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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, 1993
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4343 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
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:
CLASS A COMMON STOCK, PAR VALUE $.05 PER SHARE
(TITLE OF CLASS)
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK,
PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
12% SENIOR SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002
(TITLE OF CLASS)
12% SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002
(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. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 1, 1993 WAS $13,339,445.
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MARCH 1, 1993
WAS 43,319,703.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1994 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
Koll Real Estate Group, Inc., a Delaware corporation, formerly known as The
Bolsa Chica Company (from July 16, 1992 to September 30, 1993) and as Henley
Properties Inc. (from December 1989 to July 16, 1992), is a real estate
development company with properties principally in Southern California, as well
as New Hampshire. The principal activity of Koll Real Estate Group, Inc. and its
consolidated subsidiaries (the "Company") has been to obtain zoning and other
entitlements for land it owns and to improve the land principally for
residential development. Once the land is entitled, the Company may sell
unimproved land to other developers or investors; sell improved land to home
builders; or participate in joint ventures with other developers, investors or
home builders to finance and construct infrastructure and homes.
With the acquisition of the domestic real estate development business of The
Koll Company on September 30, 1993, the Company's principal activities have been
expanded to include providing commercial, industrial, retail and residential
real estate development services to third parties, including feasibility
studies, entitlement coordination, project planning, construction management,
financing, marketing, acquisition, disposition and asset management services on
a national basis, through its current offices throughout California, and in
Seattle, Dallas and Denver. The Company intends to consider additional real
estate acquisition opportunities; however, over the next two years the Company's
principal objective is to maintain adequate liquidity to fully support the Bolsa
Chica project entitlement efforts.
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.
BOLSA CHICA. The Bolsa Chica property is the principal property in the
Company's portfolio. The Company owns approximately 1,200 acres of the 1,700
acres of undeveloped Bolsa Chica land located on the Pacific Ocean in
northwestern Orange County, California. Bolsa Chica is bordered on the north and
east by residential development, to the south by open space and residential
development, and to the west by the Pacific Coast Highway and the Bolsa Chica
State Beach. Bolsa Chica is one of the last large undeveloped coastal properties
in Southern California, approximately 35 miles south of downtown Los Angeles.
In 1986, the California State Coastal Commission certified a local coastal
program/land use plan for the Bolsa Chica property, which was subject to the
satisfaction of certain conditions, including presentation of favorable
economic, environmental and physical feasibility studies. The proposed
development of the Bolsa Chica property as a marina/residential development
provoked substantial controversy and highlighted public awareness of an earlier
lawsuit related to the potential impact of development on the environmentally
sensitive wetland areas, among other issues. In order to achieve a public
consensus on the plans for Bolsa Chica's development and to expedite development
of the property, in November 1988 the Company helped organize the Bolsa Chica
Planning Coalition (the "Coalition"), consisting of representatives of the
Company, city, county and state officials, and the Amigos de Bolsa Chica, a
local environmental organization which had previously opposed the project and
was a party to the earlier lawsuit. The objective of the Coalition was to
consider alternative land use plans for Bolsa Chica. In 1989, the Coalition
reached an agreement in principle on a concept plan permitting the development
of an oceanfront residential community featuring protected wetlands (the
"Coalition Plan"). The parties to the litigation also dismissed the litigation
which had halted development of Bolsa Chica.
In November 1991, in accordance with the Coalition Plan, the Company
announced its plan to develop a master planned community of approximately 4,900
homes at Bolsa Chica, including approximately 4,300 units on the Company's land.
The planned community at Bolsa Chica is expected to offer a broad mix of home
choices, including single-family homes, townhomes and condominiums at a wide
range of prices. In September 1992, environmental impact documents for the Bolsa
Chica project's master planned community were released by the City of Huntington
Beach, California, and the U.S. Army Corps of Engineers for a ninety-day public
comment period which concluded in December 1992. In March 1993, the Company
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transferred local processing of the Coalition Plan to the County of Orange in
order to integrate the Bolsa Chica regional park and wetlands restoration with
the rest of the land use planning. Given the extent of comments received from
the public, including a variety of state and federal agencies, the County of
Orange recirculated a revised draft of the environmental impact report in
December 1993, for public omment which concluded on February 18, 1994. The
revised draft contains an in-depth analysis of an alternative plan which
includes 3,500 homes, in addition to the in-depth analysis of the Coalition
Plan.
Despite efforts to date in the Bolsa Chica entitlement process, the Company
has not yet obtained any of the final approvals from local, state or federal
governmental entities that are required for development of the project. Due to a
number of factors beyond the Company's control, including possible objections to
the Coalition Plan by various environmental and so-called public interest groups
that may be made in legislative, administrative or judicial forums, such
approvals could be delayed substantially. Subject to these and other
uncertainties inherent in the entitlement process, the Company's goal is to
obtain all material governmental approvals in the first half of 1995 and to
begin infrastructure construction in the second half of 1995, depending on
economic and market conditions. Realization of the Company's investment in Bolsa
Chica will also depend upon various economic factors, including the demand for
residential housing in the Southern California market and the availability of
credit to the Company and to the housing industry.
EAGLE CREST. In the City of Escondido in San Diego County, approximately 30
miles north of downtown San Diego, the Company is developing an 860-acre, gated
community consisting of 580 residential lots surrounding an 18-hole championship
golf course. The golf course opened during May 1993. Construction of the
remaining infrastructure and the permanent clubhouse has been deferred until the
residential market for trade-up homes improves and financing for such
infrastructure construction becomes available.
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 property is located within an area designated by the
City of San Diego as the "Future Urbanizing Area." The City of San Diego
recently approved a "Framework Plan" which generally defines land use, locations
and densities for the Future Urbanizing Area, subject to voter approval. The
Framework Plan could allow development of significantly greater density (up to
800 residential units) on the Company's Fairbanks Highlands property if
ultimately approved by the voters in June 1994, along with approximately 12,000
acres to be developed by neighboring landowners.
WENTWORTH BY THE SEA. This project is currently being managed, at the
direction of the Company, by a local real estate management and development
company, with the objective of developing 130 new residential and vacation homes
in New Hampshire, approximately 60 miles north of Boston. The project currently
includes an 18-hole golf course, a 170-slip marina, 21 single-family detached
condominium homes built by the previous owner and related commercial
development. The Company began marketing the 21 existing homes in September
1993, and since then four homes have been sold and nine additional homes are in
escrow. The Company is continuing to hold discussions with a community group
interested in purchasing and restoring the original Wentworth Hotel, which
closed in 1981.
OTHER PROPERTIES. The Company owns various other commercial and industrial
properties in Southern California, including land zoned for
commercial/industrial use in Coronado, Rancho Murrieta and Signal Hill,
California. All of these properties are currently held for sale, subject to
market conditions.
PROPERTY DISPOSITIONS. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's property dispositions during 1992 and 1993.
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 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
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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 difficulties in obtaining necessary governmental
approvals.
As more fully described above, the Company is in the process of seeking the
necessary local, state and federal approvals and permits to begin development of
its Bolsa Chica property. The Company reached an agreement in 1989 on the
Coalition Plan, and the Company's goal is to obtain the necessary approvals in
the first half of 1995. Nevertheless, the approval process for the Bolsa Chica
property remains subject to the uncertainties described above, and there is no
assurance that such approvals will ultimately be obtained or will not be
substantially delayed. Failure to obtain such approvals would have, and a
substantial delay in obtaining such approvals could have, a material adverse
effect on the Company.
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 or financial condition, including
current environmental litigation discussed in Part I, Item 3 -- "Legal
Proceedings" and the potential remediation expenditures required 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 has retained liabilities relating
to certain of these assets and businesses, including certain tax liabilities.
See Note 9 "Income Taxes -- Tax Sharing Agreements" in Notes to Financial
Statements on pages F-20 to F-21 of this Annual Report. 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.
Abex Inc. ("Abex") and the Company have agreed that, following the Company's
1992 merger with The Henley Group, Inc., each company will be responsible for
environmental liabilities relating to its existing, past and future assets and
businesses and will indemnify the other in respect thereof.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of Allied-Signal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However,
Allied-Signal has, through UOP, asserted a contractual indemnification claim
against the Company for claims that may be asserted against UOP by EPA or other
parties with respect to the site. EPA has proposed a cleanup 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 approximately $7.2 million. EPA
estimates that it has spent in excess of $2 million to date in performing
studies of the site. Under CERCLA, EPA could assert claims against the Torch
Lake PRPs, including UOP, to recover the cost of these studies, the cost of all
remedial action required at the site, and natural resources damages. An earlier
settlement in principle with EPA staff pursuant to which UOP would pay $1.7
million in exchange for a release similar to those normally granted by EPA in
such circumstances was rejected by certain other governmental authorities in
July 1993. Settlement negotiations between the Company, on behalf of UOP, and
EPA resumed shortly thereafter and are ongoing.
EMPLOYEES
As of March 1, 1994, the Company and its subsidiaries had approximately 92
employees.
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EXECUTIVE OFFICERS OF THE COMPANY
Certain of the executive officers of the Company are also executive officers
of The Koll Company ("Koll") and its affiliates. Accordingly, they will devote
less than all of their working time to the businesses of the Company. Set forth
below is information with respect to each executive officer.
NAME AND TITLE AGE* BUSINESS EXPERIENCE
- ------------------------------ ---- ------------------------------------------
Donald M. Koll 61 Chairman of the Board of the Company since
Chairman of the Board March 1993. Managing Director-President
and a director of the Company from 1990 to
1992. Chairman of the Board and Chief
Executive Officer of Koll (general
contracting and international real estate
development) and Chairman of the Board of
Koll Management Services, Inc. ("KMS")
(real estate management) since prior to
1989.
Ray Wirta 50 Vice Chairman of the Board and Chief
Vice Chairman of the Board and Executive Officer of the Company since
Chief Executive Officer March 1993. Vice Chairman of the Board and
Chief Executive Officer of KMS and
President and Chief Operating Officer of
Koll since prior to 1989.
Richard M. Ortwein 52 President of the Company since October
President 1993. President, Southern California
Division of Koll since prior to 1989.
Executive Vice President of KMS from 1991
to 1993, and director of KMS from 1992 to
March 1994.
Raymond J. Pacini 38 Secretary of the Company since December
Executive Vice President, 1993; Executive Vice President since March
Chief Financial Officer, 1993; Vice President, Chief Financial
Treasurer and Secretary Officer and Treasurer of the Company since
1992. Managing Director of the Company
from 1990 to 1992. Director of Financial
Reporting for The Henley Group, Inc.
during 1989. Executive Vice President and
Chief Financial Officer of KMS from March
to November 1993.
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* Ages as of April 1, 1994
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.
4
The principal properties of the Company and its subsidiaries, which are
owned in fee unless otherwise indicated, are as follows:
PROPERTY LOCATION ACRES PRESENT OR PLANNED USE
- ----------------------- -------------------- ----- -----------------------
Newport Beach* Newport Beach, CA -- Headquarters
Bolsa Chica Huntington Beach, CA 1,200 Oceanfront residential
community
Eagle Crest Escondido, CA 860 Golf/residential
community
Fairbanks Highlands San Diego, CA 390 Residential community
Wentworth By The Sea New Castle & Rye, NH 275 Resort/residential
community/golf/marina
Michigan Land Upper Peninsula, MI 3,900 Resort/residential lots
Grand Caribe Isle** Coronado, CA 5 Commercial land
Rancho Murrieta Murrieta, CA 20 Commercial/industrial
Business Park land
Signal Hill Signal Hill, CA 2 Commercial/industrial
land
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* Leased
** Ground lease
ITEM 3. LEGAL PROCEEDINGS
The owners of undeveloped real property located in San Diego County sued
Signal Landmark, a subsidiary of the Company ("Signal"), in San Diego Superior
Court, in May 1990, alleging that Signal had deposited contaminated soils on
their property and was liable under theories of nuisance, negligence, trespass
and strict liability. The plaintiffs sought general damages in the amount of
approximately $40 million and, additionally, punitive damages in an unspecified
amount, plus prejudgment interest and costs. On August 5, 1991, the plaintiffs
filed a complaint in federal court against Signal, the Company and several other
parties asserting claims under CERCLA seeking essentially the same relief sought
in the state action.
In April 1992, a jury awarded the plaintiffs damages in the amount of $2.5
million following a trial in the state action. Signal appealed the verdict in
the state action and posted a bond and cash collateral of $3.75 million in
August 1992. On March 5, 1993, Signal reached an agreement in principle with the
plaintiffs in such litigation to settle both the federal and state actions. On
July 2, 1993, the Federal Court for The Southern District of California approved
the settlement under the terms of which funds from such cash collateral account
were disbursed approximately as follows: 1) $1.3 million deposited in trust for
remediation expenditures, 2) $1.3 million disbursed to the plaintiffs, and 3)
$1.1 million returned to Signal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 Class A 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.
HIGH LOW
--------- ---------
1993
First Quarter............................................................ $ .343 $ .188
Second Quarter........................................................... .313 .125
Third Quarter............................................................ .219 .063
Fourth Quarter........................................................... .969 .125
1992
First Quarter............................................................ $ 1.250 $ .625
Second Quarter........................................................... 1.000 .250
Third Quarter............................................................ .375 .094
Fourth Quarter........................................................... .282 .094
The number of holders of record of the Company's Class A Common Stock as of
March 1, 1994 was approximately 28,000. The Company has not paid any cash
dividends on its Class A Common Stock to date, nor does the Company currently
intend to pay regular cash dividends on the Class A Common Stock. Such dividend
policy is and will continue to be subject to prohibitions on the declaration or
payment of dividends contained in debt agreements of the Company. See Note 7 --
Notes to Financial Statements on pages F-17 to F-18 of this Annual Report, which
Note is incorporated herein by reference.
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 on pages F-3 to F-6 of this Annual Report.
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-7.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1994 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.
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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
1994 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 1994 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 1994 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:
PAGE
----
Selected Financial Data................................................. F-1
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-3
Independent Auditors' Report -- Deloitte & Touche....................... F-7
Independent Auditors' Report -- Kenneth Leventhal & Company............. F-8
Balance Sheets as of December 31, 1992 and 1993......................... F-9
Statements of Operations for the Years Ended December 31, 1991, 1992 and
1993................................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1991, 1992 and
1993................................................................... F-11
Statements of Changes in Stockholders' Equity for the Three Years Ended
December 31, 1993...................................................... F-12
Notes to Financial Statements........................................... F-13
(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:
3.01 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.01 to the Registrant's Annual
Report on Form 10-K for 1992.
3.02 Amended By-Laws of the Registrant, incorporated by reference to
Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for
1992.
4.01 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.01).
4.02 Amended By-Laws of the Registrant (filed as Exhibit 3.02).
4.03 Second Amended and Restated Credit Agreement between the Registrant
and Bank of America National Trust and Savings Association dated as
of July 16, 1992, incorporated by reference to Exhibit 4.03 to the
Registrant's Annual Report on Form 10-K for 1992.
4.04 1992 Restatement of Credit Agreement (the "Credit Agreement") dated
as of July 16, 1992 among Great Island Trust Partnership, Wentworth
By The Sea, Inc., and The First
7
National Bank of Boston, for itself and as agent (the "Agent"), and
Wentworth Holdings, Inc., and Wentworth Holdings II, Inc.,
incorporated by reference to Exhibit 4.04 to the Registrant's Annual
Report on Form 10-K for 1992.
4.04A 1992 Amendment No. 1 to the Credit Agreement dated as of December
30, 1992, incorporated by reference to Exhibit 4.04A to the
Registrant's Annual Report on Form 10-K for 1992.
4.05 1992 Restatement of Guarantee Agreement between the Registrant and
the Agent dated as of July 16, 1992, incorporated by reference to
Exhibit 4.05 to the Registrant's Annual Report on Form 10-K for
1992.
4.06 Additional Guarantee Agreement dated as of July 16, 1992 between the
Registrant and the Agent, incorporated by reference to Exhibit 4.06
to the Registrant's Annual Report on Form 10-K for 1992.
4.07 Indenture dated as of July 15, 1992 for 12% Senior Subordinated
Pay-In-Kind Debentures Due March 15, 2002 ("Senior Subordinated
Debentures"), issued by the Registrant in the aggregate principal
amount of $127,550,000, incorporated by reference to Exhibit 4.08 to
the Registrant's Annual Report on Form 10-K for 1992.
4.08 Indenture dated as of July 15, 1992 for 12% Subordinated Pay-In-Kind
Debentures Due March 15, 2002, ("Subordinated Debentures"), issued
by the Registrant in the aggregate principal amount of $75,688,000,
incorporated by reference to Exhibit 4.09 to the Registrant's Annual
Report on Form 10-K for 1992.
4.09 Form of Senior Subordinated Debentures (included in Exhibit 4.07).
4.10 Form of Subordinated Debentures (included in Exhibit 4.08).
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.*
10.03 1988 Stock Plan for Executive Employees of the Registrant and its
Subsidiaries, incorporated by reference to Exhibit 10.12 to
Amendment No. 3 on Form 8 to the Registrant's Registration Statement
on Form 10.
10.03A 1993 Stock Option/Stock Issuance Plan.*
10.04 Restricted Stock Plan for Non-Employee Directors of the Registrant,
incorporated by reference to Exhibit 10.13 to the Registrant's
Registration Statement on Form 10.
10.05 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.
10.06 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.
10.07 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.
10.07A Amendment to Retirement Plan of the Registrant dated December 8,
1993*.
10.08 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*.
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10.09 Restated Environmental Matters Agreement dated as of July 28, 1989,
among a predecessor to the Registrant, Allied-Signal, 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
Allied-Signal, incorporated by reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for 1989.
10.10 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.
10.11 Option Agreement dated December 30, 1992, among Wentworth Holdings
Inc., NC Holding Company, WLP Holding Company and Wentworth Holdings
II Inc., incorporated by reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for 1992.
10.12 Transition Agreement dated as of July 16, 1992 ("Transition
Agreement"), among Henley Group, the Registrant and Abex Inc.,
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for 1992.
10.12A Amendment to Transition Agreement dated April 1, 1993.*
10.13 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.
10.14 Conditional Guarantee dated as of July 9, 1992, among Abex Inc.,
Henley Group, the Registrant and Allied-Signal, incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for 1992.
10.15 Reimbursement Agreement dated as of July 16, 1992, among Henley
Group, the Registrant and Abex Inc., incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for
1992.
10.16 Pension Agreement dated as of July 16, 1992, among the Registrant,
Henley Group and Abex Inc., incorporated by reference to Exhibit
10.18 to the Registrant's Annual Report on Form 10-K for 1992.
10.17 Option Agreement dated as of July 16, 1992, between the Registrant
and Abex Inc., incorporated by reference to Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for 1992.
10.17A Option Termination Agreement dated August 27, 1993 between the
Registrant and Abex Inc., incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.18 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.
10.18A Amendment No. 1 to the Asset Agreement dated as of December 29,
1993.*
10.19 Stock Purchase Agreement ("Stock Agreement") dated December 17, 1993
between the Registrant, certain of its subsidiaries and Libra Invest
& Trade Ltd.*
9
10.19A Amendment No. 1 to the Stock Agreement dated as of February 15,
1994.*
10.20 Exchange Agreement dated December 17, 1993 between the Registrant
and Libra Invest & Trade Ltd.*
10.21 Financing and Accounting Services Agreement dated as of September
30, 1993 between the Registrant and The Koll Company.*
10.22 Management Information Systems and Human Resources Services
Agreement dated as of September 30, 1993 between the Registrant and
Koll Management Services, Inc.*
10.23 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.
10.24 Sublease Agreement dated September 30, 1993 between the Registrant
and The Koll Company.*
21.01 Subsidiaries of the Registrant.*
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K:
Report on Form 8-K dated December 17, 1993, reporting under Item 5 Other
Events, regarding (i) the disposition of Lake Superior Land Company to Libra
Invest & Trade Ltd. ("Libra"), and; (ii) the issuance of common stock to Libra
in exchange for Libra's subordinated debentures of the Company.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1994 KOLL REAL ESTATE GROUP, INC.
By: /s/ RAYMOND J. PACINI
------------------------------------
Raymond J. Pacini
Executive Vice President -- Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange 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.
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------- --------------
/s/ DONALD M. KOLL Chairman of the Board March 30, 1994
- -----------------------------------
(Donald M. Koll)
/s/ RAY WIRTA Vice Chairman of the Board March 30, 1994
- ----------------------------------- and Chief Executive
(Ray Wirta) Officer (Principal
Executive Officer)
/s/ RAYMOND J. PACINI Executive Vice President March 30, 1994
- ----------------------------------- and Chief Financial
(Raymond J. Pacini) Officer (Principal
Financial Officer)
/s/ HAROLD A. ELLIS, JR. Director March 30, 1994
- -----------------------------------
(Harold A. Ellis, Jr.)
/s/ PAUL C. HEGNESS Director March 30, 1994
- -----------------------------------
(Paul C. Hegness)
/s/ J. THOMAS TALBOT Director March 30, 1994
- -----------------------------------
(J. Thomas Talbot)
/s/ MARCO F. VITULLI Director March 30, 1994
- -----------------------------------
(Marco F. Vitulli)
11
KOLL REAL ESTATE GROUP, INC.
SELECTED FINANCIAL DATA
The following selected financial data of Koll Real Estate Group, Inc. and
its consolidated subsidiaries (the "Company") should be read in conjunction with
the financial statements included elsewhere herein. The financial statements for
the year ended December 31, 1989 do not necessarily reflect the results of
operations of the Company had it been a separate, stand-alone company. For
further discussion of the formation of the Company and the basis of presentation
see the Notes to Financial Statements.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1989 1990 1991 1992 1993
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Balance Sheet Data:
Cash and cash equivalents and short-term investments (a).... $ 54.6 $ 22.1 $ 7.8 $ 41.6 $ 43.5
Total assets (a)............................................ 680.6 590.0 472.9 486.1 446.3
Senior bank debt (b)........................................ 75.0 95.3 82.4 65.4 7.0
Nonrecourse debt (b)........................................ 45.0 25.0 24.9 -- --
Subordinated debentures (b)................................. 144.0 161.5 184.7 165.1 134.9
Total stockholders' equity (c).............................. 148.9 208.0 101.3 149.6 163.5
Fully diluted shares outstanding at end of year............. 20.9 20.0 20.0 86.4 91.4
Book value per fully diluted share.......................... 7.12 10.40 5.07 1.73 1.79
Statement of Operations Data:
Revenues (d),(e)............................................ 123.0 97.0 34.7 28.3 16.7
Income (loss) from continuing operations (e),(f)............ 4.9 62.6 (105.5) (41.9) (20.1)
Net income (loss) (f)....................................... 6.4 64.7 (106.7) (38.4) 14.3
Per common share:
Income (loss) from continuing operations (c),(e),(f)........ .23 3.05 (5.27) (1.44) (.24)
Net income (loss) (f),(g)................................... .30 3.15 (5.33) (1.32) .17
Weighted average shares outstanding........................... 20.9 20.5 20.0 29.0 83.0
- ------------------------
(a) The decrease in total assets at December 31, 1990 is primarily due to
asset sales and revaluations and the decrease in cash and cash
equivalents, which primarily reflects the settlement of certain
liabilities from available cash. The decrease in total assets at December
31, 1991 is primarily due to asset revaluations (Note 3) and the decrease
in cash and cash equivalents, which primarily reflects principal
repayments on senior bank debt. The increase in cash and cash equivalents
and total assets at December 31, 1992 is primarily attributable to the
1992 merger with The Henley Group, Inc. (the "Merger")(Note 1), partially
offset by the elimination of hotel assets from the Company's balance sheet
in connection with the Long Beach Airport Marriott Hotel foreclosure. The
decrease in total assets at December 31, 1993 is primarily due to the
disposition of the Company's investment in Deltec Panamerica S.A.
("Deltec") and the sale of Lake Superior Land Company (Note 4).
(b) The increase in senior bank debt at December 31, 1990 reflects the
consolidation of Wentworth By the Sea, and the decrease in nonrecourse
debt at December 31, 1990 is due to the sale of a trash-to-energy
facility. The decrease in senior bank debt at December 31, 1991 is due to
principal repayments on such debt. The decreases in debt at December 31,
1992 reflect the elimination of nonrecourse debt from the Company's
balance sheet in connection with the hotel foreclosure and the reduction
of subordinated debentures and principal repayments on senior bank debt in
connection with the Merger (Notes 1 and 7). The decrease in debt at
December 31, 1993 reflects principal repayments on senior bank debt (Note
7) and the exchange of subordinated debentures in connection with the sale
of Lake Superior Land Company and issuance of 3.4 million shares of Class
A Common Stock of the Company to Libra Invest & Trade Ltd. ("Libra")
(Notes 4 and 7).
F-1
(c) The increase in equity at December 31, 1992 reflects the July 16, 1992
Merger, partially offset by the net loss for the year then ended. The
increase in equity at December 31, 1993 primarily reflects net income for
the year then ended.
(d) The decrease in 1990 revenues was principally due to decreased residential
sales as a result of the substantial completion and sale of the Coronado
Cays, California project, partially offset by increases in land sales. The
decrease in 1991 revenues was primarily due to a further decrease in
residential sales at the Coronado Cays project, as well as a decrease in
land sales and poor market conditions in the real estate industry. The
decrease in 1992 revenues was principally due to the commencement of a
foreclosure against the Company's Long Beach Airport Marriott Hotel in
September 1992 and lower hotel operating revenues prior to that date. The
decrease in 1993 revenues is principally due to a decrease in land sales
and the absence of hotel revenues, partially offset by revenues from the
Eagle Crest golf course which opened in May 1993 and development fees
generated by the business acquired in September 1993 (Note 4).
(e) Amounts have been reclassified to present Lake Superior Land Company and
Deltec as discontinued operations.
(f) Income from continuing operations, net income and earnings per common
share for the year ended December 31, 1990 include approximately $104
million ($5.07 per share) from the sale of the Company's interests in two
trash-to-energy facilities, partially offset by greater interest expense
related to the Company's post 1989 capital structure, asset revaluations
and costs related to personnel reductions. The loss from continuing
operations, net loss and loss per common share for the year ended December
31, 1991 include approximately $65 million ($3.24 per share) of charges
related to asset revaluations. The loss from continuing operations, net
loss and loss per common share for the year ended December 31, 1992
reflect lower interest expense related to lower debt outstanding as a
result of the July 16, 1992 Merger and concurrent prepayment of $15
million of senior bank debt, along with lower interest rates. The loss
from continuing operations for the year ended December 31, 1993 reflects
lower interest expense related to lower debt outstanding (Note 7), as well
as $3 million received upon termination of a put option agreement with
Abex Inc. and a $2 million insurance reimbursement related to costs
incurred in 1992. Net income and net income per common share for 1993
reflect gains on the dispositions of Lake Superior Land Company and Deltec
(Note 4) and an extraordinary gain on debt extinguishment (Notes 4 and 7).
(g) The 1989 earnings per-share amount is based on the assumption that the
shares outstanding as of December 31, 1989 were outstanding since January
1, 1989. On July 16, 1992, approximately 19.7 million shares of Class A
Common Stock and 42.5 million shares of Series A Preferred Stock were
issued in connection with the Merger. The Series A Preferred Stock is not
included in the loss per share calculations for 1991 and 1992 since the
effect is antidilutive. In December 1993, the Company issued 3.4 million
shares of its Class A Common Stock in exchange for all of Libra's
approximately $10.6 million in aggregate principal amount plus accrued
interest of subordinated debentures issued by the Company (Note 4). The
1993 earnings per share calculation includes these newly issued shares,
along with the Series A Preferred Stock and stock options outstanding.
F-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal activity of the Company has been to obtain zoning and other
entitlements for land it owns and to improve the land for residential
development. Once the land is entitled, the Company may sell unimproved land to
other developers or investors; sell improved land to home builders; or
participate in joint ventures with other developers, investors or home builders
to finance and construct infrastructure and homes. With the acquisition of the
domestic real estate development business of The Koll Company on September 30,
1993, the Company's principal activities have been expanded to include providing
commercial, industrial, retail and residential development services to third
parties, including feasibility studies, entitlement coordination, project
planning, construction management, financing, marketing, acquisition,
disposition and asset management services on a national basis, through its
current offices throughout California, and in Seattle, Dallas and Denver. The
Company intends to consider additional real estate acquisition opportunities;
however, over the next two years the Company's principal objective is to
maintain adequate liquidity to fully support the Bolsa Chica project entitlement
efforts.
Real estate held for development or sale and land held for development (real
estate properties) are carried at the lower of cost or estimated net realizable
value (Note 2). The Company's real estate properties are subject to a number of
uncertainties which can affect the future values of those assets. These
uncertainties include delays in obtaining zoning and regulatory approvals,
withdrawals or appeals of regulatory approvals and availability of adequate
capital, financing and cash flow. In addition, future values may be adversely
affected by heightened environmental scrutiny, limitations on the availability
of water in Southern California, increases in property taxes, increases in the
costs of labor and materials and other development risks, changes in general
economic conditions, including higher mortgage interest rates, and other real
estate risks such as the demand for housing generally and the supply of
competitive products. Real estate properties do not constitute liquid assets
and, at any given time, it may be difficult to sell a particular property for an
appropriate price. The state of the nation's economy, and California's economy
in particular, has had a negative impact on the real estate market generally, on
the availability of potential purchasers for such properties and upon the
availability of sources of financing for carrying and developing such
properties.
LIQUIDITY AND CAPITAL RESOURCES
The principal assets remaining 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. Sales of the Company's
non-strategic assets, such as its 44% interest in Deltec Panamerica S.A.
("Deltec"), the LaJolla, California office buildings and Lake Superior Land
Company (Note 4) have been pursued as a source of capital. During 1993, the
Company generated an aggregate of approximately $97 million through the Lake
Superior Land Company financing, the disposition of the Company's investment in
Deltec and the sale of its LaJolla office buildings, and utilized $58.4 million
of such proceeds to reduce outstanding senior bank debt. At December 31, 1993
the Company's cash, cash equivalents and short-term investments aggregated $43.5
million. Historically, sources of capital have included bank lines of credit,
specific property financings, asset sales and available internal funds. Although
the Company reported income in 1993 as a result of gains on dispositions and
extinguishment of debt, it reported losses in 1991 and 1992, and expects to
report losses in the foreseeable future. While a significant portion of such
losses is attributable to noncash interest expense on the Company's subordinated
debentures, the Company's capital expenditures for project development are
significant. In addition, the Company was notified in March 1994 that a
Stipulation of Settlement has been entered into between a predecessor company
and the Internal Revenue Service regarding the settlement of an alleged tax
deficiency that is the subject of certain tax sharing agreements (Note 9). The
Company has been informed by the other parties to these tax sharing agreements
that it is being charged with a net obligation of approximately $21 million
under this settlement, which the Company accrued for in December 1989. The
Company is currently evaluating the scope of this claimed obligation under the
settlement and potential sources of financing for such amount that the Company
may ultimately be obligated to pay. However, there can be no assurance that any
financing will
F-3
be available, or that if available, it can be obtained on terms that are
favorable to the Company and its stockholders. Given the limited availability of
capital for real estate development under current conditions in the financial
markets, the Company will be dependent primarily on cash and short-term
investments on hand to fund project investments, and general and administrative
costs during 1994 and 1995. However, if the Company is required to pay all or a
significant portion of the $21 million claimed under the tax sharing agreements
as discussed above, and any such amount is not financed, the Company will need
to obtain other sources of financing or sell additional assets in order to meet
projected cash requirements for the first quarter of 1995.
In January 1993, Lake Superior Land Company, which was a wholly owned
subsidiary of the Company at that time, sold $45 million of secured notes due
May 1, 2012 to certain pension funds of the State of Michigan. The obligations
under the note agreement are secured by all of the assets of Lake Superior Land
Company, which principally consist of approximately 300,000 acres of timberlands
and shorefront property on Lake Superior in Michigan and Wisconsin. Lake
Superior Land Company dividended the proceeds to the Company, which used $21
million of the financing proceeds to make a principal prepayment in accordance
with a term loan agreement with Bank of America.
At December 31, 1993, the Company's only outstanding senior bank debt is due
to the Bank of Boston in the principal amount of $7.0 million, under a term note
due on July 31, 1995. The term note agreement with Bank of Boston requires
additional principal prepayments to be made from the net proceeds from the sales
of Wentworth and other assets. The term note agreement also requires additional
principal repayments of $.2 million in the second half of 1994 and $.4 million
in the first half of 1995, with any remaining balance due at maturity on July
31, 1995. Amounts outstanding under the term note bear interest at prime plus
1%. The term note agreement with Bank of Boston is secured by a first mortgage
on the Wentworth property, stock pledge agreements of substantially all
significant subsidiaries of the Company and first mortgages on certain other
properties. The term note agreement contains certain restrictive covenants that
prohibit the declaration or payment of dividends and limit, among other things,
(i) the incurrence of indebtedness, (ii) the making of investments, loans and
advances, (iii) the creation or incurrence of liens on existing and future
assets of Wentworth or its subsidiaries, (iv) stock repurchases, and (v) project
development spending in excess of certain planned levels. The term note
agreement also contains various financial covenants and events of default
customary for such agreements.
FINANCIAL CONDITION
DECEMBER 31, 1993 COMPARED WITH DECEMBER 31, 1992
Cash, cash equivalents and short-term investments aggregated $43.5 million
at December 31, 1993 compared with $41.6 million at December 31, 1992. The
change in cash and cash equivalents reflects the activity presented in the
Statements of Cash Flows and described below.
The $15.9 million decrease in real estate held for development or sale is
primarily due to the November 1993 sale of the Company's office properties in
LaJolla, California, as well as the placement into service in May 1993 of the
Eagle Crest golf course and its related reclassification to operating
properties.
The $25.0 million decrease in other assets primarily reflects the sale of
the Company's investment in Deltec, partially offset by the acquisition of the
domestic real estate development business of The Koll Company (Note 4).
The $9.5 million increase in accounts payable and accrued liabilities
primarily reflects reclassification of approximately $21 million in taxes
payable from other liabilities in 1993 (Notes 8 and 9), partially offset by the
1993 payments of $7.6 million in income taxes (Note 9) and $3.2 million to
settle shareholder litigation related to the July 1992 merger with The Henley
Group, Inc. (the "Merger") (Note 1).
The $58.4 million decrease in senior bank debt reflects principal
prepayments to Bank of America and Bank of Boston in connection with Lake
Superior Land Company's financing, the disposition of the Company's investment
in Deltec (Note 4) and the sale of the Company's office properties in LaJolla,
California.
F-4
The $30.2 million decrease in subordinated debentures reflects the exchange
of approximately $42.4 million in aggregate face amount of senior subordinated
debentures held by Libra Invest & Trade Ltd. ("Libra") for the Company's Lake
Superior Land Company subsidiary, and the exchange of approximately $10.6
million in aggregate face amount of subordinated debentures held by Libra for
approximately 3.4 million shares of the Company's Class A Common stock (Notes 4
and 7), offset by payments of interest through the issuance of additional
pay-in-kind debentures on March 15 and September 15, 1993 and the accrual of
interest since September 15, 1993.
The $25.4 million increase in other liabilities is principally due to the
adoption of FAS 109 (Note 9), as well as the tax effect of the extraordinary
gain on extinguishment of debt, partially offset by the reclassification of
approximately $21 million in taxes payable to accounts payable and accrued
liabilities.
DECEMBER 31, 1992 COMPARED WITH DECEMBER 31, 1991
Cash aggregated $41.6 million at December 31, 1992 compared with $7.8
million at December 31, 1991. The increase in cash principally reflects the
Merger, along with the activity presented in the Statement of Cash Flows and
described below. The Company received $58.3 million of cash in connection with
the Merger, $15 million of which was used to repay senior bank debt on July 16,
1992 (Note 7).
The $7.7 million decrease in real estate held for development or sale
primarily reflects the sale of the Company's Ontario, California property for
net cash proceeds of approximately $6.1 million and a $1.7 million note.
The $35.2 million increase in other assets primarily reflects the Company's
investment in Deltec as a result of the Merger (Note 1).
On February 4, 1993, the Long Beach Airport Marriott Hotel (the "Hotel") was
transferred to California Federal Bank ("CalFed") in a foreclosure sale. The
foreclosure process was initiated as a result of the Hotel's inability to make
its July 1992 interim interest payment deposits under a letter of credit
reimbursement agreement with CalFed, which secured $25 million in principal
amount of Industrial Revenue Bonds (the "Bonds") issued by the City of Long
Beach on September 1, 1985 for construction of the Hotel. The Bonds and letter
of credit were nonrecourse to an indirect subsidiary of the Company that
previously owned the Hotel, and neither the Company nor any of its other
subsidiaries was a party to, or a guarantor with respect to, these obligations.
On September 15, 1992, the Company stipulated to the appointment of a receiver
to control and manage the assets of the Hotel, and the receiver took control of
the Hotel on September 16, 1992. Accordingly, the December 31, 1992 balance
sheet reflects the elimination of $24.9 million in nonrecourse project debt of
the Hotel, $.9 million of related Hotel liabilities, and a corresponding
reduction in assets of $24.3 million, with the difference of $1.5 million
reflected in other income in the 1992 statement of operations.
The $30.7 million decrease in operating properties in 1992 principally
reflects the elimination from the Company's balance sheet of the Hotel's assets
as discussed above, along with the sale of the Company's Long Beach, California
office building for approximately $6 million.
The $8.4 million increase in accounts payable and accrued liabilities
primarily reflects the classification of $7.6 million of obligations paid in
January 1993 under the tax sharing agreement with a predecessor company,
Wheelabrator Technologies Inc. ("WTI") (Note 9), as current at December 31,
1992.
The $41.0 million increase in other liabilities primarily reflects
liabilities received in connection with the Merger (Note 1), partially offset by
the reclassification of certain tax liabilities as discussed above.
The $17.0 million decrease in senior bank debt primarily reflects a $15.0
million principal prepayment in connection with the Merger (Note 7).
The $19.6 million decrease in subordinated debentures reflects the $42.5
million book value reduction in connection with the Merger (Notes 1 and 7),
partially offset by a $22.9 million increase related to pay-in-kind interest.
The changes in stockholders' equity primarily reflect the issuance by the
Company of preferred and common stock in connection with the Merger (Notes 2 and
13), partially offset by the net loss for the year.
F-5
RESULTS OF OPERATIONS
The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from year to year.
1993 COMPARED WITH 1992
The $11.6 million decrease in revenues from $28.3 million in 1992 to $16.7
million in 1993 and the decrease in cost of sales from $26.5 million in 1992 to
$16.3 million in 1993 were both principally related to the Company's 1992 sale
of California properties in Ontario, Long Beach and Coronado, along with the
February 1993 foreclosure sale of the Hotel, offset by the Company's sale in
November 1993 of two office buildings located in LaJolla, California and
revenues from golf operations and the domestic real estate development business
acquired from The Koll Company (Note 4). The pro forma impact of this
acquisition assuming it had occurred on January 1, 1993, would have been to
increase the Company's revenues and income from continuing operations before
income taxes and amortization of goodwill by $10.0 million and $2.4 million,
respectively.
The $1.8 million decrease in general and administrative expenses for 1993 as
compared with 1992 was primarily attributed to reduced personnel and occupancy
costs.
The decrease in interest expense from $31.2 million in 1992 to $24.4 million
in 1993 primarily reflects the reduction in outstanding subordinated debentures
and senior bank debt in connection with the July 1992 Merger and the 1993
prepayments of senior bank debt (Note 7).
The improvement in other expense (income), net from $2.9 million of expense
for 1992 to $2.4 million of income for 1993 primarily reflects $3.0 million
received in 1993 in connection with the termination of a put option agreement
with Abex Inc. ("Abex"), a former subsidiary of The Henley Group, Inc., and a
$2.0 million insurance reimbursement received in 1993 related to prior year
environmental litigation costs.
The Company adopted Financial Accounting Standard No. 109 "Accounting for
Income Taxes," in the first quarter of 1993, resulting in an increase in its
deferred tax liability of $36.0 million through a charge to income at the time
of adoption (Notes 2 and 9). Under this new accounting standard, the Company
also recognized $10.4 million of tax benefits on continuing operations for the
year ended December 31, 1993.
1992 COMPARED WITH 1991
The decrease in revenues from $34.7 million in 1991 to $28.3 million in 1992
and the decrease in cost of sales from $28.8 million in 1991 to $26.5 million in
1992 were both principally due to the commencement of foreclosure proceedings
against the Hotel in September 1992, and lower Hotel operating revenues prior to
that date.
The decrease in gross operating margin from $5.9 million in 1991 to $1.8
million in 1992 is primarily attributable to lower margins on asset sales and
lower Hotel operating margins in 1992 discussed above.
The $3.3 million decrease in interest expense from 1991 to 1992 is primarily
due to the reduction in outstanding subordinated debentures and senior bank debt
in connection with the Merger, as well as lower interest rates on the senior
bank debt.
The change in other expense (income), net from $65.5 million of expense for
1991 to $2.9 million of expense for 1992 primarily reflects approximately $65
million of charges in 1991 related to asset revaluations.
1991 COMPARED WITH 1990
The decrease in revenues from $97.0 million in 1990 to $34.7 million in
1991, the decrease in cost of sales from $78.9 million in 1990 to $28.8 million
in 1991, and the decrease in gross operating margin from $18.1 million in 1990
to $5.9 million in 1991, principally reflect the $42 million sale in 1990 of a
90% interest in approximately 3,500 acres of land on the island of Hawaii, along
with the substantial completion of residential sales at Coronado Cays in 1990.
The change in other expense (income), net from $97.5 million of income for
1990 to $65.5 million of expense in 1991 primarily reflects the gain on sale of
the Company's interest in two trash-to-energy facilities to WTI in 1990 and
asset revaluations in 1991.
F-6
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. (formerly The Bolsa Chica Company) as of December 31, 1993 and 1992 and the
related statements of operations, cash flows and changes in stockholders' equity
for the years then ended. 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. The financial statements of the
Company for the year ended December 31, 1991 were audited by other auditors
whose report, dated February 3, 1992, expressed an unqualified opinion on those
statements and included explanatory paragraphs that described the uncertainties
associated with the Company's ability to continue as a going concern and the
inherent uncertainty involved in the process of estimating the net realizable
value of its real estate properties.
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.
In our opinion, such 1993 and 1992 financial statements present fairly, in
all material respects, the financial position of Koll Real Estate Group, Inc. at
December 31, 1993 and 1992 and the results of its operations and its cash flows
for the years ended December 31, 1993 and 1992 in conformity with generally
accepted accounting principles.
The Company carries its real estate properties at the lower of cost or
estimated net realizable value. 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 6, the development of the Company's
Bolsa Chica project is dependent upon obtaining various governmental approvals
and various economic factors. Accordingly, the amount ultimately realized from
such project may differ materially from the current estimate of net realizable
value.
As discussed in Note 9, the Company changed its method of accounting for
income taxes in 1993. Also as discussed in Note 9, the Company was notified in
March 1994 that a Stipulation of Settlement has been entered into between a
predecessor company and the Internal Revenue Service regarding the settlement of
an alleged tax deficiency that is the subject of certain tax sharing agreements.
The Company has been informed by the other parties to these tax sharing
agreements that it is being charged with a net obligation of approximately $21
million under this settlement, which has been accrued in the Company's financial
statements since December 1989.
DELOITTE & TOUCHE
San Diego, California
February 15, 1994 (March 28, 1994 as to the
last paragraph of Note 9)
F-7
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of Koll Real Estate Group, Inc.:
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Koll Real Estate Group, Inc. (formerly
The Bolsa Chica Company and Henley Properties Inc.) for the year ended December
31, 1991. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the results of operations and cash flows of Koll Real
Estate Group, Inc. for the year ended December 31, 1991 in conformity with
generally accepted accounting principles.
The financial statements referred to above have been prepared assuming that
the Company will continue as a going concern. The Company has suffered losses
from operations and must obtain significant capital for financing its real
estate development activities and scheduled repayments of debt obligations
during 1992. The uncertainties associated with the Company's ability to obtain
sufficient capital, restructure its debt agreements and return to profitable
operations raise substantial doubt about the Company's ability to continue as a
going concern. The Company has announced a recapitalization and merger plan to
deal with these matters. The financial statements referred to above do not
include any adjustments that might result from the outcome of these
uncertainties.
The Company carries its real estate held for development or sale and land
held for development at the lower of cost or estimated net realizable value. As
discussed in Note 2, the estimation process is inherently uncertain and relies
to a considerable extent on future events and market conditions, the ability to
achieve financing for its real estate development activities and the resolution
of political, environmental and other related issues. Accordingly, ultimate
realization of asset values may differ materially from amounts presently
estimated.
KENNETH LEVENTHAL & COMPANY
Orange County, California
February 3, 1992
F-8
KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
DECEMBER 31,
------------------
1992 1993
------- -------
(IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 41.6 $ 21.8
Short-term investments...................................... -- 21.7
Real estate held for development or sale.................... 64.5 48.6
Operating properties, net................................... 24.4 16.3
Land held for development................................... 308.6 315.9
Other assets................................................ 47.0 22.0
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$ 486.1 $ 446.3
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 21.3 $ 30.8
Senior bank debt.......................................... 65.4 7.0
Subordinated debentures................................... 165.1 134.9
Other liabilities......................................... 84.7 110.1
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Total liabilities....................................... 336.5 282.8
------- -------
Stockholders' equity:
Series A (convertible redeemable nonvoting) Preferred
Stock -- $.01 par value; 42,505,504 shares authorized and
outstanding.............................................. .4 .4
Class A (voting) Common Stock -- $.05 par value;
625,000,000 shares authorized; 39,785,131 and 43,192,847
shares outstanding, respectively......................... 2.0 2.2
Class B (convertible nonvoting) Common Stock -- $.05 par
value; 25,000,000 shares authorized and no shares
outstanding.............................................. -- --
Capital in excess of par value............................ 228.7 230.0
Deferred proceeds from stock issuance..................... -- (1.5)
Minimum pension liability................................. (1.1) (1.5)
Accumulated deficit....................................... (80.4) (66.1)
------- -------
Total stockholders' equity.............................. 149.6 163.5
------- -------
$ 486.1 $ 446.3
------- -------
------- -------
See the accompanying notes to financial statements.
F-9
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December
31,
------------------------------
1991 1992 1993
-------- ------- -------
(in millions, except per share
amounts)
Revenues:
Asset sales..................................... $ 15.8 $ 16.3 $ 11.1
Operations...................................... 18.9 12.0 5.6
-------- ------- -------
34.7 28.3 16.7
-------- ------- -------
Costs of:
Asset sales..................................... 12.1 15.5 11.1
Operations...................................... 16.7 11.0 5.2
-------- ------- -------
28.8 26.5 16.3
-------- ------- -------
Gross operating margin............................ 5.9 1.8 .4
General and administrative expenses............... 11.4 10.7 8.9
Interest expense.................................. 34.5 31.2 24.4
Other expense (income), net....................... 65.5 2.9 (2.4)
-------- ------- -------
Loss from continuing operations before income
taxes............................................ (105.5) (43.0) (30.5)
Provision (benefit) for income taxes.............. -- (1.1) (10.4)
-------- ------- -------
Loss from continuing operations................... (105.5) (41.9) (20.1)
Discontinued operations:
Income from operations, net of income taxes of
$.5, $1.5 and $3.1, respectively............... .8 3.5 5.8
Gains on dispositions, net of income taxes of
$1.4........................................... -- -- 41.0
-------- ------- -------
Income (loss) before extraordinary gain and
cumulative effect of accounting changes.......... (104.7) (38.4) 26.7
Extraordinary gain on extinguishment of debt, net
of income taxes of $12.5......................... -- -- 23.6
Cumulative effect of accounting changes........... (2.0) -- (36.0)
-------- ------- -------
Net income (loss)................................. $ (106.7) $ (38.4) $ 14.3
-------- ------- -------
Earnings (loss) per common share:
Continuing operations........................... $ (5.27) $ (1.44) $ (0.24)
Discontinued operations......................... 0.04 0.12 0.56
Extraordinary gain.............................. -- -- 0.28
Cumulative effect of accounting changes......... (0.10) -- (0.43)
-------- ------- -------
Net income (loss) per common share................ $ (5.33) $ (1.32) $ 0.17
-------- ------- -------
-------- ------- -------
See the accompanying notes to financial statements.
F-10
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December
31,
------------------------------
1991 1992 1993
-------- ------- -------
(in millions)
Cash flows from operating activities:
Income (loss) before extraordinary gain and
cumulative effect of accounting changes........ $ (104.7) $ (38.4) $ 26.7
Adjustments to reconcile to cash used by
operating activities:
Depreciation and amortization................. 3.7 2.7 1.2
Non-cash interest expense..................... 23.2 22.9 21.9
Non-cash asset revaluations................... 65.5 -- --
Gains on asset sales.......................... (4.2) (4.3) --
Gains on dispositions of discontinued
operations................................... -- -- (41.0)
Proceeds from asset sales, net................ 14.6 16.7 10.4
Investments in real estate held for
development or sale.......................... (9.5) (3.1) (3.8)
Investment in land held for development....... (6.7) (5.6) (7.3)
Decrease (increase) in other assets........... 19.1 3.5 (10.0)
Decrease in accounts payable, accrued and
other liabilities............................ (.6) (9.9) (14.9)
Other, net.................................... (1.8) (.2) (.2)
-------- ------- -------
Cash used by operating activities........... (1.4) (15.7) (17.0)
-------- ------- -------
Cash flows from investing activities:
Purchase of short-term investments.............. -- -- (21.7)
Sale of fixed assets............................ -- 8.2 --
Acquisition of real estate development
business....................................... -- -- (9.8)
Sale of equity investment....................... -- -- 43.7
-------- ------- -------
Cash provided by investing activities....... -- 8.2 12.2
-------- ------- -------
Cash flows from financing activities:
Net proceeds from nonrecourse debt.............. -- -- 43.4
Proceeds from Merger............................ -- 58.3 --
Repayments of senior bank debt.................. (12.9) (17.0) (58.4)
-------- ------- -------
Cash provided (used) by financing
activities................................. (12.9) 41.3 (15.0)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (14.3) 33.8 (19.8)
Cash and cash equivalents -- beginning of year.... 22.1 7.8 41.6
-------- ------- -------
Cash and cash equivalents -- end of year.......... $ 7.8 $ 41.6 $ 21.8
-------- ------- -------
-------- ------- -------
See the accompanying notes to financial statements.
F-11
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DEFERRED
PROCEEDS RETAINED
CAPITAL IN MINIMUM FROM EARNINGS
PREFERRED COMMON EXCESS OF PENSION STOCK (ACCUMULATED
STOCK STOCK PAR VALUE LIABILITY ISSUANCE DEFICIT) TOTAL
------------ ---------- ---------- ----------- --------- ------------ ---------
(IN MILLIONS)
Balance, December 31, 1990..... -- 1.0 142.3 -- -- 64.7 208.0
Net loss..................... -- -- -- -- -- (106.7) (106.7)
------------ ---------- ---------- ----------- --------- ------------ ---------
Balance, December 31, 1991..... -- 1.0 142.3 -- -- (42.0) 101.3
Net loss..................... -- -- -- -- -- (38.4) (38.4)
Minimum pension liability.... -- -- -- (1.1) -- -- (1.1)
Merger....................... .4 1.0 86.4 -- -- -- 87.8
------------ ---------- ---------- ----------- --------- ------------ ---------
Balance, December 31, 1992..... .4 2.0 228.7 (1.1) -- (80.4) 149.6
Net income................... -- -- -- -- -- 14.3 14.3
Minimum pension liability.... -- -- -- (.4) -- -- (.4)
Deferred proceeds from stock
issuance.................... -- .2 2.0 -- (2.2) -- --
Valuation adjustment to
deferred proceeds from stock
issuance.................... -- -- (.7) -- .7 -- --
------------ ---------- ---------- ----------- --------- ------------ ---------
Balance, December 31, 1993..... $.4 $2.2 $230.0 $(1.5) $(1.5) $(66.1) $163.5
------------ ---------- ---------- ----------- --------- ------------ ---------
------------ ---------- ---------- ----------- --------- ------------ ---------
See the accompanying notes to financial statements.
F-12
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BASIS OF PRESENTATION
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.
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. Henley Properties, through its Henley Group subsidiary,
received in the Merger 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
(Note 4). In connection with this acquisition, The Bolsa Chica Company was
renamed Koll Real Estate Group, Inc. (the "Company").
Immediately prior to the July 1992 Merger, Henley Group distributed to its
stockholders among other consideration (the "Distribution"), in respect of each
share of its outstanding common stock (the "Henley Group Common Stock"): (i)
$6.00 aggregate principal amount of the 12% Senior Subordinated Pay-In-Kind
Debentures due March 15, 2002 of the Company (the "Senior Subordinated
Debentures"); and (ii) $1.50 aggregate principal amount of the 12% Subordinated
Pay-In-Kind Debentures due March 15, 2002 of the Company (the "Subordinated
Debentures", and, together with the Senior Subordinated Debentures, the
"Debentures"). Approximately $159.4 million aggregate principal amount of the
Debentures were distributed in the Distribution and approximately $43.8 million
aggregate principal amount of the Debentures were retained by the Company's
Henley Group subsidiary in the Merger. In the Merger, Henley Group stockholders
also received, in respect of each share of Henley Group Common Stock, the
following securities of the Company: (i) two shares of Series A Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock"); and (ii) one share
of Class A Common Stock (the "Class A Common Stock").
Certain prior-period amounts have been reclassified to conform with the
current presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, all highly liquid instruments
purchased with a maturity of three months or less are considered to be cash
equivalents.
EARNINGS PER COMMON SHARE
In connection with the Merger, on July 16, 1992, the Company issued
approximately 19.7 million shares of its Class A Common Stock and 42.5 million
shares of its Series A Preferred Stock.
On December 17, 1993, the Company issued 3.4 million shares of its Class A
Common Stock to Libra Invest & Trade Ltd. ("Libra") in exchange for all of
Libra's approximately $10.6 million in aggregate principal amount of
Subordinated Debentures plus accrued interest.
The weighted average numbers of common shares outstanding for the years
ended December 31, 1991, 1992, and 1993 were 20.0 million, 29.0 million, and
83.0 million, respectively. The Series A Preferred Stock is
F-13
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not included in the loss per share calculation for 1991 and 1992 because the
effect is antidilutive. The 1993 earnings per share calculation includes the
Series A Preferred Stock and the effect of 5.7 million shares of common and
preferred stock granted under the 1988 Stock Option Plan (Note 14).
SHORT-TERM INVESTMENTS
The Company accounts for short-term investments at the lower of cost or
market value.
REAL ESTATE
Real estate held for development or sale and land held for development (real
estate properties) are carried at the lower of cost or estimated net realizable
value. The estimation process involved in the determination of net realizable
value is inherently uncertain since it requires estimates as to future events
and market conditions. Such estimation process assumes the Company's ability to
complete development and dispose of its real estate properties in the ordinary
course of business based on management's present plans and intentions. Economic,
market, environmental and political conditions may affect management's
development and marketing plans. In addition, the implementation of such
development and marketing plans could be affected by the availability of future
financing for development and construction activities. Accordingly, the ultimate
net realizable values of the Company's real estate properties are dependent upon
future economic and market conditions, the availability of financing, and the
resolution of political, environmental and other related issues.
The cost of sales of multi-unit projects is computed using the relative
sales value method. Direct construction costs are accumulated by phase, using
the specific identification method; land and all other common costs are
allocated between phases benefited, using area or unit methods. These methods do
not differ significantly from the relative sales value method. Interest,
carrying costs, indirect general and administrative costs that relate to several
real estate projects and property taxes are capitalized to projects during their
development period.
No interest expense incurred during the years ended December 31, 1991, 1992,
and 1993 was capitalized.
Operating properties are generally depreciated using estimated lives that
range principally from 5 to 30 years. For financial statement purposes,
depreciation is computed utilizing the straight-line method. For tax purposes,
depreciation is generally computed by accelerated methods based on allowable
useful lives. Accumulated depreciation amounted to $12.6 million and $9.7
million at December 31, 1992 and 1993, respectively.
The Company's rental operations consist primarily of the leasing of office
and marina space and all of the Company's leases are classified as operating
leases. Such leases are generally for periods of up to 5 years.
INTANGIBLE ASSETS
Goodwill, which represents the difference between the purchase price of a
business acquired in 1993 (Note 4) and the related fair value of net assets
acquired, is amortized on a straight-line basis over 15 years. Goodwill of $8.7
million as of December 31, 1993 is included in other assets.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," ("FAS 106") was implemented by
the Company on the immediate recognition basis effective January 1, 1991
resulting in a $2 million charge to earnings. This standard requires that the
cost of these benefits, which are primarily health care related, be recognized
in the financial statements during each employee's active working career. The
Company's previous practice was to charge these costs to expense as they were
paid. As of December 31, 1993 the accrued unfunded costs totalled $1.5 million.
F-14
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 supersedes both APB Opinion No. 11 and FAS No. 96, "Accounting
for Income Taxes." With the adoption of FAS 109 in the first quarter of 1993,
the Company changed to the liability method of accounting for income taxes,
which resulted in an increase in its deferred tax liability of approximately $36
million, through a charge to income (Note 9). Also see Note 9 for a discussion
of the tax sharing agreements with Abex Inc.("Abex") and Wheelabrator
Technologies Inc. ("WTI").
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.
NOTE 3 -- ASSET REVALUATIONS
During the fourth quarter of 1991, the Company recorded approximately $65
million of charges for the revaluation of certain assets, including goodwill.
Management believes that these revalued amounts better reflected market values
based on real estate market conditions and the Company's plan to sell certain
non-strategic assets.
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS
On August 27, 1993 the Company disposed of its entire 44% interest in Deltec
for $43.7 million in net cash proceeds, resulting in a gain of $1.9 million.
Discontinued operations for the years ended December 31, 1992 and 1993 also
includes $.9 million and $4.2 million of net income through the date of
disposition. The Company used $23.8 million of the proceeds to make principal
prepayments in accordance with term loan agreements with Bank of America and
Bank of Boston. The Company also terminated its put option agreement with Abex
(Note 10) on August 27, 1993 and received $3 million in cash from Abex which was
used to prepay senior bank debt.
On September 30, 1993, the Company acquired the domestic real estate
development business and related assets of The Koll Company ("Koll"). The
principal activity of the acquired business is to provide commercial,
industrial, retail and residential real estate development services, including
feasibility studies, entitlement coordination, project planning, construction
management, financing, marketing, acquisition, disposition and asset management
services throughout the nation. The acquired business generates income
principally through fees and participating interests in equity partnerships. No
real property was involved in the transaction. In connection with the
acquisition, the Company paid $4.75 million in cash, approximately $1 million in
reimbursement of investments in transferred development projects, and agreed to
pay an earn-out over the next four and one-quarter years based on the future
profitability of the business acquired. On December 29, 1993 the Company amended
its agreement with Koll, under which the Company paid $4.25 million in cash to
Koll in exchange for the immediate termination of the earn-out payments with
retroactive effect to the initial date of the acquisition agreement. Under the
earn-out, the Company was entitled to a 20% preferred return on its original
$4.75 million investment, Koll was then entitled to a matching return subject to
available profits, with all remaining profits split equally between the Company
and Koll. In addition, on September 30, 1993, Koll and Mr. Donald M. Koll (an
officer and director of the Company and owner of Koll) entered into covenants
not to compete with the Company with respect to domestic real estate
development, subject to certain limited exceptions. The Koll covenant is
perpetual in duration while the covenant of Mr. Koll is limited to the five-year
period following his ceasing to be either an officer, director or stockholder of
the Company. In connection with the acquisition, the Company also paid
F-15
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Koll $325,000 to terminate its June 11, 1990 management agreement in lieu of
continuing to receive and pay for duplicative services during the 90-day notice
period which would otherwise have been required under the management agreement.
On September 30, 1993, the Company and Koll also entered into various other
agreements regarding services they provide to one another (Note 11).
On December 17, 1993, the Company completed a transaction with Libra whereby
it exchanged the Company's Lake Superior Land Company subsidiary for (1)
approximately $42.4 million in aggregate face amount of Senior Subordinated
Debentures held by Libra; (2) net cash proceeds to be generated by Libra's
periodic sale of up to approximately 3.4 million shares of the Company's Class A
Common Stock held by Libra through a series of transactions to be effected in an
orderly manner within a three-year period; and (3) the right of the Company to
receive a contingent payment if the proceeds from any disposition by Libra of
Lake Superior Land Company during the 15 year period following the closing of
the transaction exceed a 20% preferred return on the negotiated value of Libra's
investment. Accordingly, the financial information included in the statements of
operations for all periods has been reclassified to present Lake Superior Land
Company as a discontinued operation. Lake Superior Land Company owns and manages
a commercial hardwood timber business on approximately 300,000 acres of forest
lands and shoreline property on Lake Superior in Michigan and Wisconsin.
Revenues related to the discontinued operation were $6.2 million and $8.9
million for the years ended December 31, 1991 and 1992, respectively and $10.6
million for 1993 through the date of the disposition. Net income from the
discontinued operation for 1991 , 1992 and 1993 through the date of disposition
was $.8 million, $2.6 million and $1.6 million, respectively. The accumulated
deficit of Lake Superior Land Company at the date of the disposition was
approximately $24.8 million. The Company also completed a separate transaction
with Libra in December 1993, whereby the Company exchanged approximately 3.4
million newly issued shares of its Class A Common Stock for approximately $10.6
million in aggregate face amount of Subordinated Debentures held by Libra. In
connection with these transactions, the Company recorded an after-tax gain of
$39.1 million on the disposition of Lake Superior Land Company and an after-tax
extraordinary gain on extinguishment of the Debentures of $23.6 million (Note
7). After these transactions, Libra and affiliates presently hold approximately
7.4 million shares, or 17%, of the Company's Class A Common Stock, including
approximately 3.4 million shares which have been deposited in a custodial
account for periodic sale in accordance with instructions from the Company, and
approximately 11.9 million shares, or 28%, of the Company's preferred stock. In
February 1994, the Company received $1 million in cash from Libra in exchange
for the immediate termination of the contingent payment provision described
above.
NOTE 5 -- REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Real estate held for development or sale consists of the following at
December 31 (in millions):
1992 1993
----- -----
Residential............................. $51.4 $43.3
Commercial/industrial................... 13.1 5.3
----- -----
$64.5 $48.6
----- -----
----- -----
The decrease in real estate held for development or sale during 1993 relates
primarily to the sale of the Company's LaJolla, California office property for
$10.0 million in cash, as well as the placement into service of the Eagle Crest
golf course and its related reclassification to operating properties.
NOTE 6 -- LAND HELD FOR DEVELOPMENT
Land held for development consists of approximately 1,200 acres known as
Bolsa Chica located in Orange County, California, surrounded by the City of
Huntington Beach and approximately 35 miles south of downtown Los Angeles
("Bolsa Chica"). The Company is currently seeking approvals from local, state
and federal governmental entities for a 4,900 unit (approximately 4,300 units on
Company-owned land)
F-16
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LAND HELD FOR DEVELOPMENT (CONTINUED)
residential project on this site. A revised environmental impact report was
released for public comments in December 1993 for a 60-day period ending
February 18, 1994. The County of Orange requested that this document contain an
in-depth analysis of an alternative plan which includes 3,500 homes, in addition
to the in-depth analysis of the Company's plan. Due to a number of factors
beyond the Company's control, including possible objections of various
environmental and so-called public interest groups that may be made in
legislative, administrative or judicial forums, the required approvals could be
delayed substantially. Subject to these and other uncertainties inherent in the
entitlement process, the Company's goal is to obtain all material governmental
approvals in the first half of 1995 and to begin construction in the second half
of 1995, depending on economic and market conditions. Realization of the
Company's investment in Bolsa Chica will also depend upon various economic
factors, including the demand for residential housing in the Southern California
market and the availability of credit to the Company and to the housing
industry.
NOTE 7 -- DEBT
SENIOR BANK DEBT
TERM LOAN
During 1993, the Company retired the entire balance of senior bank debt owed
to Bank of America with proceeds from the January 1993 Lake Superior Land
Company financing, the August Deltec disposition and termination of the Abex put
option agreement (see Note 4), and the November sale of two office buildings
located in La Jolla, California.
TERM NOTE
On July 16, 1992, in connection with the Merger, the Company entered into a
$13.8 million term note agreement due on July 31, 1995 with the Bank of Boston,
principally secured by resort and residential property in New Hampshire
("Wentworth"). Approximately $6.4 million of the proceeds from the August 1993
Deltec disposition and termination of the Abex put option agreement (Note 4)
were used to make principal prepayments to Bank of Boston. The term note
agreement with Bank of Boston requires additional principal prepayments to be
made from the net proceeds from the sale of Wentworth and other assets. The term
note agreement also requires additional principal repayments of $.2 million in
the second half of 1994 and $.4 million in the first half of 1995, with any
remaining balance due at maturity on July 31, 1995. Amounts outstanding under
the term note bear interest at prime plus 1%. The term note agreement with Bank
of Boston is secured by a first mortgage on the Wentworth property, stock pledge
agreements of substantially all significant subsidiaries of the Company and
first mortgages on certain other properties. The term note agreement contains
certain restrictive covenants that prohibit the declaration or payment of
dividends and limit, among other things, (i) the incurrence of indebtedness,
(ii) the making of investments, loans and advances, (iii) the creation or
incurrence of liens on existing and future assets of Wentworth or its
subsidiaries, (iv) stock repurchases, and (v) project development spending in
excess of certain planned levels. The term note agreement also contains various
financial covenants and events of default customary for such agreements.
SUBORDINATED DEBENTURES
The Debentures were comprised of the following as of December 31 (in
millions):
1992 1993
------- -------
Senior Subordinated Debentures.......... $ 135.2 $ 109.4
Subordinated Debentures................. 33.8 27.4
------- -------
Total face amount..................... 169.0 136.8
Less unamortized discount............... (9.8) (6.7)
Plus accrued interest................... 5.9 4.8
------- -------
$ 165.1 $ 134.9
------- -------
------- -------
F-17
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- DEBT (CONTINUED)
The Debentures give the Company the right to pay interest in-kind, in cash
or, subject to certain conditions, in the Company's common stock. It is
currently anticipated that interest on the Debentures will be paid in-kind. The
Debentures, which are due March 15, 2002, do not require any sinking fund
payments and may be redeemed by the Company at any time in cash only, or at
maturity in cash or stock, subject to certain conditions. The Debentures
prohibit the payment of any dividends or other distributions on the Company's
equity securities.
As a result of the Distribution and the Merger on July 16, 1992 (Note 1),
approximately $159.4 million aggregate principal amount of the Debentures were
distributed to stockholders of Henley Group and approximately $43.8 million
aggregate principal amount of the Debentures were retained by Henley Group,
which is now a wholly owned subsidiary of the Company.
As a result of the transactions with Libra (Note 4) in which approximately
$42.4 million in aggregate principal amount of Senior Subordinated Debentures
and $10.6 million in aggregate principal amount of Subordinated Debentures held
by Libra were retired, the Company recorded on extraordinary gain of $36.1
million, less an applicable income tax provision of $12.5 million, in the
accompanying consolidated financial statements.
At December 31, 1993 the estimated fair value of the Company's Debentures
was within a range of approximately $40 million to $60 million. The fair value
of the Debentures is estimated based on the negotiated values in the Libra
transactions (lower end of range) and current quotes from certain bond traders
making a market in the Debentures (upper end of range). However, due to the low
trading volume and illiquid market for the Debentures, current quotes from bond
traders may not be meaningful indications of value. The carrying amount for all
other debt of the Company approximates market primarily as a result of floating
interest rates.
INTEREST
The Company made cash payments of interest of $10.6 million, $7.4 million
and $2.5 million for the years ended December 31, 1991, 1992 and 1993,
respectively.
NOTE 8 -- OTHER LIABILITIES
Other liabilities were comprised of the following as of December 31 (in
millions):
1992 1993
----- ------
Deferred taxes payable (Note 9)......... $-- $ 45.1
Other tax liabilities (Note 9).......... 32.7 14.5
Accrued pensions and benefits........... 12.7 12.0
Accrued indemnity obligations........... 29.3 29.4
Other reserves.......................... 10.0 9.1
----- ------
$84.7 $110.1
----- ------
----- ------
NOTE 9 -- INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109
requires a change from the deferred method of accounting for income taxes under
APB Opinion No. 11 to the asset and liability method of accounting for income
taxes. Under FAS 109, 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. At January 1, 1993, the Company recorded
the cumulative effect of this change in accounting for income taxes as a $36
million charge to earnings in the consolidated statement of operations.
F-18
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
The tax effects of items that gave rise to significant portions of the
deferred tax accounts as of December 31, 1993 are as follows:
Deferred tax assets:
Real estate held for development or sale and
operating properties, principally due to asset
revaluations and interest capitalized for tax
purposes....................................... $ 21.3
Accruals not deductible until paid.............. 14.5
Net operating loss carryforwards................ 37.1
Other........................................... 1.5
Valuation allowance............................. (13.9)
-------
$ 60.5
-------
-------
Deferred tax liabilities:
Land held for development, principally due to
accounting for a prior business combination.... $ 101.6
Other........................................... 4.0
-------
$ 105.6
-------
-------
At December 31, 1993, the Company had available tax net operating loss
carryforwards of approximately $106 million which expire in the years 2003
through 2008 if not utilized. The Internal Revenue Code (the "Code") imposes an
annual limitation on the use of loss carryforwards upon the occurrence of an
"ownership change" (as defined in Section 382 of the Code). Such an ownership
change occurred in connection with the Merger. As a result, approximately $25
million of the Company's net operating loss carryforwards will generally be
limited to the extent that Henley Properties and its subsidiaries recognize
certain gains in the five-year period following the ownership change (ending
July 16, 1997).
The following is a summary of the income tax provision (benefit) on
continuing operations for the years ended December 31 (in millions):
1991 1992 1993
---- ------ -------
Income Tax Provision:
Current..................... $.0 $ (1.1) $ (2.9)
Deferred.................... -- -- (7.5)
---- ------ -------
$.0 $ (1.1) $ (10.4)
---- ------ -------
---- ------ -------
Cash payments for federal, state and local income taxes were approximately
$1.6 million, $1.3 million and $7.8 million for the years ended December 31,
1991, 1992 and 1993, respectively. Tax refunds received in 1993 were
approximately $5.1 million.
F-19
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
The principal items accounting for the difference in taxes on income
computed at the statutory rate and as recorded are as follows for the years
ended December 31 (in millions):
1991 1992 1993
------- ------- -------
Provision for income taxes at statutory rate...... $ (36.5) $ (14.6) $ (10.7)
State income taxes, net........................... .2 .2 (.6)
Nondeductible expenses............................ 10.2 2.0 --
Nonbenefitable book losses........................ 17.6 7.5 --
Excess of book over tax basis of assets sold
during the year.................................. 6.8 2.6 --
Effect of tax rate increase....................... -- -- .9
All other items, net.............................. 1.7 1.2 --
------- ------- -------
$ .0 $ (1.1) $ (10.4)
------- ------- -------
------- ------- -------
TAX SHARING AGREEMENTS
Henley Group and Abex, a former subsidiary of Henley Group whose stock was
distributed to stockholders of Henley Group, 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 Abex 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 Abex, 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 Abex 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.
PRE-1989 INCOME TAXES. Under tax sharing agreements with WTI and Abex, the
parties are charged with sharing responsibility for paying any increase in the
federal, state or local income tax liabilities (including any interest or
penalties payable with respect thereto) for any consolidated, combined or
unitary tax group which included WTI, Henley Group or any of their subsidiaries
for tax periods ending on or before December 31, 1988. WTI is charged with
responsibility for paying the first $51 million of such increased taxes,
interest and penalties, plus any amounts payable with respect to such
liabilities by certain former affiliates of WTI under their tax sharing
agreements with WTI. Should the amounts payable exceed $51 million, the Company
is charged with responsibility for paying the next $25 million, plus amounts
payable with respect to liabilities which are attributable to certain of the
Company's subsidiaries. Liabilities in excess of amounts payable by WTI and the
Company, as described above, will generally be assumed by Abex (the "Abex
Indemnification"). In the first quarter of 1993, the Company paid approximately
$7.6 million related to the tax sharing agreements. Of this amount,
approximately $4.5 million will be applied against the Company's $25 million
limitation (as discussed above). The remaining $3.1 million relates to
liabilities which are attributable to certain of the Company's subsidiaries.
Therefore the Company's potential liability for additional payments under these
tax sharing agreements is approximately $21 million, which has been accrued in
the Company's financial statements since December 1989 and is included in
accounts payable and accrued liabilities as of December 31, 1993.
F-20
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
In January 1993, the Internal Revenue Service completed its examination of
the Federal tax returns of WTI for the periods May 27, 1986 through December 31,
1988 and asserted a material deficiency relating to the tax basis of a former
subsidiary of WTI. WTI, Abex and the Company disagreed with the position taken
by the IRS and WTI filed a petition with the U.S. Tax Court. A trial date had
been scheduled for June 1994; however, in March 1994, WTI and the IRS entered
into a Stipulation of Settlement that will result in a tax payable together with
interest of approximately $72 million which is due in April 1994. The Company
has been informed by the other parties to these tax sharing agreements that it
is being charged with a net obligation of approximately $21 million under this
settlement. The Company is currently evaluating the scope of this claimed
obligation under the settlement and potential sources of financing for such
amount that the Company may ultimately be obligated to pay. However, there can
be no assurance that any financing will be available, or that if available, it
can be obtained on terms that are favorable to the Company and its stockholders.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
TRANSITION AGREEMENTS
Pursuant to a 1989 transition agreement, Henley Group provided to the
Company and its subsidiaries certain services, including management, strategic
planning and advice, legal, tax, accounting, data processing, cash management,
employee benefits, operational, corporate secretarial, insurance purchasing and
claims administration consulting services for a quarterly fee of $750,000,
commencing on the date of the 1989 distribution, plus an amount for the use of
office space in Henley Group's Hampton, New Hampshire offices for such period.
This rent amounted to approximately $.8 million for the year ended December 31,
1991, and $.4 million for the first half of 1992. The 1989 Transition Agreement
was cancelled in July 1992 in connection with the Merger.
Pursuant to a 1992 transition agreement, each of Abex and the Company
provides to the other certain administrative support services until the first
anniversary of the Merger, and thereafter until 60 days' prior written notice of
termination is given by one company to the other and each company reimburses the
other for its out-of-pocket expenses. Effective March 16, 1993, the 1992
transition agreement was amended to provide that all transitional services would
be provided by Abex to the Company for a period ending on March 31, 1994, and
that the Company would pay $.5 million quarterly for such services. Accordingly,
the Company reimbursed Abex approximately $1.0 million and $1.8 million for the
years ended December 31, 1992 and 1993. The amendment also provided for the
termination of the New Hampshire facilities lease on March 31, 1993.
In connection with the Merger, the Company entered into a put option
agreement with Abex, through December 31, 1995, which provided the Company the
right to require Abex to purchase certain assets of the Company at 85% of
appraised value, subject to an annual limitation of no more than $50 million and
an aggregate limitation of $75 million for such assets. On August 27, 1993, the
Company received $3.0 million from Abex in exchange for the termination of this
agreement (Note 4).
LEGAL PROCEEDINGS
The owners of undeveloped real property located in San Diego County sued
Signal Landmark, a subsidiary of the Company ("Signal"), in San Diego Superior
Court, in May 1990, alleging that Signal had deposited contaminated soils on
their property and was liable under theories of nuisance, negligence, trespass
and strict liability. The plaintiffs sought general damages in the amount of
approximately $40 million and additionally, punitive damages in an unspecified
amount, plus prejudgment interest and costs. On August 5, 1991, the plaintiffs
filed a complaint in Federal court against Signal and several other parties
asserting claims under the Federal Comprehensive Environmental Response,
Compensation and Liability Act, seeking essentially the same relief sought in
the state action.
F-21
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
In April 1992, a jury awarded the plaintiffs damages in the amount of $2.5
million following a trial in the state action. Signal appealed the verdict in
the state action and posted a bond and cash collateral of $3.75 million in
August 1992. On March 5, 1993, Signal reached an agreement in principle with the
plaintiffs in such litigation to settle both the federal and state actions. On
July 2, 1993, the Federal Court for the Southern District of California approved
the settlement agreement under the terms of which funds from such cash
collateral account were disbursed approximately as follows: 1) $1.3 million was
deposited in trust for remediation expenditures; 2) $1.3 million was disbursed
to the plaintiffs; and 3) $1.1 million was returned to Signal.
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
liquidity or financial condition.
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.
Abex and the Company agreed that, following the Distribution and the Merger,
each company will be responsible for environmental liabilities relating to its
existing, past and future assets and businesses and will indemnify the other in
respect thereof.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of Allied-Signal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However,
Allied-Signal has, through UOP, asserted a contractual indemnification claim
against the Company for claims that may be asserted against UOP by EPA or other
parties with respect to the site. EPA has proposed a cleanup 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 approximately $7.2 million. EPA
estimates that it has spent in excess of $2 million to date in performing
studies of the site. Under CERCLA, EPA could assert claims against the Torch
Lake PRPs, including UOP, to recover the cost of these studies, the cost of all
remedial action required at the site, and natural resources damages. An earlier
settlement in principle with EPA staff pursuant to which UOP would pay $1.7
million in exchange for a release similar to those normally granted by EPA in
such circumstances was rejected by certain other governmental authorities in
July 1993. Settlement negotiations between the Company, on behalf of UOP, and
EPA resumed shortly thereafter and are ongoing.
NOTE 11 -- RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENT
In June 1990 the Company entered into a management agreement with Koll. On
September 30, 1993, in connection with the Company's acquisition of the domestic
real estate development business and related assets of Koll, the Company paid
Koll $325,000 to terminate the management agreement in lieu of continuing to
receive and pay for duplicative services during the 90-day notice period which
would otherwise have been required under the management agreement. Under the
terms of the management agreement, the
F-22
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Company was obligated to pay a quarterly management fee equal to .125% of the
average book value of its assets managed by Koll. Additionally, the Company was
obligated to reimburse Koll for certain personnel costs and other expenses and
Koll was generally entitled to a disposition fee of 1% of the net sale proceeds
(as defined) upon the sale of any real estate property (other than the Bolsa
Chica and Wentworth properties) managed by Koll. During 1991, 1992 and 1993 the
Company incurred management fees of $2.5 million, $2.0 million and $1.4 million
through September 30, 1993, respectively, and reimbursable personnel costs and
other expenses of $1.6 million, $.9 million and $.1 million, respectively, under
this management agreement. In 1990, the Company also entered into construction
management agreements with Koll Construction, a wholly owned subsidiary of Koll,
with respect to the Eagle Crest and Murrieta projects. In 1993, the Company
entered into a construction management agreement with Koll Construction for
demolition of bunkers at the Bolsa Chica project. During 1991, 1992 and 1993 the
Company incurred fees aggregating approximately $.5 million, $.2 million and $.1
million, respectively, to Koll Construction in consideration of these services
and related reimbursements.
SERVICE AGREEMENTS
On September 30, 1993, the Company entered into a Financing and Accounting
Services Agreement to provide Koll 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 year ended
December 31, 1993 were approximately $.1 million.
The Company also entered into a Management Information Systems and Human
Resources Services Agreement on September 30, 1993 with Koll Management
Services, Inc. ("KMS"), a public company majority owned by Koll. Under this
agreement, KMS provides computer programming, data organization and retention,
record keeping, payroll and other related services until 30 days' prior written
notice of termination is given by one company to the other. Fees and related
reimbursements accrued during the year ended December 31, 1993 were
approximately $.1 million.
SUBLEASE AGREEMENTS
On September 30, 1993, the Company entered into a month-to-month Sublease
Agreement with Koll to sublease a portion of a Koll affiliate's office building
located in Newport Beach, California. The Company also entered into lease
agreements on a month-to-month basis for office space in Northern California and
San Diego, California with KMS and Koll Construction, respectively. Combined
annual lease costs on these month-to-month leases during the year ended December
31, 1993 were approximately $.1 million.
DEVELOPMENT FEES
For the year ended December 31, 1993, the Company earned fees of
approximately $.7 million for real estate development services provided to
partnerships in which Koll and certain directors and officers of the Company
have an ownership interest.
LOAN RECEIVABLE
In December 1993, the Company purchased a nonrecourse construction loan,
secured by a first trust deed on four multi-tenant industrial buildings, for
which the borrower is a partnership in which Koll and certain directors and
officers of the Company have an ownership interest. The loan balance of $.8
million as of December 31, 1993 is included in other assets.
OTHER TRANSACTIONS
See Notes 4, 9 and 10 for descriptions of other transactions and agreements
with Koll, Libra, Abex and WTI.
F-23
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all employees of the Company prior to September 30, 1993 who had
completed one year of continuous employment. Net periodic pension cost for the
years ended December 31, consisted of the following (in millions):
1991 1992 1993
----- ----- -----
Service cost...................................... $ .1 $ .1 $ .1
Interest cost..................................... .5 .5 .5
Actual return on assets........................... (.4) (.1) (.2)
Net amortization and deferral..................... .1 (.2) (.3)
Curtailment loss.................................. -- -- .8
----- ----- -----
Net periodic pension cost......................... $ .3 $ .3 $ .9
----- ----- -----
----- ----- -----
The curtailment loss in 1993 resulted from the freeze of benefit accruals
for former participants in April 1993.
The funded status and accrued pension cost at December 31, 1992 and 1993 for
defined benefit plans were as follows (in millions):
1992 1993
------ ------
Actuarial present value of benefit obligations:
Vested.................................................... $ (6.8) $ (6.9)
Nonvested................................................. -- --
------ ------
Accumulated benefit obligation.............................. $ (6.8) $ (6.9)
------ ------
------ ------
Projected benefit obligation................................ $ (7.2) $ (6.9)
Plan assets at fair value................................... 5.4 5.5
------ ------
Projected benefit obligation in excess of plan assets....... (1.8) (1.4)
Unrecognized transition liability........................... .1 --
Unrecognized prior service cost............................. .9 --
Unrecognized net loss....................................... 1.4 1.3
Adjustment required to recognize additional minimum
liability.................................................. (2.0) (1.5)
------ ------
Accrued pension cost........................................ $ (1.4) $ (1.4)
------ ------
------ ------
The development of the projected benefit obligation for the plans at
December 31, 1991, 1992 and 1993 are based on the following assumptions:
discount rates of 8.5%, 8% and 7%, respectively, rates of increase in employee
compensation of 5.5%, 4% and 0%, respectively, and expected long-term rates of
return on assets of 9%. The date used to measure plan assets and liabilities was
October 31 in each year. Assets of the plans are invested primarily in stocks,
bonds, short-term securities and cash equivalents.
NOTE 13 -- CAPITAL STOCK
COMMON STOCK
Under its restated certificate of incorporation, the Company has authority
to issue up to 750 million shares of common stock, par value $.05 per share,
subject to approval of the Board of Directors (the "Board"), of which 625
million shares of Class A Common Stock and 25 million shares of Class B Common
Stock are initially authorized for issuance and an additional 100 million shares
may be issued in one or more series, and have such voting powers or other rights
and limitations as the Board may authorize.
F-24
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- CAPITAL STOCK (CONTINUED)
On June 11, 1992, all shares of Class B Common Stock (convertible nonvoting)
were converted into an equal number of shares of Class A Common Stock (voting).
On July 16, 1992, in connection with the Merger, the Company issued
approximately 19.7 million shares of its Class A Common Stock (Notes 1 and 2).
On December 17, 1993, the Company issued 3.4 million shares of its Class A
Common Stock in exchange for all of Libra's approximately $10.6 million in
aggregate principal amount of Subordinated Debentures plus accrued interest. In
connection with the Company's sale of Lake Superior Land Company to Libra, the
net cash proceeds from the sale of 3.4 million shares of Class A Common Stock
held by Libra will be forwarded to the Company. The estimated amount of proceeds
to be received from such sale is reflected in the equity section of the balance
sheet as deferred proceeds from stock issuance.
Under the Company's term loan agreement with Bank of Boston and Indentures
for the Debentures (Note 7), the Company is prohibited from purchasing shares of
its common stock.
PREFERRED STOCK
Under its restated certificate of incorporation, the Company has authority
to issue 150 million shares of preferred stock, par value $.01 per share, in one
or more series, with such voting powers and other rights as authorized by the
Board. Effective July 16, 1992, in connection with the Merger, the Board
authorized approximately 42.5 million shares of Series A Preferred Stock, which
have a liquidation preference of $.75 per share, participate in any dividend or
distribution paid on the Class A Common Stock on a share for share basis, and
have no voting rights, except as required by law (Notes 1 and 2).
The Series A Preferred Stock is redeemable at the Company's option, on 30
days' notice given at any time after the second anniversary of issuance, at the
liquidation preference of $.75 per share, in cash or generally in shares of
Class A Common Stock. Each share of the Series A Preferred Stock is convertible
at the holder's option, at any time after the second anniversary of issuance,
generally into one share of Class A Common Stock.
NOTE 14 -- STOCK PLANS
The Company has various plans which are described below:
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan ("1993 Plan"), was adopted by the
Board on November 29, 1993, subject to stockholder approval 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 will be
incorporated into the 1993 Plan upon its approval. Under the 1993 Plan 7,500,000
shares each (including 3,000,000 shares each authorized under the 1988 Stock
Plan) of Series A Preferred Stock and Class A Common Stock have been reserved
for issuance to officers, key employees and consultants of the Company and its
subsidiaries and the non-employee members of the Board. Options generally become
exercisable for 40% of the option shares upon completion of one year of service
and become exercisable for the balance in two equal annual installments
thereafter.
The 1993 Plan includes an automatic option grant program, pursuant to which
each individual serving as a non-employee Board member on the November 29, 1993
effective date of the 1993 Plan received an option grant for 125,000 shares each
of Series A Preferred Stock and Class A Common Stock with an exercise price of
$.4063 per share, equal to the fair market value of the underlying securities on
the grant date. Each individual who first joins the Board as a non-employee
director after such effective date will receive a similar option grant. Of the
shares subject to each option, 40% will vest upon completion of one year of
Board service measured from the grant date, and the balance will vest in two
equal annual installments thereafter. Each automatic grant will have a maximum
term of 10 years, subject to earlier termination upon the optionee's cessation
of Board service.
F-25
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- STOCK PLANS (CONTINUED)
Each non-employee Board member may also elect to apply all or any portion of
his or her annual retainer fee to the acquisition of shares of Series A
Preferred Stock or Class A Common Stock which will vest incrementally over the
individual's period of Board service during the year for which the election is
in effect.
During the fiscal year ended December 31, 1993, options for 3,520,000 shares
each of Series A Preferred Stock and Class A Common Stock were granted under the
1993 Plan, including options for an aggregate of 500,000 shares of each class to
non-employee directors, subject to stockholder approval at the 1994 Annual
Meeting. The exercise price for these options is $.4063 per share, equal to the
fair market value of the underlying securities as of the grant date.
1988 STOCK PLAN
The 1988 Stock Plan will be replaced by the 1993 Plan, subject to
stockholder approval at the 1994 Annual Meeting of Stockholders. The 1988 Stock
Plan of the Company provides for the grant of awards covering a maximum of
3,000,000 shares each of Class A Common Stock and Series A Preferred Stock to
officers and other executive employees of the Company and to persons who provide
management services to the Company. Awards under the 1988 Stock Plan may be
granted in the form of: (i) incentive stock options, (ii) non-qualified stock
options, (iii) restricted shares, (iv) restricted units to acquire shares, (v)
stock appreciation rights or (vi) limited stock appreciation rights. No
incentive stock options grants may be made thereunder after December 14, 1999.
Options may be accompanied by stock appreciation rights or limited stock
appreciation rights. During the year ended December 31, 1993, options for
1,860,000 shares each of Class A Common Stock and Series A Preferred Stock were
cancelled and options for 2,630,000 shares of each class were granted at an
exercise price of $.25 and $.2813, respectively. No Class A Common Stock options
were granted during 1991 and no Series A Preferred Stock options were granted
prior to 1992. Options vest 40%, 70%, and 100% at the first, second, and third
anniversaries, respectively, from the grant date.
RESTRICTED STOCK PLAN
Under the Restricted Stock Plan, each individual joining the Company as an
non-employee Board member received an immediate one-time grant of 2,000 shares
of Class A Common Stock. The shares are subject to certain transfer restrictions
for a specified period, during which the director has the right to receive
dividends and the right to vote the shares. After the restricted period expires,
the shares will vest based upon certain terms related to service. The shares are
forfeited if the director ceases to be a nonemployee director prior to the end
of the restricted period. During 1993, 8,000 shares were granted and 3,600
shares were forfeited under such Restricted Stock Plan. No shares were granted
during 1991 or 1992. The Restricted Stock Plan was terminated in November 1993
in connection with the implementation of the 1993 Plan.
F-26
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 1992 and
1993 (in millions, except per share amounts):
FULL
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
1993
Revenues (a)................ $ .2 $ .9 $ 2.2 $ 13.4 $ 16.7
Cost of sales (a)........... .6 .9 1.5 13.3 16.3
Loss from continuing
operations (a)............. (5.8) (6.6) (2.6) (5.1) (20.1)
Net income (loss) (b) (c)... (38.4) (3.5) (2.1) 58.3 14.3
Income (loss) per common
share...................... (.96) (.09) (.05) .69 .17
Weighted average common
shares outstanding (d)
(e)........................ 39.8 39.8 39.8 84.9 83.0
1992
Revenues (a)................ 12.1 4.4 10.9 .9 28.3
Cost of sales (a)........... 11.7 4.0 9.9 .9 26.5
Loss from continuing
operations (a)............. (14.1) (8.3) (7.1) (12.4) (41.9)
Net loss.................... (13.6) (8.0) (6.3) (10.5) (38.4)
Loss per common share....... (.68) (.40) (.18) (.26) (1.32)
Weighted average common
shares outstanding (e)..... 20.0 20.0 36.3 39.8 29.0
- ------------------------
(a) Amounts have been reclassified to present Lake Superior Land Company and
Deltec as discontinued operations.
(b) The Company recorded a $36 million ($.90 per share) charge to income in the
first quarter of 1993 in connection with the adoption of FAS 109 (Note 9).
(c) The Company recognized a $39.1 million gain on the disposition of Lake
Superior Land Company and a $23.6 million extraordinary gain on the
extinguishment of debt in the fourth quarter of 1993 (Notes 4 and 7).
(d) On December 17, 1993 the Company issued 3.4 million shares of Class A
Common Stock to Libra in exchange for $10.6 million face amount plus
accrued interest of Subordinated Debentures. The fourth quarter 1993
calculation of weighted average shares outstanding includes these newly
issued shares, along with the 42.5 million shares of Series A Preferred
Stock and options for 5.7 million common and preferred shares granted under
the 1988 Stock Plan.
(e) On July 16, 1992, in connection with the Merger, the Company issued
approximately 19.7 million shares of Class A Common Stock and 42.5 million
shares of Series A Preferred Stock. The Series A Preferred Stock is not
included in the calculation of weighted average shares outstanding in 1992
and the first three quarters of 1993 because the effect is antidilutive.
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