
KOC's liability for Taxes).
11.26 CONSISTENT TAX POSITIONS. KNHC and KDC (and by written
acknowledgement hereto KOC) covenant and agree that neither KOC nor any of
its subsidiaries shall take a position, for federal income tax purposes and
comparable state and local tax purposes (including in connection with any
examination or audit by any tax authority or other proceeding), inconsistent
with the position that (a) the federal consolidated group of which KREG is
the common parent (the "KREG Group") underwent an ownership change within the
meaning of SECTION 382 of the Code as a result of the bankruptcy
reorganization of KREG in 1997, (b) the provisions of SECTION 382(1)(5) apply
to such ownership change, and (c) that each member of the KREG Group is
subject to the provisions of SECTION 382(1)(5) of the Code in the respect of
such ownership change; PROVIDED, HOWEVER, that if KREG elects not to apply
the provisions of SECTION 382(1)(5) of the Code, this provision shall not
apply. Accordingly, subject to the provision in the preceding sentence, KOC
and its subsidiaries shall treat the purchase of the stock of KOC pursuant to
this Agreement as a second ownership change within the meaning of SECTION
382(1)(5)(D) of the Code and under any comparable provisions of state and
local law. In furtherance of the foregoing, KOC further agrees to execute
and deliver, and to cause its subsidiaries to execute and deliver, to KREG
such other documents or agreements evidencing the foregoing and compliance
therewith, if and when reasonably requested by KREG.
11.27 TERMINATION OF TAX SHARING AGREEMENTS. KREG hereby agrees and
covenants that any obligation of KOC pursuant to any tax sharing agreement or
similar arrangements shall be terminated on or before the Closing Date, and
no payments pursuant to any such tax sharing agreement or arrangements shall
be made after such termination.
36
<PAGE>
XII. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
"Affiliate" with respect to any Person shall mean a Person that, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such Person.
"Agreement" shall have the meaning set forth in the preamble to this Agreement.
"Claim Notice" shall have the meaning set forth in SECTION 9.3(a) .
"Closing" shall mean the closing of the transactions contemplated by this
Agreement as set forth in SECTION 1.4.
"Closing Consideration" shall have the meaning set forth in SECTION 1.2.
"Closing Date" shall have the meaning set forth in SECTION 1.4.
"Code" shall have the meaning set forth in SECTION 2.7(b).
"Confidential Information" shall mean all trade secrets and other confidential
and/or proprietary information of the particular Person, including, but not
limited to, information derived from reports, processes, data, know -how,
software programs, improvements, inventions, strategies, compensation
structures, reports, investigations, research, work in progress, codes,
marketing and sales programs and plans, financial projections, cost summaries,
formulae, contract analyses, financial information, forecasts, confidential
filings with any state or federal agency, and all other confidential concepts,
methods of doing business, ideas, materials or information prepared or performed
for, by or on behalf of such Person by its employees, officers, directors,
agents, representatives, or consultants.
"Contribution" shall have the meaning set forth in the preamble to this
Agreement.
"Damages" shall have the meaning set forth in SECTION 9.1.
"Election" shall have the meaning set forth in SECTION 9.4.
"Election Period" shall have the meaning set forth in SECTION 9.3(a).
"Encumbrance" shall mean any charge, claim, community property interest,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income or exercise of any other attribute of ownership.
37
<PAGE>
"Environmental Laws" shall mean any federal, state or local laws, ordinances,
codes, regulations, rules, policies and orders that are intended to assure the
protection of the environment, or that classify, regulate, call for the
remediation of, require reporting with respect to, or list or define air, water,
groundwater, solid waste, Hazardous Substances, or which are intended to assure
the safety of employees, workers or other persons, including the public in each
case as in effect on the date hereof.
"Environmental Liabilities" shall mean all liabilities, whether contingent or
fixed, which have arisen, or may arise, under Environmental Laws.
"ERISA Affiliates" shall have the meaning set forth in SECTION 2.7(a).
"ERISA Liabilities" shall mean all liabilities whether contingent or fixed which
have arisen or may arise under the Employee Retirement Income Security Act of
1974, as amended, and all rules and regulations from time to time promulgated
thereunder.
"ERISA Plans" shall have the meaning set forth in SECTION 2.7(a).
"GAAP" shall mean U. S. generally accepted accounting principles.
"Guarantees" shall have the meaning set forth in SECTION 5.5.
"Hazardous Substances" shall mean any toxic or hazardous substances, material or
waste, or any pollutant or contaminant, or infectious or radioactive substance
or material, including without limitation, those substances, materials and
wastes defined in or regulated under any Environmental Laws.
"Indemnified Party" shall have the meaning set forth in SECTION 9.3(a).
"Indemnifying Party" shall have the meaning set forth in SECTION 9.3(a).
"Indemnity Notice" shall have the meaning set forth in SECTION 9.3(d).
"Initial Consideration" shall have the meaning set forth in SECTION 1.2.
"Investments" shall have the meaning set forth in SECTION 2.2.
"IRS" shall mean the Internal Revenue Service.
"Knowledge of the Individual Parties" means the actual knowledge of Donald
M.Koll without any duty of inquiry and the knowledge of Richard M. Ortwein after
reasonable inquiry of those persons employed by KOC or its Affiliates who are
likely to have knowledge of the subject matter of any particular inquiry.
38
<PAGE>
"Knowledge of KNHC or KDC" means the actual knowledge of the executive officers
and those persons charged with executive management and policy making decisions
after reasonable inquiry.
"Knowledge of KREG" means with respect to KREG, KHI and KOC, the actual
knowledge of Raymond J. Pacini and Sandra Sciutto after reasonable inquiry
(other than inquiry of the Individual Parties or other employees who will remain
in the employ of KOC or its lower tier Affiliates after the Closing); and with
respect to the KOC Employee Affiliates, Project Partnerships and their
respective lower tier Affiliates of KOC, the actual knowledge of Raymond J.
Pacini and Sandra Sciutto without any duty of inquiry.
"KNHC Individual" shall have the meaning set forth in SECTION 8.2(g).
"KOC Employee Affiliates" means KREG-OC, L.P., a California limited partnerships
KREG-SW, L.P., a California limited partnership, KREG-SW, EPA L.P., a Texas
limited partnership, and KREG-AZ, L.P., an Arizona limited partnership.
"KREG Consolidated Group" shall have the meaning set forth in SECTION 2.8.
"Letter of Credit" shall mean a letter of credit from a financial institution
reasonably acceptable to KREG which shall provide as follows:
(a) the Letter of Credit shall be irrevocable and shall initially
be in a face amount equal to the indicated percentage of the principal
amount of the Guarantees for which Releases shall not have been obtained
on or prior to the Closing Date (the "Unreleased Amount"): (i) 5%, if
the Unreleased Amount is less than $100 million; (ii) 4%, if the
Unreleased Amount is between $100 million and $200 million: and (iii) 3%,
if the Unreleased Amount is greater $200 million;
(b) the Letter of Credit shall provide that KREG may draw upon the
Letter of Credit upon KREG's submission of a written certification to
the issuer of the Letter of Credit that: (i) it has received notice from
a lender demanding or requiring KREG to perform under a Guarantee and (ii)
it has given KDC at least fifteen (15) days' prior written notice of such
demand and KDC has not caused the applicable lender to withdraw the
demand letter; and
(c) the Letter of Credit shall provide that its face amount shall be
reduced as of the first business day of each month to the amount that would
have been determined pursuant to clause (a) above if the Unreleased Amount
in effect as of the close of business on the last business day of the
previous month had been the Unreleased Amount on the Closing Date (it being
recognized that the outstanding principal amount of the guarantees shall be
reduced over time as liability thereunder is satisfied or reduced in
accordance with the terms of such guarantees) and shall expire at any
time that the Unreleased Amount shall be reduced to less than $2
million.
39
<PAGE>
"Material Adverse Effect" shall mean a material adverse effect on the assets,
properties, business, operations, condition (financial or otherwise),
liabilities, results of operations or prospects of the Person or Persons being
referred to, taken as a whole (including its consolidated subsidiaries, if any),
in consideration of all relevant facts and circumstances.
"Netting Agreements" shall mean the Netting Agreements between each of the KOC
Employee Affiliates and the employee partners of such KOC Employee Affiliates.
"1998 Activity Consideration" shall have the meaning set forth in SECTION 1.2.
"PBGC" shall have the meaning set forth in SECTION 2.7(c).
"Person" shall mean any natural person, corporation, partnership, joint venture,
limited liability company, association, group, organization or other entity.
"Plans" shall have the meaning set forth in SECTION 2.7(a).
"Pre-Closing Tax Period" shall have the meaning set forth in SECTION 9.4.
"Project Partnerships" means partnerships formed by the KOC Employee Affiliates
and third parties to hold interests in real estate.
"Purchase Price" shall have the meaning set forth in SECTION 1.2.
"Releases" shall have the meaning set forth in SECTION 5.5.
"Required Consents" shall have the meaning set forth in SECTION 2.5.
"Stock" shall have the meaning set forth in the preamble to this Agreement.
"Straddle Period" shall have the meaning set forth in SECTION 9.4(c).
"Tax Claim" shall have the meaning set forth in SECTION 9.5(a).
"Tax Notice" shall have the meaning set forth in SECTION 9.5(a).
"Taxes" shall mean all (a) federal, state, local or foreign income, property,
sales, use, occupation, service, transfer, payroll, franchise, excise,
withholding and any other taxes (other than real property taxes) or similar
governmental charges, fees, levies or other assessments, including any interest,
penalties or additions with respect thereto, (b) liabilities for the payment of
any amounts of the type described in (a) as a result of being a member of an
affiliated, consolidated, combined, unitary or similar group, and (c)
liabilities for the payment of any amounts as a result of being party to any tax
sharing agreement or similar arrangement or as a result of any express or
implied obligation to indemnify any other person with respect to the payment of
any amounts of the type described in clause (a) or (b).
40
<PAGE>
"Tax Return"shall mean any return, report, information return, or other document
(including any related or supporting information) filed or required to be filed
with any federal, state, local or foreign governmental entity or other authority
in connection with the determination, assessment or collection of any Tax
(whether nor not such Tax is imposed on KOC or the Investments) or the
administration of any laws, regulations or administrative requirements relating
to any Tax.
"Third Party Claim" shall have the meaning set forth in SECTION 9.3(a).
"Unreleased Amount" shall have the meaning set forth in the definition of Letter
of Credit.
"Vesting Agreements" shall mean the Vesting Agreements between each of the KOC
Employee Affiliates and the employee partners of such KOC Employee Affiliates.
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Stock
Purchase Agreement as of the date first written above.
KREG:
KOLL REAL ESTATE GROUP, INC.
By /s/ Raymond J. Pacini
-----------------------------------
Raymond J. Pacini
Executive Vice President
and Chief Financial Officer
KHI:
KREG HOLDINGS, INC.
By /s/ Raymond J. Pacini
-----------------------------------
Raymond J. Pacini
Executive Vice President
and Chief Financial Officer
KNHC:
KN HOLDING CORP.
By
-----------------------------------
Name:
Title:
KDC:
KOLL DEVELOPMENT COMPANY LLC
By KN Holding Corp.
By
----------------------------------
Name:
Title:
By KDP Holdings, LLC
By
---------------------------------
Name:
Title:
INDIVIDUAL PARTIES:
/s/ Donald M. Koll
-----------------------------------
Donald M. Koll
/s/ Richard M. Ortwein
-----------------------------------
Richard M. Ortwein
42
<PAGE>
EXHIBIT A
KREG OPERATING CO.
BALANCE SHEET
AS OF DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash $ 1,097
Restricted cash 242
Accounts receivable 2,587
Real estate held for development 82,096
Reorganization value in excess of amounts allocated in net assets 13,250
Investment in unconsolidated development projects 1,874
Predevelopment 2,329
Other assets 605
-------------
$ 104,080
-------------
-------------
LIABILITIES AND EQUITY:
Accounts payable and accrued liabilities $ 6,262
Project debt 74,658
Minority interest 2,869
-------------
Total Third Party Liabilities 83,789
-------------
Due to parent 9,575
STOCKHOLDER'S EQUITY:
Common stock 10
Additional paid-in-capital 23,338
Accumulated deficit (12,632)
-------------
Total Equity 10,716
-------------
$ 104,080
-------------
-------------
</TABLE>
UNAUDITED
A - 1
<PAGE>
EXHIBIT A
KREG OPERATING CO.
BALANCE SHEET
AS OF FEBRUARY 28, 1997
(in thousands)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash $ 563
Restricted cash 242
Accounts receivable 2,377
Real estate held for development 105,605
Reorganization value in excess of amounts allocated in net assets 13,100
Investment in unconsolidated development projects 2,532
Predevelopment 2,157
Other assets 489
-------------
$ 127,065
-------------
-------------
LIABILITIES AND EQUITY:
Accounts payable and accrued liabilities $ 2,680
Project debt 100,801
Minority interest 2,869
-------------
Total Third Party Liabilities 106,350
-------------
Due to parent 10,457
STOCKHOLDER'S EQUITY:
Common stock 10
Additional paid-in-capital 23,338
Accumulated deficit (13,090)
-------------
Total Equity 10,258
-------------
$ 127,065
-------------
-------------
</TABLE>
UNAUDITED
A - 2
<PAGE>
EXHIBIT A
KREG OPERATING CO.
NOTES TO BALANCE SHEET
Note 1 Basis of Presentation
The financial statements of KREG Operating Co. (the "Company"), an
indirect wholly-owned subsidiary of Koll Real Estate Group, Inc.
(the "Parent"), are internally prepared and unaudited. Certain
information and substantially all footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. The Company began business on September 30, 1993, upon its
acquisition of the domestic development operations of The Koll
Company.
Note 2 Reorganization value in excess of amounts allocated to net assets
Reorganization value in excess of amounts allocated to net assets
arose from the adoption of Fresh-Start Reporting upon the Parent's
completion of its recapitalization on September 2, 1997 and is
being amortized on a straight-line basis over 15 years.
Note 3 Income taxes
The Company is included in the consolidated tax returns of the
Parent and no current or deferred tax provisions are reflected in
the accompanying balance sheet from inception.
A - 3
<PAGE>
Exhibit B
Page 1 of 3
NEWS RELEASE - DRAFT DATED 3/30/98
Contact: Raymond J. Pacini, Chief Financial Officer, 714-833-3025 X291
KREG ANNOUNCES AGREEMENT TO SELL COMMERCIAL DEVELOPMENT BUSINESS
- COMPANY PLANS TO FOCUS ON RESIDENTIAL BUSINESS
NEWPORT BEACH, California -- March 31, 1998 - Koll Real Estate Group,
Inc. (NASDAQ:KREG) announced today that it has executed a definitive
agreement with Koll Development Company LLC ("KDC") and an affiliated
company, for the sale of the Company's commercial development business for
(1) $30 million in cash plus adjustments for 1998 activity; and (2) the
assumption by KDC of all liabilities related to the business.
KDC is a newly formed limited liability company, whose members include
the Company's current Chairman and Chief Executive Officer, Donald M. Koll
and its President, Richard M. Ortwein. Upon completion of the transaction,
Messrs. Koll and Ortwein will resign from their current positions with the
Company, and the Company will change its name to discontinue use of the
"Koll" name.
The Company also announced that, effective upon completion of the
transaction, Raymond J. Pacini will be appointed as the Company's new
President and Chief Executive Officer. Mr. Pacini has been the Chief
Financial Officer of the Company since 1992 and has 18 years of experience
with publicly traded companies, including 10 years in real estate
development. Prior to moving to the Company's headquarters in Newport Beach,
CA in 1990, Mr. Pacini held various financial management positions with the
Company's predecessor, The Henley Group, Inc. from 1986 to 1989 in Hampton,
NH. From 1979 to 1986, he was a C.P.A. with the "Big Six" accounting firm of
Coopers & Lybrand in Boston, MA.
In approving the transaction, the Company's Board of Directors accepted
a recommendation from a Special Committee of independent directors that had
negotiated with KDC that the terms of the proposed sale of the commercial
development business to KDC are fair to, and in the best interests of, the
Company and its shareholders.
<PAGE>
March 31, 1998 Page 2 of 3
Mr. Koll stated, "This transaction is beneficial to all parties
concerned. The Company and its shareholders will receive necessary capital to
continue development of its existing land inventory, while the commercial
group will be better positioned to focus on its core competency, which is the
development of office, industrial and retail real estate across the United
States and Asia."
Mr. Pacini commented, "We believe the residential real estate
market in California is one of the best in this state's history. By selling
the commercial development business, the Company will be in a position to
focus exclusively on maximizing the value of its significant residential land
holdings. Our residential team, which includes Lucy Dunn, Senior Vice
President; Ed Mountford, Vice President; and Mike Rafferty, the President
of our homebuilding subsidiary, will remain with the Company to lead the
litigation process and the ultimate development of the Bolsa Chica property.
This infusion of cash allows the Company to vigorously defend its land use
entitlements at Bolsa Chica through the pending court appeals and commence
construction immediately thereafter." The Company also is developing
master-planned communities elsewhere in Southern California, in Aliso Viejo
(1,200 homes), Escondido (580 homes) and Fairbanks Highlands (a 93-home joint
venture).
KREG received a deposit of $1 million from KDC upon execution of the
definitive agreement, which is nonrefundable except under limited
circumstances, including if a higher offer for the commercial development
business ultimately is accepted by the Company, in which case KDC also would
be paid a break-up fee of $2 million plus up to $500,000 for legal and other
advisory fees. In the event that a higher offer is accepted, Messrs. Koll
and Ortwein would not be obligated to perform any services for the acquiror
and would have the right to immediately be released from their employment
agreements with the Company, including their covenants-not-to-compete.
As noted above, the definitive agreement was unanimously approved
by a Special Committee of independant directors, which commissioned an
investment banking firm, The Blackstone Group L.P., to provide advice on
strategic alternatives and the fairness of the proposed terms of the
transaction. The Special Committee has directed
<PAGE>
March 31, 1998 Page 3 of 3
the Company's management and The Blackstone Group L.P. to be available to
receive inquiries from any other parties interested in the possible
acquisition of the commercial development business and, if appropriate, to
provide information and enter into discussions and negotiations with such
parties in connection with any such indicated interest.
The transaction is scheduled to be completed on April 30, 1998,
subject to various conditions, unless extended by agreement of the parties.
The Company expects to realize a gain on this transaction of approximately
$9.5 million; however, there can be no assurance that the transaction with
KDC will be completed or will close on schedule.
The Company is a residential land development and homebuilding company
which holds a large residential land inventory in Southern California. The
Company's principal subsidiaries and operating divisions are Signal Landmark,
which owns the approximately 200-acre Warner Mesa (formerly known as the
Bolsa Chica mesa) property, and Hearthside Homes, the fifth largest
homebuilder in Orange County, currently building the 1,200 home project in
Aliso Viejo, CA.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Certain statements in this press release constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements.
***END***
<PAGE>
SCHEDULE 1.2
1998 Activity Consideration
<TABLE>
<CAPTION>
Notes
-----
<S> <C> <C> <C>
1) CARRY ON $30 MILLION @ 13.5% FROM 1/1/98 TO 3/31/98 (A) 1,012,500 (i)
------------
------------
2) PLUS NET CASH USED BY OPERATIONS
FROM 1/1/98 THROUGH CLOSING (4/30/98):
a. Net Cash Used By Operations Before New Project Equity
Investments and Asset Sales Activity:
i. Net Cash Used By Operations Before Asset Sales Activity (B) (1,799,667)
ii. Estimated net pre-development from 1/1 - 4/30 (767,000)
iii. Denso TI's, Lincoln and Other Project costs, net (203,000)
------------
subtotal (C) (2,769,667)
------------
b. Net Asset Sales Activity (C) & (D) 3,366,000
------------
c. NEW PROJECT EQUITY EXPECTED TO BE INVESTED FROM 1/1 TO 4/30
Disney (287,000)
Main & MacArthur / NorthStar LLC (466,519)
Tech Plaza (168,000)
Valley View (29,167)
Omni (230,000)
Arrowhead (200,000)
------------
Subtotal (E) (1,380,686)
------------
d. Estimated Interest on Net Cash Used By Operations and
Preferred Return on Project Equity Investments (C) & (E) (51,000)
------------
Estimated Net Cash Used By Operations from 1/1/98 to closing (F) (835,353) (ii)
------------
------------
Estimated total due to Parent @ closing = (i)-(ii) 1,847,853
------------
------------
</TABLE>
NOTES:
(A) - (F) See Attached
1.2-1
<PAGE>
SCHEDULE 1.2
1998 Activity Consideration
NOTES TO SCHEDULE 1.2
(A) Interest carry on the $30 million Purchase Price from January 1, 1998
through March 31, 1998 shall be calculated using a simple interest rate of
13.5% per annum based on a 360 day year (i.e. $30 million * 13.5% / 360 * 90
days = $1,012,500). In the event that KNSH elects to defer the Closing Date
in accordance with Section 7.4, then interest carry on the $30 million
Purchase Price shall be increased for the period from May 1, 1998 through the
Closing Date using a simple interest rate of 12% per annum based on a 360 day
year.
(B) Net Cash Used By Operations Before Asset Sales shall be calculated based
on KOC's standard monthly financial reports (see 1.2 - 4) in a manner
consistent with Schedule 1.2 and the notes thereto, and includes an agreed
upon allocation of Corporate overhead of $50,000 per quarter, or $16,667 per
month (see 1.2 -3).
(C) For Net Cash Used By Operations Before new Project Equity Investments and
Asset Sales Activity, interest on the average monthly balance (which shall be
calculated beginning 1/1/98 by adding net cumulative cash flow as of the
beginning of the month plus net cumulative cash flow as of the end of the
month and dividing by 2) shall be calculated using a rate of 13.5% per annum,
or 1.125% per month for each month between 1/1/98 and 3/31/98, and at a rate
of 12% per annum, or 1.00% per month or portion thereof from 4/1/98 through
closing. Such calculation shall include the agreed upon allocation of
Corporate overhead of $16,667 per month. For Net Asset Sales Activity,
interest shall be credited @ a rate of .0375% per day (1.125% per month)
prior to 3/31/98 and @ a rate of .0333% per day (1.00% per month) from 4/1/98
through closing, and shall be calculated on the daily balance from the date
funds are received by KREG.
(D) See 1.2 - 3
(E) For new Project Equity Investments after January 1, 1998, the preferred
return shall be calculated on the daily balance from the date such Project
Equity Investment is made through and including the Closing Date at a rate of
25% per annum, or .0694444% per day based on a 360 day year from 1/1/98
through 3/31/98 and @ a rate of .0333% per day (1.00% per month) from 4/1/98
through closing. Project Equity Investments shall include partial fundings
in advance of project loan fundings where KREG is the intended equity source
from the beginning (i.e. Disney project where KREG funded land purchase prior
to loan closing).
(F) To be adjusted to reflect best estimate one day prior to Closing Date
and further adjusted to reflect actual within 30 days of Closing Date.
1.2-2
<PAGE>
SCHEDULE 1.2
1998 Activity Consideration
NOTES TO SCHEDULE 1.2, (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
(B) ESTIMATED CASH BASIS OPERATING INCOME FROM 1/1 - 4/30
Revenues 3,482,000
98 Expenses - Corporate * (66,667)
98 Expenses - Divisions * * (4,652,000)
97 Bonuses (563,000)
------------
Net operations before asset sales (1,799,667)
------------
------------
(D) NET ASSET SALES ACTIVITY:
Net proceeds before employee distributions * * * 4,256,000
Employee distributions before netting (2,128,000)
Deferred development fees paid @ sale 574,000
Denso Preferred Return 64,000
Netting recovery 375,000
------------
Subtotal - Asset Sales 3,141,000
------------
RETURN OF CAPITAL FROM ASSET SALES BUDGETED FOR 1Q98
Metro - Return of capital 200,000
Metro - Preferred Return 25,000
------------
Subtotal 225,000
------------
Net Asset Sales Activity 3,366,000
------------
------------
</TABLE>
NOTES:
* Reflects negotiated allocation of corporate overhead of $16,667
per month ($50,000 per quarter)
* * Includes an allocation of 10% of S. Sciutto and J. Johnston for
accounting and tax sevices plus 100% of KREG Operating Co.'s
accounting staff
* * * Reflects actual sale of Denso and budgeted sales of Metro,
Anaheim Tech & Spectrum Land
1.2-3
<PAGE>
KOLL REAL ESTATE GROUP
SUMMARY STATEMENT OF OPERATIONS
AND CASH FLOW
FOR THE ONE MONTH ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
SIGNAL LANDMARK
-------------------------------------
RANCHO BOLSA OTHER KREG KOLL KREG, INC.
SAN PASQUAL CHICA PROPERTIES CORPORATE OPERATING COMMUNITES CONSOLIDATED
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
REVENUE 950 2,010 2,960
EXPENSES: COST OF SALES 950 1,560 2,510
G & A 18 400 (47) (114) 257
REORGANIZATION 45 45
-------------------------------------------------------------------------------------------
0 0 (18) (445) 497 114 148
BONUS EXPENSE 337 337
INTEREST INCOME (32) (33) (2) (67)
SUBTOTAL 0 0 (32) (33) 335 0 270
OTHER (INC) EXP: 81 (15) (8) (66) 51 43
INTEREST EXPENSE (84) 84 41 41
-------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS) 0 (81) 29 (320) 144 22 (206)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
CASH FLOW
SOURCES:
REVENUES 842 1,288 2,130
BORROWINGS 0
-------------------------------------------------------------------------------------------
TOTAL SOURCES: 842 0 0 0 1,288 0 2,130
USES:
G&A, OPERATING EXPENSES 26 (324) (1,055) 246 (1,107)
LIABILITIES (234) (234)
DEVELOPMT/CONSTRUCTN (244) 259 15
PREDEV/INVESTMENTS (645) 111 (534)
LOAN PAYMENTS 0
INTEREST 72 72
-------------------------------------------------------------------------------------------
TOTAL USES: (244) (645) 98 (558) (685) 246 (1,788)
-------------------------------------------------------------------------------------------
NET CASH FLOW FOR PERIOD 598 (645) 98 (558) 603 246 342
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
BEGINNING CASH 6,836
--------------
ENDING CASH 7,178
--------------
--------------
</TABLE>
1.2.4
<PAGE>
SCHEDULE 2.2
INVESTMENTS
<TABLE>
<CAPTION>
KREG OPERATING CO. SUBSIDIARIES:
PERCENTAGE STATE/COUNTRY
OWNERSHIP (a) INCORPORATED
-------------- --------------
<S> <C> <C>
KREG - LA, Inc. 94 Delaware
KREG - NC, Inc. 84 Delaware
KREG - NW, Inc. 80 Delaware
KREG - OC, Inc. 80 Delaware
KREG - SD, Inc. 84 Delaware
KREG - SW, Inc. 84 Delaware
KREG - AZ, Inc. 100 Delaware
KREG Asia Holdings, Inc. 100 Delaware
KREG Taiwan, Inc. 100 Delaware
KREG Malaysia, Inc. 100 Delaware
KREG China, Inc. 100 Delaware
C.P. Koll Investment Company Ltd. 49 Cayman Islands
KOC EMPLOYEE AFFILIATES:
KREG - OC, L.P. 50 California
KREG - SW, L.P. 50 California
KREG - SW, EPA L.P. 50 Texas
KREG - AZ, L.P. 50 Arizona
</TABLE>
(a) Except for C.P. Koll Investment Company Ltd., the balance of ownership is
held by employees.
<PAGE>
SCHEDULE 2.5
REQUIRED CONSENTS: NONE
PROJECT CONSENTS:
<TABLE>
<CAPTION>
PROJECT FINANCIAL PARTNER [2.5 (i)] LENDER [2.5 (ii)]
EXISTING GUARANTEES:
<S> <C> <C>
Nokia Ronoko BankOne
NAI N/A Comerica
RappCollins N/A Guaranty Federal
Nortel N/A Guaranty Federal
EPA N/A NationsBank
Arrow Center - Ph.1 Guardian & Capellino Bank of Hemet
Faraday Guardian & KREG Employees Comerica
Otay Mesa Citicorp NationsBank
Koll Anaheim Tech. Center Invesco (Stanford) NationsBank
Arden Center - Ph. I Invesco (Stanford) NationsBank
Spectrum Citicorp Sanwa Bank
Century Park East Northstar Comerica
Arden Center - Ph. II Invesco (Stanford) NationsBank
Lincoln Center The Lincoln National Bank One
Ocean Terrace Cigna Tokai Bank
Valley View - Ph. I Apollo Bank One
</TABLE>
<TABLE>
<CAPTION>
DEALS EXPECTED TO CLOSE PRIOR TO APRIL 30, 1998:
<S> <C> <C>
Arrowhead Center Citicorp Bank One
Technology Plaza Citicorp Sanwa Bank
Omni (Sabre Center) Citicorp Bank One
Disney Travel N/A Tokai Bank
Plantation Ph. I Invesco (Stanford) NationsBank
</TABLE>
<TABLE>
<CAPTION>
DEALS APPROVED BY BOARD THAT MAY OR MAY NOT CLOSE BY APRIL 30, 1998:
<S> <C> <C>
Omnicom to be determined Bank One
Nortel Phase II N/A Guaranty Federal
Oryx Energy to be determined to be determined
Plantation Phase II Invesco to be determined
Arrow Center, Phase II Guardian & Capellino to be determined
</TABLE>
<PAGE>
SCHEDULE 2.7 A
1. KOC Netting and Vesting Agreements
2. KOC Employment Agreements with Walt Rector, Jerry Yahr. Larry Brose, Peter
Evans, David Mudgett and Jim Mueller.
3. KREG Employment Agreements with Don Koll, Richard Ortwein and Raymond J.
Pacini
4. The Koll Company 401 (K) Plus Plan
5. KREG Defined Benefit Pension Plan (frozen in December 1993)
6. KREG Executive Retirement and Savings Program (nonqualified plan which was
terminated effective November 15, 1996)
7. KREG 1993 Stock Option/Stock Issuance Plan
8. Pullman, Inc. Non-Contributory Pension Plan (liability assumed by MAFCO
Consolidated Group, Inc. in March 1997)
9. KREG Medical, Dental & Vision Insurance Plans (including pre-tax premium
plan)
10. KREG Group Universal Life Insurance
11. KREG Long-Term Disability Insurance
12. KREG Voluntary Accidental Death and Dismemberment (AD&D) Insurance
13. KREG Health Care and Dependent Care Reimbursement Accounts (flex spending)
14. Business Council Credit Union
15. Educational Assistance and Reimbursement Program
16. Extended Health Coverage (COBRA)
17. Workers' Compensation Insurance
18. State Disability Insurance
19. 1994 Stock Issuance Plans of (i) KREG-OC, Inc.; (ii) KREG-LA, Inc.; (iii)
KREG-SD, Inc.; (iv) KREG-NC, Inc.; (v) KREG-SW, Inc.; and (vi) KREG-NW,
Inc.
20. Verbal understanding with Kristen Pigman regarding August 4, 1995
termination and participation in pending Dunlap/Wal-Mart transaction
(see draft severance agreement)
21. KREG Retiree Medical Plan
<PAGE>
SCHEDULE 2.7 B
ERISA AFFILIATES
<TABLE>
<CAPTION>
Percentage State/Country of
Ownership Incorporation
--------- -------------
<S> <C> <C>
Hengro Fifteen Inc. 100 Delaware
Henley Disc Media, Inc. 100 Delaware
Henley Facilities, Inc. 100 Delaware
New Henley Holdings Inc. 100 Delaware
Air Correction International, Inc. 100 Delaware
GCC Patents Holding Company Inc. 100 Delaware
Hengro Fourteen Inc. 100 Delaware
Hengro Ten Inc. 100 Delaware
Hengro Thirteen Inc. 100 Delaware
Henley Deltec Holdings Inc. 100 Delaware
Henley Deltec Corporation 100 Delaware
Henley Investments, Inc. Two 100 Delaware
IRE Corporation 100 Indiana
LJC Investments, Inc. 100 Delaware
Moore International Inc. 80 Delaware
Newco A.C. Corporation 100 Delaware
Procon International Inc. 100 Delaware
Procon Incorporated 100 Delaware
Procofrance, S.A. 100 France
Procon (Great Britain) Limited 100 United Kingdom
Pullman Environmental Services Inc. 100 Delaware
Pullman Passenger Car Company Inc. 100 Delaware
Pullman Swindell Ltd. 100 United Kingdom
Trailmobile International Ltd. 100 Delaware
Pullman Trailmobile de Mexico S.A. de C.V. 100 Mexico
Trailmobile Leasing Corp. 100 Delaware
W.O.L. Corporation 100 Delaware
W. W. C. Corporation 100 Delaware
Wheelabrator Export Corporation 100 Delaware
Henley Holdings Two Inc. 100 Delaware
Signal Landmark Holdings Inc. 100 Delaware
Signal Landmark 100 California
Calumet Real Estate Inc. 100 Delaware
Newport Realty Corp. 100 California
Signal Hawaii, Inc. 100 Hawaii
Signal Puako Corporation 100 Hawaii
KREG Residential Corp. 100 Delaware
</TABLE>
2.7B-1
<PAGE>
SCHEDULE 2.7 B
ERISA AFFILIATES
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Henley/KNO Holding Inc. 100 Delaware
Koll Communities Holdings, Inc. 100 Delaware
KCI - AV Holdings Company 100 California
AV Partnership 49 California
AV Partners Corp. 49 California
Koll Communities, Inc. 100 Delaware
KREG Holdings Inc. 100 Delaware
KREG Operating Co. 100 Delaware
KREG - LA, Inc. 94 Delaware
KREG - NC, Inc. 84 Delaware
KREG - NW, Inc. 80 Delaware
KREG - OC, Inc. 80 Delaware
KREG - SD, Inc. 84 Delaware
KREG - SW, Inc. 84 Delaware
KREG - AZ, Inc. 100 Delaware
KREG Asia Holdings, Inc. 100 Delaware
KREG Taiwan, Inc. 100 Delaware
KREG Malaysia, Inc. 100 Delaware
KREG China, Inc. 100 Delaware
C.P. Koll Investment Co. Ltd. 49 Cayman Islands
NC Holding Company 100 Delaware
Wentworth By The Sea, Inc. * 50 Delaware
Newco A. D. Corporation 100 South Carolina
Twenty Newco Inc. 100 Delaware
Wentworth Holdings Inc. 100 Delaware
Wentworth By The Sea, Inc. * 50 Delaware
WESI Maryland Inc. 100 Delaware
WT/HRC Corporation 100 Illinois
Heat Research Corporation 100 Delaware
</TABLE>
(*) Together NC Holding Company and Wentworth Holdings Inc. own 100% of
Wentworth By The Sea, Inc.
2.7B-2
<PAGE>
SCHEDULE 2.8
The Internal Revenue Service ("IRS") has completed its examinations of the
tax returns of KREG 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.
KREG 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, KREG 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
September 30, 1997. KREG has not determined the extent of potential accompanying
state tax liability adjustments should the proposed IRS adjustments be upheld.
KREG'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 KREG's financial
statements. KREG is prepared to pursue all available administrative and judicial
appeal procedures with regard to this matter and KREG is advised that its
dispute with the IRS could take up to five years to resolve.
<PAGE>
SCHEDULE 2.9
TRANSACTIONS WITH AFFILIATES
<TABLE>
<CAPTION>
<S> <C> <C>
1. Reconciliation of R. Ortwein cost center
reimbursement of 62.5% due to KOC from
KREG (assuming 4/30/98 closing) ** $ *
2. Reimbursement for workers compensation
insurance due to KREG from KOC $ *
3. Reimbursement for medical insurance due
to KREG from KOC $ *
4. Reimbursement, if any, for medical and
dependent care reimbursement accounts. $ *
5. Reimbursement for telephone systems and
service due to KREG from KOC $ *
----------
Total $ *
----------
----------
</TABLE>
6. 1994 Stock Issuance Plans of (i) KREG-OC, Inc.; (ii) KREG-LA, Inc.; (iii)
KREG-SD, Inc.; (iv) KREG-NC, Inc.; (v) KREG-SW, Inc.; and (vi) KREG-NW,
Inc.
NOTES:
* Amounts to be estimated one day prior to Closing Date for the purpose
of determining the amount to be paid on the Closing Date. Within
thirty (30) days after the Closing Date a final accounting shall be
completed and reviewed by the accounting staffs of KDP and KREG and
any adjustments shall be paid in the same manner as set forth in
Section 1.2 (c).
** If closing does not occur on a month-end, then KOC would owe KREG
reimbursement for salaries, payroll taxes, benefits, rent and other
overhead for any stub period between the closing date and the end of
the next payroll period for D. Koll, J. Dubbs and M. Roylance (assumes
these 3 KREG employees stay on KREG payroll until the end of a pay
period; alternatively, KREG could remove these people from its payroll
as of closing date if that is more convenient. However, since rent and
related overhead costs are paid by KREG in advance, KOC would owe KREG
for such costs for any stub period.)
<PAGE>
SCHEDULE 2.12
1. On February 9, 1998, KREG-SW, EPA, L.P. was threatened with litigation
regarding a claim for commissions payable with respect to KOC's EPA project in
Kansas City, Kansas.
2. WHITING CORPORATION V. WT/HRC CORPORATION AND KREG-OC, INC., filed March
25, 1997, Circuit Court, Cook County, Illinois.
<PAGE>
SCHEDULE 5.5
KREG CORPORATE GUARANTEES
<TABLE>
<CAPTION>
LOAN
AMOUNT MATURITY
LENDER PROJECT LOCATION (IN MILLIONS) DATE
------ ------- -------- ------------- ----
<S> <C> <C> <C> <C>
1. BANK ONE Nokia Los Colinas, TX $ 37.7 4/98
2. BANK ONE Lincoln Center Scottsdale, AZ 35.5 12/99
spec. office
3. BANK ONE Valley View - Ph. I Las Vegas, NV 6.2 9/99
4. BANK OF HEMET Arrow Center - Ph. I Rancho Cucamonga 3.5 6/98
spec. Industrial
5. COMERICA Faraday - spec.. Carlsbad, CA 9.3 8/98
industrial
6. COMERICA NAI Carlsbad, CA 9.7 12/98
7. COMERICA Century Park West L.A. 7.9 7/99
East - spec.
office rehab
8. GUARANTY FEDERAL RappCollins Los Colinas, TX 10.8 2/99
9. GUARANTY FEDERAL Nortel Richardson, TX 48.1 10/98
10. NATIONSBANK EPA Kansas City, KS 31.5 12/99
11. NATIONSBANK Otay Mesa San Diego, CA 9.2 8/00
spec. Industrial
12. NATIONSBANK Koll Anaheim Anaheim, CA 13.1 5/00
Tech. Center
13. NATIONSBANK Arden Center - Ph. I Hayward, CA 9.7 11/00
spec. industrial
14. NATIONS BANK Arden Center - Ph. II Hayward, CA 5.0 2/00
spec. industrial
15. SANWA BANK Spectrum Carlsbad, CA 26.9 10/99
spec. industrial
16. TOKAI BANK Ocean Terrace San Diego, CA 22.7 1/00
spec. office/R&D ----
TOTAL EXISTING GUARANTEES $ 286.8
-----
</TABLE>
5.5-1
<PAGE>
SCHEDULE 5.5
KREG CORPORATE GUARANTEES
(CONTINUED)
<TABLE>
<CAPTION>
LOAN
AMOUNT
LENDER PROJECT LOCATION (IN MILLIONS)
------ ------- -------- -------------
<S> <C> <C> <C>
LOANS EXPECTED TO CLOSE IN APRIL
1. BANK ONE Omni (Sabre Center) San Diego, CA $ 12.6
2. BANK ONE Arrowhead Ctr. Phoenix, AZ 12.1
spec. office
3. SANWA BANK Technology Plaza San Diego, CA 9.4
spec. industrial
4. TOKAI BANK Disney Travel Anaheim, CA 2.4
-------
PLANNED APRIL CLOSINGS 36.5
OTHER DEALS-IN-PROGRESS
1. BANK ONE Omnicom Plano, Tx 37.0
2. GUARANTY FEDERAL Nortel Phase II Richardson, TX 32.0
3. TO BE DETERMINED Oryx Energy Plano, TX 21.0
4. TO BE DETERMTINED Plantation City of Industry, 55.0
spec. industrial CA
5. TO BE DETERMTINED Arrow Center, Rancho Cucamonga, 6.0
phase II CA ---
spec. industrial
OTHER DEALS-IN-PROGRESS $187.5
------
TOTAL AUTHORIZED GUARANTEES $474.3
------
</TABLE>
5.5-2
<PAGE>
SCHEDULED 8.1 (h)
PERSONAL PROPERTY
DONALD M. KOLL'S OFFICE:
Computer; printer, etc. (or KOC can reimburse KREG $5,000)
RAYMOND J. PACINI'S OFFICE:
Executive Chair
Executive Desk, credenza, and file cabinets (in Keith Ross's office)
Wood filing cabinets (2)
Artwork (2)
Computer (on desk of Mary Roylance)
Printer, etc.
Misc. desk supplies
CHRISTINE RUSH'S WORK AREA:
Chair
Steel filing cabinets (2)
Computer
Printer, etc. (on desk of Mary Roylance)
Fax Machine
Typewriter
Inter-com
Heater
Electronic rollodex (2)
Misc. desk supplies
SANDRA SCIUTTO'S OFFICE:
Computer, printer, etc.
Chair
File Cabinet
Calculator
Misc. desk supplies
JON JOHNSTON'S OFFICE:
Computer, printer, etc.
Chair
Calculator
Metal book shelf
Misc. desk supplies
<PAGE>
MARY ROYLANCE'S WORK AREA:
Casio 10-key calculator
Heavy duty 3-hole punch
Misc. desk supplies
MARY KOBLENTZ'S WORK AREA:
Computer, printer, etc.
Chair
Calculator
Modem
Bulletin Board
Misc. desk supplies
MARGIE GRAUPENSPERGER'S WORK AREA:
Computer, printer, etc.
Chair
Fax Machine
Typewriter
Calculator
Heavy Duty 3-hole punch and stapler
2-hole punch
Bulletin Board
Misc. desk supplies
GENERAL:
Phone System from 4400 MacArthur Blvd.
Postage Meter from 4400 MacArthur Blvd.
Compaq Prosignia 200 Server
50% of Anzac check printer & cartridge (owned with TKC/International)
Charlie Abdi's Toshiba Laptop (or KOC can reimburse KREG $1,000)
Furniture and copier at 4400 MacArthur Blvd.
8.1(h)-2
<PAGE>
KOLL REAL ESTATE GROUP, INC.
WORLDWIDE SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage State/Country of
Ownership Incorporation
---------- -------------
<S> <C> <C>
Hengro Fifteen Inc. 100 Delaware
Henley Disc Media, Inc. 100 Delaware
Henley Facilities, Inc. 100 Delaware
New Henley Holdings Inc. 100 Delaware
Air Correction International, Inc. 100 Delaware
GCC Patents Holding Company Inc. 100 Delaware
Hengro Fourteen Inc. 100 Delaware
Hengro Ten Inc. 100 Delaware
Hengro Thirteen Inc. 100 Delaware
Henley Deltec Holdings Inc. 100 Delaware
Henley Deltec Corporation 100 Delaware
Henley Investments, Inc. Two 100 Delaware
IRE Corporation 100 Indiana
LJC Investments, Inc. 100 Delaware
Moore International Inc. 80 Delaware
Newco A.C. Corporation 100 Delaware
Procon International Inc. 100 Delaware
Procon Incorporated 100 Delaware
Procofrance, S.A. 100 France
Procon (Great Britain) Limited 100 United Kingdom
Pullman Environmental Services Inc. 100 Delaware
Pullman Passenger Car Company Inc. 100 Delaware
Pullman Swindell Ltd. 100 United Kingdom
Trailmobile International Ltd. 100 Delaware
Pullman Trailmobile de Mexico S.A. de C.V. 100 Mexico
Trailmobile Leasing Corp. 100 Delaware
W.O.L. Corporation 100 Delaware
W. W. C. Corporation 100 Delaware
Wheelabrator Export Corporation 100 Delaware
Henley Holdings Two Inc. 100 Delaware
Signal Landmark Holdings Inc. 100 Delaware
Signal Landmark 100 California
Calumet Real Estate Inc. 100 Delaware
Newport Realty Corp. 100 California
Signal Hawaii, Inc. 100 Hawaii
Signal Puako Corporation 100 Hawaii
KREG Residential Corp. 100 Delaware
1
<PAGE>
Henley/KNO Holding Inc. 100 Delaware
Koll Communities Holdings, Inc. 100 Delaware
KCI - AV Holdings Company 100 California
AV Partnership 49 California
AV Partners Corp. 49 California
Koll Communities, Inc. 100 Delaware
KREG Holdings Inc. 100 Delaware
KREG Operating Co. 100 Delaware
KREG - LA, Inc. 94 Delaware
KREG - NC, Inc. 84 Delaware
KREG - NW, Inc. 80 Delaware
KREG - OC, Inc. 80 Delaware
KREG - SD, Inc. 84 Delaware
KREG - SW, Inc. 84 Delaware
KREG - AZ, Inc. 100 Delaware
KREG Asia Holdings, Inc. 100 Delaware
KREG Taiwan, Inc. 100 Delaware
KREG Malaysia, Inc. 100 Delaware
KREG China, Inc. 100 Delaware
C.P. Koll Investment Co. Ltd. 49 Cayman Islands
NC Holding Company 100 Delaware
Wentworth By The Sea, Inc. *50 Delaware
Newco A. D. Corporation 100 South Carolina
Twenty Newco Inc. 100 Delaware
Wentworth Holdings Inc. 100 Delaware
Wentworth By The Sea, Inc. *50 Delaware
WESI Maryland Inc. 100 Delaware
WT/HRC Corporation 100 Illinois
Heat Research Corporation 100 Delaware
</TABLE>
(*) Together NC Holding Company and Wentworth Holdings Inc. own 100% of
Wentworth By The Sea, Inc.
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