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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 0-20418
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KENNEDY-WILSON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4364537
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9601 WILSHIRE BOULEVARD, SUITE 220,
BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 887-6400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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Common Stock NASDAQ National
($.01 par value) Market
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 (229.405 of this chapter) 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. / /
As of March 2, 1999, there were outstanding 6,746,681 shares of the Registrant's
Common Stock. The aggregate market value of the Registrant's Common Stock held
by non-affiliates on March 2, 1999 was approximately $29,752,973 based on the
closing price of $9.63 per share.
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF
STOCKHOLDERS, TO BE HELD AT A FUTURE DATE, ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS REPORT.
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KENNEDY-WILSON, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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CAPTION PAGE
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PART I
ITEM 1. Business.................................................................................... 3
ITEM 2. Properties.................................................................................. 10
ITEM 3. Legal Proceedings........................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 11
ITEM 6. Selected Financial Data..................................................................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk................................... 22
ITEM 8. Financial Statements and Supplementary Data................................................. 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 52
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 52
ITEM 11. Executive Compensation...................................................................... 52
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................. 52
ITEM 13. Certain Relationships and Related Transactions.............................................. 52
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 53
2
ITEM 1. BUSINESS
OVERVIEW
We are an integrated, international real estate services and investment
company. Founded in 1977, we were later incorporated in Delaware and became a
public company in 1992. Through our subsidiaries, we deliver a complementary
array of real estate services. Headquartered in Beverly Hills, we have
approximately 640 full- and 50 part-time employees in offices throughout the
U.S. and in an office in Tokyo.
We initially gained recognition in the U.S. real estate market through our
residential real estate auction services. Over time, we diversified our business
so that we now provide:
- Commercial and residential property management and leasing;
- Management of real estate and note pool investments; and
- Commercial and residential brokerage, including auction marketing.
In addition to these real estate related services, we invest for our account in:
- Commercial and residential real estate; and
- Pools of secured and unsecured distressed notes.
Our clients include large U.S. and Japanese financial institutions, major
corporations, pension funds, real estate developers, insurance companies and
governmental entities.
We have had a presence in Japan for ten years, through which we have
developed significant relationships with Japanese companies and financial
institutions. In 1995 we opened our Tokyo office. It is staffed with nine
Japanese employees, two of whom are Japanese licensed real estate brokers with
knowledge of the local culture and real estate market. We believe that success
in the Japanese real estate market is determined primarily by a company's
reputation and its business relationships, not solely by its access to capital.
We have entered into joint venture relationships with companies and partnerships
affiliated with Colony Capital, Inc. and Cargill, Incorporated to invest in
Japanese real estate and distressed notes. We believe that these joint venture
parties were attracted to us, in large part, by our strong Japanese presence.
OUR BUSINESS OPERATIONS
PROPERTY MANAGEMENT AND LEASING
On July 17, 1998, we acquired Heitman Properties, Ltd., a national property
management and leasing company founded in 1969. As a result of this acquisition,
we have become a nationwide commercial and residential property management and
leasing company. We provide a full range of services relating to property
management, including:
- Commercial and residential building management;
- Leasing;
- Construction management;
- Engineering services;
- Technical services; and
- Environmental management.
We have managers in four regional offices--Beverly Hills, Houston,
Minneapolis and Chicago-- supervising approximately 600 full-time and 50
part-time employees who assist in managing more than 125 office and industrial
buildings, commercial garages and multi-unit residential complexes in 26
different states and the District of Columbia. We have approximately 48 million
gross square feet of real estate under management, including 15,334 residential
units.
3
As part of our strategy for providing our property management clients with
the best services possible, we apply the same approach in managing our clients'
properties as we do in managing our own, where our primary objective is to
maximize the return on investment. To this end, we work with each client to
ascertain its goals and expectations and to design strategic plans for marketing
and improving each property in a way that increases the client's returns. We
also strive to maximize our clients' returns by reducing property operating
expenses through the discounts and lower prices that we generally obtain for
vendor services and supplies such as janitorial and gardening services and
office supplies. As a result of our national purchasing programs and service
provider alliances, we can sometimes secure these services and supplies for less
than the manager of a single property.
We are actively seeking to expand our property management and leasing
operations through the acquisition of property management and leasing companies,
the marketing of our property management services to our existing brokerage
clients and the development of new, institutional clients. We have one senior
executive whose sole responsibility is to seek out, evaluate and negotiate
property management and leasing company acquisitions and we have marketing
personnel working out of our Beverly Hills, Phoenix and Chicago offices seeking
new property management engagements. We have also charged our property managers
and leasing agents with the responsibility of bringing in new business and we
compensate them with bonuses when they are successful in doing so. In addition
to expanding our property management business in the U.S, we also intend to
expand that business into Japan in concert with our efforts to invest in
Japanese real estate.
REAL ESTATE BROKERAGE
Through our offices in Beverly Hills, New York and Tokyo, and with the
assistance of our affiliate in Hong Kong, Kennedy-Goldman, Ltd., we provide
specialized brokerage services for both commercial and residential real estate.
We market and sell on behalf of our clients and ourselves:
- Office and retail buildings;
- Multi- and single-family residences;
- Industrial sites;
- Hotels and resorts; and
- Undeveloped land.
The properties for which we have brokered sales are located throughout the U.S.
with a significant concentration in California. We have also sold properties in
Japan, Guam and Canada.
We strive to achieve the best results for our clients and to provide
superior customer service that focuses on personalized attention, frequent
updates on marketing efforts and utilization of our international relationships
and our complementary array of real estate services. The following is a sample
of the real estate services that we provide in connection with our brokerage
activities:
- Property valuations;
- Development and implementation of marketing plans;
- Sealed bid brokerage; and
- Open bid auctions.
When we receive a new brokerage engagement, we begin by developing with our
client a sales strategy that we believe will maximize the sales proceeds while
taking into account our client's individual situation, including time
parameters, sensitivity to publicity and cash flow needs. We also investigate
and analyze, among other things, the physical condition of the property, its
cash flow and tenant characteristics, market rents and market dynamics within
submarkets and comparable transactions. We conduct commercial property sales
primarily through private negotiations and, to a lesser extent, sealed bid
sales. We conduct residential property sales primarily through sealed bid and
open bid auctions and conventional brokerage activities.
4
As part of our effort to ensure that our various offices work together to
provide the brokerage and marketing services that a particular client may need,
our compensation practices reward employees in all offices that participate in a
marketing effort for a particular client. We believe that our compensation
practice is particularly effective when our Asian clients are selling their U.S.
real estate holdings.
COMMERCIAL BROKERAGE SERVICES. We specialize in marketing commercial
properties with privately negotiated sealed bid sales. As part of our efforts to
market each commercial property, we develop and implement cost effective
marketing campaigns ranging from local to worldwide in scope. Each marketing
campaign is tailored to the client's objectives and the property's
characteristics. We also market properties directly to various investors with
whom we maintain ongoing business relationships. We believe that through these
efforts, we create a sales environment intended to enable our clients to obtain
the highest possible prices for their properties.
We obtain our commercial brokerage engagements primarily through our
existing relationships with over 100 institutional and corporate owners of real
estate located in the U.S. Our clients are located in the U.S., Japan, Canada,
Australia and Hong Kong.
Traditionally, our commercial brokerage marketing in Asia focused primarily
on selling properties located in the U.S. for Asian clients. Over the years, we
have built relationships with large Japanese financial institutions, developers,
investors and property owners and have developed what we believe to be a
reputation among them as successful marketer of commercial and residential real
estate in the U.S. In 1995, in order to establish ourselves as brokers in the
Japanese real estate market, we opened our office in Tokyo and are now brokering
the sales of commercial property in Japan.
When we engage in a competitive bidding process for brokerage engagements,
our brokerage commission rates often structured to demonstrate our confidence in
our ability to sell the property at a high price. For example, we might offer a
property owner a market or below-market brokerage commission rate for selling a
property at the price the owner initially expects and a higher rate for selling
the property for a higher price. On average, our commercial brokerage
assignments last for six months from the listing of the property to the payment
of a brokerage commission upon its sale. Generally, we do not enter into
long-term contracts for brokerage services.
RESIDENTIAL BROKERAGE SERVICES. We specialize in designing marketing
programs to sell single-family home developments and condominium projects using
conventional sales and auction-marketing programs. We also design and implement
sealed bid marketing programs for exclusive estates and land for residential
development. Most of the residential properties that we have brokered are
located in California. Our clients include builders, developers, private
sellers, financial institutions and government agencies.
AUCTION SERVICES. We provide our clients with auction marketing services to
sell both commercial and residential real estate. Auctions provide a seller an
opportunity to concentrate the marketing efforts and sell its holdings on one
established date. By doing so, the seller can increase liquidity and avoid
long-term carrying costs and the risk of a drop in market value. For these
reasons, we believe that the net proceeds to the seller following an auction
sale of multiple units often exceeds what the net proceeds would have been had
the units been sold individually through conventional brokerage arrangements.
The typical auction marketing program spans approximately four months from the
time that we sign the agreement with our client to the date of the auction.
REAL ESTATE INVESTMENTS AND ASSET MANAGEMENT
We invest in commercial and residential real estate with joint venture
partners and on our own account. We also provide asset management services for
some of our joint ventures.
5
Our current investment portfolio and our plans for future investments focus
on commercial buildings and multiple and single family residences. Generally, we
purchase properties that are subperforming in a manner which we believe can be
rectified with our expertise or financial resources. For example, a developer of
a residential real estate project may find it difficult or impossible to finish
the project because it cannot properly market the finished product or has
insufficient cash flow. In such a situation, we can purchase the project at a
discounted price then apply our marketing expertise and draw on our financial
resources to finish the project and sell it as a whole or to individual home
buyers for a profit. With regard to commercial properties, we acquire
subperforming buildings, make the improvements necessary to attract tenants,
lease to new tenants and then sell the buildings. We refer to this process as
stabilizing the asset.
We believe that one of our strengths is our ability to quickly identify and
acquire desirable real estate assets. We do so by capitalizing on the
institutional knowledge we have developed through our brokerage and investment
business and by conducting quick and thorough investigations and analyses of the
properties, their financial condition and what we believe to be their financial
potential. We have extensive experience in identifying and analyzing the factors
that impact property values in the regions in which we do business, such as new
construction, the marketability of certain neighborhoods, leasing trends and the
types of businesses seeking various types of commercial space. Our
investigations and analyses are conducted by an experienced in-house team,
occasionally supplemented by outside due diligence professionals.
To date, a significant portion of the real estate in which we have invested
is located in California. Within the next year, we plan to liquidate the
commercial real estate investments that we currently wholly own in the U.S. due
to our belief that we will have stabilized or will soon stabilize these assets
in many markets. While we believe the current cycle of the U.S. commercial real
estate market has matured, we think that Japan offers significant real estate
opportunities due to the recent Asian economic downturn. Presently our brokerage
operations are the source of many of our real estate acquisitions in the U.S.
These operations provide us with unique investment opportunities in the form of
close relationships with clients that have substantial real estate investments.
We expect our property management and brokerage operations to continue to
provide select opportunities for us to acquire additional U.S. real estate
investments suitable for our stabilization techniques.
Occasionally, our clients desire to sell some or all of their real estate
holdings through means other than conventional brokerage or auction services.
For example, financial institutions are generally not in the business of holding
and managing property and they may have regulatory or internal requirements that
mandate the rapid sale of real property acquired through foreclosure. Thus, a
financial institution client that has acquired a property through a foreclosure
may desire to sell it in less time than it would take for a conventional
brokerage or auction sale. Similarly, as a result of the current economic
conditions in Asia, a client in Asia may have the need or desire to sell a real
estate holding in a rapid manner with little publicity. In the past, we have
been able to meet the needs of these types of clients by purchasing their
properties quickly and discretely for our own account.
Depending on the size of the property, the availability of capital and our
assessment of risks, we either acquire a property as part of a joint venture or
entirely for our own account. Historically, we have used joint ventures to
acquire larger commercial buildings, typically those with more than 250,000
square feet of space. In these transactions, our joint venture partner
contributed the majority of the capital while we contributed the remainder of
the capital along with our marketing expertise. In some cases we have provided
the joint venture fee based asset management services. These transactions have
offered us the ability to leverage our capital and diversify the risks
associated with owning these larger properties.
We generally finance the acquisitions of our wholly-owned real estate with
mortgage loans and mezzanine financing. Currently, all but one of our
wholly-owned commercial properties were acquired
6
with the use of mezzanine financing. In our typical mezzanine financing
transaction, we are required to make an equity investment of 25% to 35% of the
purchase price, of which 70% to 80% of that equity investment is financed by the
mezzanine lender. The remainder of the investment is generally financed by a
mortgage lender. Typically, the mezzanine lender receives interest on its loan
and a share of the sale proceeds. The share of the sale proceeds is generally
determined by the amount of the loan and the period of time which the property
is held. In this type of arrangement, we control the management of the property,
including the timing and marketing of the property's sale.
We are pursuing joint ventures with large international investors,
particularly in Japan. To this end, we have entered into a limited partnership
agreement with affiliates of Colony Capital to invest up to $100.0 million of
which $2.0 million will be invested by us, in Japanese real estate and pools of
distressed notes. The investment strategy of the Kennedy-Wilson/Colony
partnership is to take advantage of depressed Japanese real estate prices and
the weakened Japanese economy by purchasing Japanese real estate and distressed
notes at discounted prices. Once the partnership acquires an asset, whether a
pool of notes or real estate, we manage that investment on behalf of the
partnership for a fee. Thus far, the partnership has purchased a 356,000 square
foot office building in Kawasaki, Japan occupied by high tech tenants and a pool
of notes as described in the "Distressed Note Pool Investments" section that
follows this section.
DISTRESSED NOTE POOL INVESTMENTS
Since 1994, we have been purchasing and managing pools of distressed notes.
Generally, distressed notes are those where the borrower has stopped making
payments or is late in making payments. Our note pools contain notes that are
secured and unsecured. The secured notes are collateralized by real estate or
personal property.
Historically, we have acquired these pools from regulatory agencies such as
the Federal Deposit Insurance Corporation and the Resolution Trust Corporation.
We have also purchased notes from various U.S. private sellers, such as banks,
savings institutions, mortgage companies and insurance companies. Most of these
notes were originated by lenders in California, Texas and Florida.
Recently, we expanded our operations to include the acquisition of a pool of
Japanese distressed note pools a joint venture. In September, 1998, the
Kennedy-Wilson/Colony partnership purchased for $24.0 million a pool of
distressed Japanese notes with a face value in excess of $400.0 million, some of
which are secured by real estate and personal property. In addition, the pool
also included 17 commercial and residential properties. As of December 31, 1998,
this note pool had generated for the Kennedy-Wilson/ Colony partnership revenues
in excess of $1.6 million, of which $109,000 represents revenues for us. In
addition to any amounts paid by the borrowers in this note pool, we will also
earn an asset management fee for managing the notes and real estate acquired.
In March, 1999, we entered into a joint venture agreement with an entity
affiliated with Cargill, Incorporated. The present investment strategy of the
Kennedy-Wilson/Cargill joint venture is to acquire on a privately negotiated
basis pools of distressed Japanese real estate secured notes that cost from $3.0
million to $10.0 million. In addition to our 5.0% contribution, we will provide
the Kennedy-Wilson/ Cargill joint venture asset management and disposition
services on a fee basis. Although, the Kennedy-Wilson/Cargill joint venture has
not yet acquired any assets, we expect it to do so in the near future. In
accordance with our obligations under the Kennedy-Wilson/Colony partnership, we
presented this opportunity to that partnership. The Kennedy-Wilson/Colony
partnership declined the opportunity because, we believe, the assets we intend
to acquire through the Kennedy-Wilson/Cargill partnership do not fit within the
Kennedy-Wilson/Colony partnership strategic investment plan.
We also invest in individual distressed notes secured by real property.
Presently, we hold two nonperforming distressed notes secured by undeveloped
land in the Kailua-Kona region of Hawaii that we acquired in 1998. In one of
those notes we have an equity investment of $3.9 million and it is
7
secured by 450 acres of ocean front, undeveloped land. In the second note, we
have an equity investmnet of $540,000. This note is secured by 1,000 acres of
undeveloped land.
MEZZANINE LENDING
In 1997, we began making mezzanine loans to real estate developers for new
single-family, residential developments. Total project costs for these
developments typically range from $5.0 to $25.0 million, and our mezzanine loans
typically range from $500,000 to $1.0 million. We expect to hold these loans for
a period of less than two years. Presently, the borrowers pay interest at 10%
per annum, and we are entitled to a participation in any profits from the
development. We also, generally, collect at the closing of each loan a 1% set-up
fee. We have made three loans of this type, each of which remains outstanding.
The aggregate outstanding principal balance of all three loans is approximately
$1.4 million.
EQUITY INVESTMENTS IN OTHER COMPANIES
KENNEDY GOLDMAN. In June, 1997 we acquired a 20% equity interest in Kennedy
Goldman (HK) Limited, a Hong Kong corporation, located in Hong Kong. Kennedy
Goldman is a real estate services company specializing in leasing and real
estate investment brokerage in Hong Kong. We acquired this interest in order to
maintain a presence in the Hong Kong real estate market and business relations
with Asian real estate investors. We have a director on Kennedy Goldman's Board
of Directors. The book value of our investment is $32,000.
ASSET ONE. In April, 1998 we acquired a 40% equity interest in Asset One, a
Japanese corporation with an office in Tokyo. Asset One is a loan servicing
company. Part of Asset One's business includes servicing the loans in our
distressed Japanese loan pools. The book value of our investment is $182,000.
JUTAKU RYUTSU. In March, 1998 we acquired a 30% equity interest in Jutaku
Ryutsu, a Japanese corporation with offices in Tokyo, Osaka and Fukuoka, Japan.
Jutaku Ryutsu is a brokerage company that specializes in selling real estate
assets between $500,000 and $10 million in value. Jutaku Ryutsu assists us with
our acquisition due diligence on our Japanese loan pools and real estate and the
disposition of those assets. The book value of our investment is $253,000.
GOVERNMENT REGULATIONS
Our brokerage and property management operations are subject to various
federal, state and local regulations in the U.S. and in Japan. We must have an
officer licensed as a real estate broker or we must associate with a broker
licensed by each state within the U.S. in which we provide brokerage and
property management services. In California, we must have an officer licensed as
a real estate broker in order to be exempt from California's lender licensing
requirements with respect to the real estate secured mezzanine loans that we
make. Each of our employees that performs certain brokerage functions in any
particular state must be a licensed real estate salesperson in that state and he
or she must work under the supervision of a broker licensed by that state. In
addition to these licensing requirements, certain state governmental entities,
such as the California Department of Real Estate, regulate our brokerage and
property management operations by requiring our resident operative subsidiary to
be licensed. We believe that we are in substantial compliance with all material
licensing requirements and regulations in states and countries in which licenses
are required and in which we are engaged in material brokerage and property
management activities.
In various states, governmental entities license individual auctioneers
and/or administer various regulations governing their activities and may require
that auctioneers post bonds. We believe that we are in substantial compliance
with all material licensing and bonding requirements in all states in which
auctioning licenses and bonds are required and in which we are engaged in
material auction activities.
8
COMPETITION
Because of our unique combination of businesses, we compete with brokerage,
auction, leasing and property management companies as well as companies,
partnerships, trusts and individuals that invest in real estate and distressed
notes. We believe that the brokerage and property management industries are both
highly fragmented and highly competitive. We must compete with conventional
property management companies and commercial and residential real estate brokers
as well as other auction companies. Several of these companies are significantly
larger than us and possess greater financial resources. We compete with real
estate brokerage and auction-marketing companies on the basis of brokerage
commissions charged, marketing expenses paid and quality of service. We compete
with property management and leasing firms on the basis of management fees and
leasing commissions charged and the range and quality of services provided.
Our investment operations compete to varying degrees with real estate
investment partnerships and other investment companies. Many of these
competitors have significantly greater capital resources. Some of these
competitors, however, focus on acquisitions which are larger in size than those
historically targeted by us. We believe that we also compete to a lesser degree
with real estate investment trusts that seek to acquire similar assets. We
compete with these other investors on the basis of the amounts that we pay for
the investments acquired.
EMPLOYEES
We have approximately 640 full-time and 50 part-time employees in the U.S.
and in Japan. None of our employees are represented by a collective bargaining
agreement. Our compensation policies are designed to attract and retain and
motivate the employees that are an integral part of our profitability.
Generally, executive officers and brokers receive a base salary and a variety of
performance based rewards including stock options and either profit sharing or
bonuses. These employees, other than those in our property management and
leasing group, receive a relatively low base salary, with the bulk of their
salary being paid in the form of a performance based bonuses. The upper level
employees in the property management and leasing group receive a market based
salary and performance based bonuses. In either case, the bonuses are based in
part upon the profitability of the group with which the employees are affiliated
as well as our overall performance. As a result, employees are encouraged to
meet individual goals as well as to contribute their expertise and efforts on
behalf of their group. In addition to promoting the generation of revenues, our
bonus structure also encourages our commercial real estate brokers to control
costs because the bonuses paid are based on the profits of the commercial
brokerage operations as opposed to gross brokerage revenues. In furtherance of
our compensation philosophy, we have granted approximately 3% of our employees
stock options to reward excellent performance and to further align their
personal interests with those of our other stockholders. Finally, approximately
4% of our employees are entitled to participate in a deferred compensation plan
in which we match each employee's contribution up to a specified maximum
according to our overall performance.
9
ITEM 2. PROPERTIES
Our executive and administrative offices are located at 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California, and consist of approximately
26,000 square feet in an office building managed by us. We also lease space for
our regional and branch offices and sublease space to third parties. These
facilities, including our Beverly Hills headquarters, comprise a total of
approximately 84,488 square feet of leased space, with an annual aggregate base
rental of approximately $1.0 million. Each of these leases is scheduled to
expire within the next five years. We believe that we will be able to renew any
expiring lease or obtain suitable office space to replace such leased facility,
as necessary, without any material increase in our rental costs.
As described above, we also buy and sell real estate in the ordinary course
of our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business and routine. These matters are generally covered by insurance. The
ultimate disposition of these ordinary proceedings is not presently
determinable. We believe based upon currently available information, that the
outcome of these proceedings will not have a material adverse effect on our
financial position or results of operations and that the existing proceedings,
individually or collectively, are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our stockholders during the
fourth quarter of 1998.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock trades on The NASDAQ National Market under the symbol
"KWIC." The following table sets forth the high and low closing sale prices per
share of our Common Stock as reported in the NASDAQ National Market, adjusted
for a 20% stock dividend paid October 27, 1997; a 200% stock dividend paid April
10, 1998 and a 50% stock dividend paid December 15, 1998, where appropriate.
HIGH LOW
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1997--
First Quarter............................................................. $ 2.22 $ 1.77
Second Quarter............................................................ $ 2.97 $ 2.13
Third Quarter............................................................. $ 3.33 $ 2.73
Fourth Quarter............................................................ $ 4.39 $ 3.08
1998--
First Quarter............................................................. $ 8.78 $ 3.67
Second Quarter............................................................ $ 12.67 $ 6.33
Third Quarter............................................................. $ 9.00 $ 6.00
Fourth Quarter............................................................ $ 8.50 $ 5.00
As of March 2, 1999, there were approximately 1,250 holders of our Common
Stock. Since the completion of our initial public offering in August 1992, we
have not paid any cash dividends, and we have no present intention to commence
the payment of cash dividends. However, our Board of Directors may determine to
pay cash dividends on our Common Stock in the future depending on our results of
operations, financial condition, contractual restrictions and other factors our
Board may deem relevant from time to time. Presently, our loan agreemnt with FBR
Asset Investment Corporation prohibits us from declaring or paying any dividend
with respect to our Common Stock without first obtaining the consent of FBR
Asset Investment Corporation.
On December 18, 1998, we purchased 100% of the issued and outstanding stock
of TechSource Services, Inc. from its four stockholders for $225,000 cash and
28,300 shares of our common stock at a per share price of $8.027. The sale was
exempt from registration under the Securities Act of 1933 under Section 4(2)
thereof. We reasonably believed prior to the sale of our shares that each of the
purchasers had such knowledge and experience in financial and business matters
that each was capable of evaluating the merits and risks of an investment in our
Company.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data as of and for
each of the five fiscal years ended December 31. The data set forth below should
be read in conjunction with the Consolidated Financial Statements and related
Notes to Consolidated Financial Statements appearing elsewhere herein and ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
YEAR ENDED DECEMBER 31,
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1994 1995 1996 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Total revenues........................................... $ 38,647 $ 20,610 $ 31,967 $ 26,999 $ 50,872
Total expenses........................................... $ 37,589 $ 33,752 $ 28,376 $ 22,768 $ 44,710
Income (loss) from operations............................ $ 1,058 $ (13,142) $ 3,591 $ 4,231 $ 6,162
Net income (loss)........................................ $ 1,010 $ (13,186) $ 3,531 $ 4,030 $ 5,325
Basic income (loss) before extraordinary items per
share.................................................. $ 0.13 $ (1.74) $ 0.50 $ 0.65 $ 0.85
Basic extraordinary items per share...................... N/A N/A N/A $ 0.01 N/A
Basic net income per share............................... $ 0.13 $ (1.74) $ 0.50 $ 0.66 $ 0.85
Basic weighted average shares............................ 7,594 7,575 7,087 6,104 6,254
Diluted income before extraordinary items per share...... $ 0.13 N/A $ 0.50 $ 0.64 $ 0.78
Diluted extraordinary items per share.................... N/A N/A N/A $ 0.01 N/A
Diluted net income per share............................. $ 0.13 N/A $ 0.50 $ 0.65 $ 0.78
Diluted weighted average shares.......................... 7,686 N/A 7,094 6,187 6,801
AS OF DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- --------- --------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets............................................. $ 37,014 $ 37,651 $ 51,114 $ 45,718 $ 204,816
Total liabilities........................................ $ 15,995 $ 29,706 $ 40,732 $ 34,124 $ 182,036
Total stockholders' equity............................... $ 21,019 $ 7,945 $ 10,382 $ 11,594 $ 22,780
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an international real estate services and investment company. We
provide property management and leasing services, asset management, commercial
and residential brokerage, and auction services to clients primarily in the U.S.
and Japan. Our clients include financial institutions, major corporations, real
estate developers, insurance companies and governmental agencies. We also invest
in commercial and residential real estate, as well as individual and pools of
distressed notes both in the U.S. and Japan. Our revenues in 1996, 1997, and
1998 were $32.0 million, $27.0 million, and $50.9 million, respectively. Our net
income in the same periods was $3.5 million, $4.0 million, and $5.3 million,
respectively.
In 1998, we substantially increased our activities in Japan, including a
joint venture with an affiliate of Colony Capital, Inc. This joint venture
provides a framework for the investment of up $100.0 million, $2.0 million of
which would be invested by us, in Japanese real estate and pools of distressed
notes, of which approximately half has been invested to date. Under the terms of
the joint venture agreement, we provide Japanese real estate expertise and
receive acquisition, management and disposition fees. The joint venture
agreement also requires us to provide 2.0% of the required equity in any
investment. In addition, we made minority investments in brokerage and loan
servicing businesses in Japan and have expanded the size of our direct employee
base in Japan to nine real estate professionals. As part of our strategy, we
plan to grow our business in Japan, continuing to emphasize fee based sources of
income. In furtherance of this strategy, we entered into a joint venture and
strategic alliance with an affiliate of Cargill, Incorporated in March 1999 to
invest in small- and medium-sized pools of distressed notes.
When we sell residential real property, we recognize as gross revenues the
total sales price of residential real estate property and we recognize as an
expense the purchase price and improvements associated with that real estate.
Therefore, a sale of residential real property in any reported period has a
disproportionate effect on revenues and expense in that period relative to sales
of other investments and our other business lines. Our commercial real property
investments are accounted for on a net gain on sale basis.
Our 1998 growth was due principally to our acquisition of our property
management and leasing company, Heitman Properties, Ltd., in July 1998. We
funded this acquisition with a $21.0 million loan from Colony K-W, LLC. We made
this acquisition as part of our strategy to increase recurring fee income as a
percentage of total revenues. We expect that this acquisition will be a platform
for future growth of our property management business in both the U.S. and
Japan. We acquired Heitman Properties for $21.0 million in cash and we accounted
for this transaction under the purchase method of accounting, resulting in
goodwill of $16.0 million which we are amortizing on a straight-line basis over
30 years.
Historically, we have purchased for our own account commercial and
residential real estate in the U.S. During 1996, 1997, and 1998, we acquired
$13.1 million, $10.8 million, and $102.1 million, respectively, of commercial
properties, and $2.2 million, $2.8 million, and $7.6 million, respectively, of
residential properties. We held or hold all these properties for resale. We
anticipate selling these domestic, wholly-owned properties within the next year.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL REVENUES
Total revenues for 1998 were $50.9 million, which represents an 88.4%
increase over 1997. Earnings before taxes for 1998 were $6.2 million, which
represents a 45.6% increase over 1997. Net income for 1998 was $5.3 million,
which represents a 32.1% increase over 1997. These increases are primarily
attributable to our acquisition of Heitman Properties, Ltd.
13
PROPERTY MANAGEMENT. In 1998 our property management and leasing operations
generated $14.2 million of revenues, representing 27.9% of our total revenues.
On July 17, 1998 we acquired Heitman Properties, Ltd., from Heitman Financial,
Inc., and renamed it Kennedy-Wilson Properties, Ltd. Between July 17, 1998 and
December 31, 1998, this subsidiary generated $12.7 million of our $14.2 million
in property management fees and leasing commissions. As of December 31, 1998, it
had under management a portfolio of approximately 48 million square feet of
commercial, industrial and apartment properties located in 26 states and the
District of Columbia.
BROKERAGE. Brokerage commission revenues in 1998 were $4.9 million,
representing 9.7% of total revenues and a 16.6% decrease over brokerage
commission revenues in 1997 of $5.9 million. There were a total of 30
transactions in 1998 with an aggregate value of $522.9 million, compared to 57
transactions in 1997 with an aggregate value of $423.8 million. This reflects a
continued trend toward increased brokerage commissions from commercial sales and
decreased brokerage commissions from residential sales. Commercial properties
typically have higher sales prices but lower brokerage commission rates compared
to residential properties. The costs associated with a commercial assignment
tend to be lower than those associated with residential assignments.
INVESTMENTS. Sales of residential real estate were $13.8 million in 1998,
representing 27.2% of total revenues, compared to $6.8 million in 1997. This
equates to a 104.8% increase. This increase is due to sales from four projects
in 1998, including a 10 unit single family home development in North Los
Angeles, seven units of a 23 unit single family development in Palm Desert, and
the bulk sale of a 24 unit condominium project in west Los Angeles. This
compares to revenues in 1997 from the sale of 13 units of a 14 unit condominium
project located in Orange County, California, the sale of the remaining seven
units in a condominium project in Hawaii, and the sale of a land lot zoned for
condominium development in Beverly Hills. The sales of residential real estate
for both years reflect our strategy to sell upon completion of planned
improvements, rather than holding for speculation.
Equity in income of investments with related parties and affiliates and gain
on sale of partnership increased in total to $4.7 million in 1998, or 9.2% of
total revenue, a 227.7% increase from the $1.4 million realized in 1997. The
gain on sale of the partnership interest was $4.1 million. The increase was
substantially due to the gain on the sale in 1998 of our interest in a joint
venture that owned two commercial office buildings in downtown Los Angeles. We
sold our interest in the joint venture because we had completed the process of
stabilizing the properties, which included increasing average occupancy of the
properties from approximately 45% at acquisition in 1996 to approximately 80% at
the time of sale. Both 1998 and 1997 included revenues from the sale of 88
condominium units from a 109 unit joint venture project located in near downtown
Los Angeles. The sales of these units occurred over the two years as planned
improvements to the units were completed.
Gain on sale of commercial real estate was $2.7 million 1998, or 5.2% of
total revenues, down 58.2% from $6.3 million in 1997. The decline resulted from
the fact that in 1997 we sold five commercial properties including a 46,000
square foot property in Santa Monica, a 50,000 square foot property in West Los
Angeles, 30,000 square foot property in Anaheim, a 61,000 square foot in
Pasadena and a 20,000 square foot property in Santa Monica. In 1998, we sold two
commercial properties, consisting of a 36,000 square foot building in Santa
Monica, and a 28,000 square foot building in downtown Los Angeles. All
properties were sold after the completion of the stabilization process.
Gains on restructured notes totaled $3.9 million in 1998, or 7.7% of total
revenues, a 3.1% decrease from $4.0 million in 1997. This decrease can be
attributed to a reduction in the number of U.S. note purchases in 1998. The gain
in both years reflects our continued progress in liquidating our portfolios of
distressed notes that were purchased at substantial discounts to face value. Our
strategy to collect the note balances consists of either restructuring the note
to performing status, negotiating a payoff, or foreclosing and selling the
related collateral.
14
Net rental income was $4.6 million in 1998, or 9.0% of total revenues,
representing a 181.3% increase from $1.6 million in 1997. The increase reflects
our acquisition of approximately 1.1 million square feet of commercial office
properties in 1998. All of these acquisitions represent what we believe are
value-added opportunities in recovering sub markets in Los Angeles county,
including two properties in Hollywood consisting of 467,000 square feet, a
property in downtown Los Angeles consisting of 282,000 square feet, a property
in the Mid-Wilshire District of Los Angeles consisting of 133,000 square feet, a
property in Pasadena consisting of 52,000 square feet, and a property in Van
Nuys consisting of 74,000 square feet.
TOTAL OPERATING EXPENSES.
Operating expenses in 1998 were $44.7 million, representing a 96.4% increase
over $22.8 million in 1997. This increase was due primarily to the addition of
new personnel in connection with the acquisition of Heitman Properties, Ltd.
Brokerage commissions and marketing expenses decreased 42.7% to $532,000 in
1998 from $928,000 in 1997, primarily as a result of the decreased auction
sales, which are typically more expensive than sealed bid sales or traditional
brokerage sales.
Cost of residential real estate sold was $12.2 million in 1998, a 119.0%
increase from $5.6 million in 1997. The increase correlates with the increased
revenues from the sales of residential real estate discussed above.
Compensation and related expenses was $14.6 million in 1998, up 90.4% from
$7.7 million in 1997. The increase reflects the increase in personnel from 60
employees in 1997 to approximately 700 employees in 1998, primarily as a result
of our acquisition of Heitman Properties, Ltd. In addition, in 1997 we
implemented a deferred compensation program designed to retain and motivate key
employees to help achieve targeted company-wide goals.
General and administrative expenses were $6.9 million in 1998, representing
a 47.8% increase over 1997 expenses of $4.7 million. The increase is due
primarily to the additional expenses associated with our property management
operations.
Depreciation and amortization expense increased to $2.1 million in 1998, a
160.6% increase over the $790,000 in 1997. The increase was due to the increase
in the commercial property portfolio to $110.0 million in 1998 from $14.1
million in 1997. In addition, amortization of the goodwill and property
management contracts associated with the acquisition of Heitman Properties, Ltd.
began from its acquisition in July 1998 and amounted to about $800,000 in 1998.
Interest expense was $8.4 million in 1998, compared to $3.1 million in 1997,
representing a 167.5% increase. The increase results from the increase in total
debt to $163.9 million in 1998 from $28.9 million in 1997. It should be noted
that approximately $115.1 million of the debt in 1998 was in the form of loans
incurred concurrently with the acquisition of our commercial and residential
properties as such acquisitions and loans are discussed in the "Liquidity and
Capital Resources" section.
Provision for income taxes was $837,000 in 1998, a 200% increase over the
$280,000 in 1997. The tax expense has been significantly less than the statutory
rate due to substantial net operating losses carryforward which have been
utilized in reducing the Company's federal tax liabilities. At December 31,
1998, the Company has available net operating losses carryforward totaling
approximately $219,000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL REVENUES.
Total revenues in 1997 were $27.0 million, a 15.5% decrease from $32.0
million in 1996. Earnings before taxes for 1997 were $4.2 million, representing
a 17.8% increase over 1996. Net income for 1997 was $4.0 million, representing a
14.1% increase over 1996. Despite the decrease in sales of residential real
estate earnings before taxes, net income increased because of an increase in the
sale of commercial real estate. We had no property management revenues from 1996
or 1997.
15
BROKERAGE. Revenues from brokerage commissions were $5.9 million in both
1997 and 1996, representing 21.8% of total revenues in 1997 and 18.4% of total
revenues in 1996. In 1997 there were 57 transactions totaling $424.0 million in
value, compared to 70 transactions in 1996 totaling $359.6 million in value.
Also, in 1997 a greater proportion of the brokerage commissions were earned from
commercial property sales, as opposed to 1996 when sales of residential
properties, especially through the auction process, were greater. Commercial
properties typically have higher sales prices but lower brokerage commission
rates compared to residential properties. The costs associated with a commercial
assignment tend to be lower than those associated with residential assignments.
INVESTMENTS. Residential real estate sales were $6.8 million in 1997, equal
to 25.0% of total revenues, compared to $19.7 million in 1996 representing a
65.8% decline. Residential real estate sales in 1997 consisted of revenues from
three projects, including 13 units of a 14 unit condominium property in Orange
County, the remaining seven units in a condominium property in Hawaii, and land
in Beverly Hills. This compares to residential real estate sales in 1996 which
included revenues from four projects, including 33 condominium units from a
property in Hawaii, 42 condominium units from a property in south San Francisco,
nine units from a property in west Los Angeles, and the remaining unit from a
condominium project located in San Francisco.
Equity in income of investments with related parties and non-affiliates was
$1.4 million in 1997, or 5.3% of total revenues, compared to $178,000 in 1996.
The increase is due primarily to sales of 88 condominium units in a 109 unit
joint venture property located near downtown Los Angeles.
Gain on sale of commercial real estate was $6.3 million in 1997,
representing 23.5% of total revenues, compared to $1.4 million in 1996, equating
to a 336.0% increase. The increase is due primarily to the fact that in 1997 we
sold five commercial properties, including a 46,000 square foot property in
Santa Monica, California, a 50,000 square foot property in west Los Angeles, and
a 30,000 square foot property in Anaheim, California, a 61,000 square foot
property in Pasadena, California, and a 20,000 square foot property in Santa
Monica. In 1996 we sold one commercial property consisting of 56,000 square feet
in Santa Monica.
Gains on restructured notes receivable were $4.0 million in 1997, or 15.0%
of total revenues, compared to $3.1 million in 1996, which equates to a 32.0%
increase. The increase reflects the increased collections from the note pools
acquired in 1996 and 1997.
Rental income net was $1.6 million in 1997, or 6.0% of total revenues,
versus $1.5 million in 1996, resulting in an 11.0% increase. The increase
resulted from an increase in the average occupancy of properties in our
portfolio in 1997 due to our management and leasing programs.
TOTAL OPERATING EXPENSES.
Total expenses in 1997 were $22.8 million, a 20.0% decrease from $28.4
million in 1996. Despite the decrease in sales of residential real estate,
earnings before taxes and net income increased because of an increase in the
sales of commercial real estate. We had no property management revenues in 1996
or 1997.
Brokerage commission and marketing expenses decreased 40.5% to $928,000 in
1997 from $1.6 million in 1996, reflecting the continued trend of less auction
marketing revenues which is typically more costly than single asset commercial
brokerage transactions.
Cost of residential real estate sold decreased 66.2% to $5.6 million in 1997
from $16.7 million in 1996. This was due primarily to the decreased revenues
from sales of residential real estate discussed above.
Compensation and related expenses increased 62.0% to $7.7 million in 1997
from $4.7 in 1996, resulting from an increase in executive employees and from
increased incentive compensation, including the implementation of a deferred
compensation program designed to maximize our profits.
16
General and administrative expenses increased 49.1% to $4.7 million in 1997
from $3.1 million in 1996, due to an increase in occupancy costs associated with
opening our office in New York as well as the necessity of additional corporate
space, and to increased legal costs associated with increased collection and
restructuring of notes receivable and leasing and sales of commercial and
residential real estate.
Depreciation and amortization increased 195.0% to $790,000 in 1997 from
$268,000 in 1996. Although commercial properties held for sale at the end of
1997 totaled approximately $14.1 million, compared to approximately $25.1
million at the end of 1996, the average balance during 1997 was higher.
Interest expense increased 59.8% to $3.1 million in 1997 from $2.0 million
in 1996. Although our total debt decrease to $28.9 million from $37.6 million in
1996, the average balance in 1997 was higher.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include expenditures for
real estate held for sale, distressed notes pools, the acquisition of property
management portfolios, and working capital needs. Historically, we have not
required significant capital resources to support our brokerage operations. We
finance our operations with internally generated funds and borrowings under our
revolving lines of credit as described below. Our investments in real estate are
typically financed by mortgage loans secured primarily by that real estate.
These mortgage loans are generally nonrecourse in that, in the event of a
default, recourse will be limited to the mortgaged property serving as
collateral, subject to certain exceptions that are standard in the real estate
industry. Exceptions where the lender may proceed against the borrower or
guarantor, if any, generally include the voluntary transfer of the mortgaged
property by the borrower, the voluntary initiation of bankruptcy proceedings by
the borrower, fraud or misrepresentation in obtaining the loan, and other
similar acts.
Cash provided by operating activities was about $3.7 million in 1998,
compared to $3.0 million in cash used in operating activities in 1997. The
change included an increase in accounts receivable attributable primarily to the
property management fees which are received one month in arrears, as well as
leasing commissions earned but not received until the related tenant moves in,
offset by increased accrued expenses which includes bonuses and deferred
compensation. The $3.0 million cash used in operating activities in 1997
compares to $533,000 in cash provided by operating activities in 1996. The
change resulted from an increase in 1997 in gains on sale of real estate, which
are excluded from cash flows from operating activities, offset by an increase in
accrued expenses.
Cash used in investing activities was about $136.0 million in 1998, compared
to $21.5 million in cash provided by investing activities in 1997. The change
resulted primarily from our purchases of real estate held for sale of $123.0
million which was attributable to our commercial property acquisitions. In
addition, in 1998, we purchased Heitman Properties, Ltd. for about $21.0
million, which was allocated to contracts, furniture and fixtures, and goodwill.
The $21.5 million in cash provided by investing activities in 1997 compares to
cash used in investing activities in 1996 of $11.7 million. The change resulted
primarily from proceeds from sale of real estate held for sale in the amount of
$36.3 million and collection of notes receivable of $4.9 million, offset by
purchases of real estate held for sale in the amount of $18.8 million.
Cash provided by financing activities was about $131.8 million in 1998,
compared to cash used in financing activities in 1997 of about $10.0 million.
The change resulted from $114.7 million in mortgage loans payable related
primarily to the purchase of the commercial properties referred to above. In
addition we issued $21.0 million in subordinated debt related to the purchase of
Heitman Properties, Ltd. The $10.0 million in cash used in financing activities
in 1997 compares to cash provided by financing activities of $10.8 million in
1996. The change resulted from repayments of mortgage loans payable of $19.7
million and repayment of notes payable of $7.1 million.
17
Prior to September 1998, we had a $15.0 million unsecured credit facility
with East-West Bank with an interest rate of prime plus 2.0%. In September 1998,
we increased that facility to $21.0 million with interest payable monthly at a
rate of LIBOR plus 2.0% and a maturity date of June 30, 2000. We use this
facility primarily for working capital purposes and acquisitions. The
outstanding balance on this facility was $13.1 million as of December 31, 1998.
In July 1998, we entered into a bridge loan agreement with Colony K-W, LLC
that provided us with $21.0 million in subordinated debt, the proceeds from
which we utilized to consummate our acquisition of Heitman Properties, Ltd. This
debt bears interest at a rate of 14%, and the principal is payable in three
installments of $7.0 million due on July 30 in each of 1999, 2000 and 2001.
As of December 31, 1998, we had $115.1 million in mortgage notes payable. We
used proceeds from these loans to finance the acquisition of several commercial
and residential properties, and are secured by both first and second mortgage
liens. All but $5.3 million of these loans are non-recourse against the borrower
or guarantor, if any, except in certain circumstances that are standard in the
real estate industry. We plan to repay each note upon the sale of the
corresponding secured property.
In June 1998, we entered into a term loan agreement with FBR Asset
Investment Corporation which had an original principal amount of $10.0 million
bearing interest at 12.0% per annum. As of November, 1998 the loan terms were
amended so that after December 3, 1998, the interest rate was 13% per annum
payable monthly plus 4% per annum compounded monthly and payable at maturity and
the loan was extended to June 1999; however, we plan on refinancing this debt on
or prior to maturity. As of December 31, 1998 the outstanding principal balance
was $7.5 million. We used the proceeds of this loan to purchase note pools.
To the extent that we engage in additional strategic investments, including
real estate, note portfolio, or acquisitions of other property management
companies, we may need to obtain third party financing which could include bank
financing or the public sale or private placement of debt or equity securities.
We believe that existing cash, plus capital generated from property management
and leasing, brokerage, sales of real estate owned, collections from notes
receivable, as well as our current line of credit with East-West Bank, will
provide us with sufficient capital requirements for the foreseeable future.
Our need, if any, to raise additional funds to meet our working capital and
capital requirements will depend on numerous factors, including the success and
pace of the implementation of our strategy for growth. We regularly monitor
capital raising alternatives to be able to take advantage of other available
avenues to support our working capital and investment needs, including strategic
partnerships and other alliances, bank borrowings, and the sale of equity or
debt securities. We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends.
RECENT DEVELOPMENTS
On March 5, 1999, we executed a letter of intent relating to our proposed
acquisition of a property management company. The acquisition price is less than
$2.5 million. We intend to finance a portion of this acquisition with borrowings
under our East-West Bank line of credit.
INFLATION
Our long-term leases contain provisions designed to mitigate the adverse
impact of inflation on its results from operations. Such provisions include
escalation clauses, which generally increase rental rates during the terms of
the respective agreements. Such escalation clauses are often related to
increases in the CPI or similar inflation indices. In addition, many of our
leases and management agreements are for terms of less than ten years, which
permits us to seek to increase rents and fees at market rates if they are below
then existing market rates. Many of our leases require the tenants to pay a pro
rata
18
share of operating expenses, including common area maintenance, real estate
taxes, insurance and utilities, thereby reducing our exposure to increases in
costs and operating expenses resulting from inflation. See Note 1 of Notes to
the Company's Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES was issued June 1998, applicable
for all fiscal years beginning after June 15, 1999. At this time, management has
not completed their analysis of this pronouncement's impact on the Company's
financial statements.
YEAR 2000 ISSUE
It is difficult to estimate the impact the Year 2000 Issue may have on our
business, financial condition and results of operations. Based on current
testing, we have identified two primary systems affected by the Year 2000 Issue.
First, we rely upon information technology systems to run software for
databases, accounting, word processing, e-mail and other programs necessary to
our business. Second, certain mechanical systems in the buildings we manage and
own, such as fire safety systems, key card access devices and air conditioning
and heating units, may be reliant, to some degree, on computer systems for
various functions.
WHAT IS THE STATE OF READINESS OF OUR INFORMATION TECHNOLOGY SYSTEMS?
In January, 1999, we formed an internal information services group that
developed a plan to bring our information technology systems into Year 2000
compliance by September, 1999, consisting of the following:
- Educate management of the nature and scope of the Year 2000 Issue;
- Inventory all hardware and software systems which we use;
- Scan these systems with two industry standard programs for Year 2000
compliance and repair or replace those identified as non-compliant;
- Install a new computer network and server which will allow us to back up
all of our data every evening; and
- Test new systems in a "non-live environment" by turning their internal
clocks forward while monitoring and recording responses and hire outside
consultants to audit and validate our results.
We project our new network will be up and running no later than June 1,
1999, and we presently anticipate to be through with all internal testing by
September, 1999. We plan to have outside consultants perform and complete their
valuation audit of our testing by the fourth quarter of 1999. We estimate based
on current testing, that we will have to replace approximately 20 computers of
the 120 in use at our five corporate offices.
Most of the properties to which we provide property management services have
computer terminals. While these terminals will be tested, they will not be
placed on our network. We do not presently believe Year 2000 compliance problems
with these terminals will have a material adverse affect on our property
management operations.
WHAT IS THE STATE OF READINESS OF OUR BUILDING SYSTEMS?
In the first quarter of 1998, we formed a Year 2000 Compliance Task Force to
formulate and draft a Year 2000 compliance program for the various properties we
manage. Each individual property owner
19
is ultimately responsible for assuring its properties are ready for Year 2000,
and our role as property manager is limited to identifying potential problems
and recommending remedial action. However, we will make the necessary Year 2000
renovations to the properties we own.
As of February 28, 1999, approximately 60% of the properties under
management in 1998 are participating in the Year 2000 compliance program. For
those properties, we have substantially completed reviews of the preliminary
inventories and testing and have submitted proposals to those owners. We will
contact owners of non-participating buildings to determine if they would now
like to participate in our Year 2000 compliance program.
HOW DOES THE YEAR 2000 ISSUE IMPACT US?
We are not currently aware of any internal Year 2000 problems that could be
reasonably expected to have a material adverse impact on our business, results
of operations and financial condition. The vendors from which we will acquire
hardware and software for our new information technology system have indicated
the products we plan to use are currently Year 2000 compliant. The current
review of the preliminary systems inventories from our participating managed
properties revealed few Year 2000 Issues.
However, there can be no assurance that we will not discover Year 2000
problems with our systems that will require their repair or replacement. We
cannot give assurances that third-party software, hardware or services
incorporated into our material systems, or systems upon which we are reliant,
will not need to be revised or replaced, which could be time consuming and
expensive. In addition, we cannot give assurances that governmental agencies,
utilities, third-party service providers and others outside of our control will
be Year 2000 compliant. The failure of such entities to become compliant could
result in a systemic failure beyond our control, such as loss of
telecommunications or electricity, which could adversely impact our information
technology systems or may allow tenants at the buildings we own or manage to
terminate leases if such failures persist.
WHAT WILL IT COST TO IMPLEMENT THE YEAR 2000 PLANS?
We estimate that we will incur approximately $150,000 in our Year 2000
compliance efforts, of which we have spent approximately $12,000 to date. The
majority of this amount will be spent on replacing hardware and software and on
testing. We have not had to defer any of our information technology plans as a
result of our Year 2000 preparations. However, these estimates are based on our
current assessment and are subject to change. We will continue to assess our
Year 2000 Issue compliance efforts and as a result, we may need to revise our
budget to implement new measures in the future.
CONTINGENCY PLAN
We are currently developing a Year 2000 Contingency Plan. The results of
current and future testing and responses of vendors, manufacturers and service
providers will be taken into account in developing this plan.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document may constitute
"forward-looking statements" within the meaning of the federal securities laws.
Forward-looking statements are statements containing a projection of revenues,
income (loss), earnings (loss), capital expenditures, dividends, capital
structure or other financial terms or our plans and objectives for future
operations.
The Forward-looking statements in this document are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
20
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are:
- General volatility of the capital markets and the market price of our
common shares;
- Changes in the real estate market, interest rates or the general economy
of the markets in which we operate;
- Our ability to identify and complete acquisitions and successfully
integrate businesses we acquire;
- Our ability to employ and retain qualified employees;
- Our ability, and the ability of our significant vendors, suppliers and
customers, to achieve Year 2000 compliance;
- Changes in government regulations that are applicable to our regulated
brokerage and property management businesses;
- Changes in the demand for our services; and
- Degree and nature of our competition.
When used in our documents or oral presentations, the words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal," or similar words are intended to identify forward-looking
statements. We qualify any and all such forward-looking statements entirely by
these cautionary factors.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below represents contractual balances of our financial instruments
at the expected maturity dates as well as the fair value at December 31, 1998.
The expected maturity categories take into consideration actual amortization of
principal and does not take into consideration reinvestment of cash. The
weighted average interest rate for the various assets and liabilities presented
are actual as of December 31, 1998. (See Consolidated Financial Statements--Note
2, Fair Value of Financial Instruments).
PRINCIPAL MATURING IN:
-----------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
------------ ------------ ------------ ----------- --------- ----------- -------------
Interest rate
sensitive assets:
Cash and cash
equivalents....... $ 9,838,000 $ 9,838,000
Average interest
rate............ 4.00% 4.00%
------------ ------------ ------------ ----------- --------- ----------- -------------
$ 9,838,000 $ 9,838,000
------------ ------------ ------------ ----------- --------- ----------- -------------
------------ ------------ ------------ ----------- --------- ----------- -------------
Weighted average
interest rate....... 4.00% 4.00%
------------ ------------ ------------ ----------- --------- ----------- -------------
------------ ------------ ------------ ----------- --------- ----------- -------------
Interest rate
sensitive
liabilities:
Variable rate
borrowings........ $ 23,596,000 $ 408,000 $ 99,412,000 $ 1,114,000 $ 83,000 $ 7,283,000 $ 131,896,000
Average interest
rate............ 8.91% 9.16% 9.66% 10.16% 10.66% 10.66% 9.58%
Fixed rate
borrowings........ 16,789,000 14,000,000 1,250,000 32,039,000
Average interest
rate............ 14.40% 14.65% 16.15% 14.58%
------------ ------------ ------------ ----------- --------- ----------- -------------
$ 40,385,000 $ 14,408,000 $ 99,412,000 $ 1,114,000 $ 83,000 $ 8,533,000 $ 163,935,000
------------ ------------ ------------ ----------- --------- ----------- -------------
------------ ------------ ------------ ----------- --------- ----------- -------------
Weighted average
interest rate 11.19% 14.49% 9.66% 10.16% 10.66% 11.46% 10.56%
------------ ------------ ------------ ----------- --------- ----------- -------------
------------ ------------ ------------ ----------- --------- ----------- -------------
FAIR VALUE
DECEMBER 31, 1998
------------------
Interest rate
sensitive assets:
Cash and cash
equivalents....... $ 9,838,000
Average interest
rate............
------------------
$ 9,838,000
------------------
------------------
Weighted average
interest rate.......
------------------
------------------
Interest rate
sensitive
liabilities:
Variable rate
borrowings........ $ 131,896,000
Average interest
rate............
Fixed rate
borrowings........ 32,039,000
Average interest
rate............
------------------
$ 163,935,000
------------------
------------------
Weighted average
interest rate
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENNEDY-WILSON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report............................................................................... 25
Consolidated Balance Sheets as of December 31, 1998, and 1997.............................................. 26
Consolidated Statements of Income for the Three Years Ended December 31, 1998.............................. 27
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1998................ 28
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998.......................... 29
Notes to Consolidated Financial Statements................................................................. 30
Schedule III--Real Estate and Accumulated Depreciation..................................................... S-1
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kennedy-Wilson, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Kennedy-Wilson,
Inc. and subsidiaries (the "Company"), as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and financial statement schedule are the
responsibilty of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted out 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 financial statements present fairly, in all material
respects, the financial position of Kennedy-Wilson, Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 26, 1999
24
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
ASSETS
Cash and cash equivalents $ 10,448,000 $ 9,838,000
Cash--restricted (Note 2) 174,000 8,168,000
Accounts receivable 1,018,000 6,674,000
Notes receivable (Notes 3 and 8) 9,546,000 23,115,000
Real estate held for sale (Notes 4 and 9) 18,628,000 122,407,000
Investments with related parties and non-affiliates (Notes 5 and 11) 4,899,000 9,209,000
Contracts, furniture, fixtures and equipment and other assets (Note 6) 1,005,000 9,238,000
Goodwill, net (Note 2) 16,167,000
-------------- --------------
TOTAL ASSETS $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 666,000 $ 1,752,000
Accrued expenses and other liabilities 4,553,000 15,721,000
Deferred taxes (Note 12) 628,000
Notes payable (Note 8) 4,764,000 14,291,000
Borrowings under lines of credit (Note 7) 9,039,000 13,514,000
Mortgage loans payable (Note 9) 15,102,000 115,130,000
-------------- --------------
Total liabilities 34,124,000 161,036,000
-------------- --------------
Subordinated debt (Note 10) 21,000,000
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock, $.01 par value; shares authorized: 2,000,000, none issued
Common stock $.01 par value; shares authorized: 10,000,000 in 1998 and
5,000,000 in 1997; shares issued: 6,597,075 in 1998 and 5,923,548 in 1997 59,000 66,000
Additional paid-in capital 23,768,000 28,888,000
Accumulated deficit (10,913,000) (5,970,000)
Notes receivable from stockholders (1,320,000) (204,000)
-------------- --------------
Total stockholders' equity 11,594,000 22,780,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
See notes to consolidated financial statements.
25
KENNEDY-WILSON, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
REVENUES
Property management and leasing fees (Note 18) $ 14,194,000
Commissions $ 4,821,000 $ 5,001,000 3,716,000
Commissions--related parties (Note 11) 1,052,000 894,000 1,201,000
Sales of residential real estate 19,743,000 6,753,000 13,828,000
Equity in income of investments with related parties and
non-affiliates (Note 5) 178,000 1,431,000 612,000
Gain on sale of joint venture 4,077,000
Gain on sale of commercial real estate 1,454,000 6,339,000 2,654,000
Rental income, net 1,467,000 1,629,000 4,583,000
Gain on restructured notes receivable (Notes 2 and 3) 3,057,000 4,036,000 3,911,000
Other income 195,000 916,000 2,096,000
------------- ------------- -------------
Total Revenues 31,967,000 26,999,000 50,872,000
------------- ------------- -------------
OPERATING EXPENSES
Commissions and marketing expenses 1,560,000 928,000 532,000
Cost of residential real estate sold 16,523,000 5,592,000 12,249,000
Cost of residential real estate sold--related parties 209,000
Compensation and related expenses 4,726,000 7,658,000 14,582,000
General and administrative 3,126,000 4,661,000 6,890,000
Depreciation and amortization 268,000 790,000 2,059,000
Interest expense 1,964,000 3,139,000 8,398,000
------------- ------------- -------------
Total Operating Expenses 28,376,000 22,768,000 44,710,000
------------- ------------- -------------
Income Before Provision for Income Taxes and Extraordinary Items 3,591,000 4,231,000 6,162,000
Provision for Income Taxes (Note 12) 60,000 280,000 837,000
------------- ------------- -------------
Income Before Extraordinary Items 3,531,000 3,951,000 5,325,000
Extraordinary Items (Note 17) 79,000
------------- ------------- -------------
NET INCOME $ 3,531,000 $ 4,030,000 $ 5,325,000
------------- ------------- -------------
------------- ------------- -------------
SHARE DATA
Basic net income before extraordinary items per share $ 0.50 $ 0.65 $ 0.85
Basic extraordinary items per share N/A $ 0.01 N/A
Basic net income per share $ 0.50 $ 0.66 $ 0.85
Basic weighted average shares 7,086,848 6,104,497 6,254,470
Diluted net income before extraordinary items per share $ 0.50 $ 0.64 $ 0.78
Diluted extraordinary items per share N/A $ 0.01 N/A
Diluted net income per share $ 0.50 $ 0.65 $ 0.78
Diluted weighted average shares 7,093,958 6,187,280 6,801,356
See notes to consolidated financial statements.
26
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES
COMMON STOCK RECEIVABLE
--------------------- ADDITIONAL ACCUMULATED FROM
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT STOCKHOLDERS TOTAL
---------- --------- -------------- -------------- -------------- --------------
Balance, January 1, 1996 7,563,236 $ 75,000 $ 22,669,000 $ (14,799,000) $ 7,945,000
Repurchase of common stock (891,000) (9,000) (1,085,000) (1,094,000)
Net income 3,531,000 3,531,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1996 6,672,236 66,000 21,584,000 (11,268,000) 10,382,000
Repurchase of common stock (748,688) (7,000) (1,491,000) (1,498,000)
Stock dividend 3,675,000 (3,675,000)
Notes receivable from
stockholders (Note 16) $ (1,320,000) (1,320,000)
Net income 4,030,000 4,030,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1997 5,923,548 59,000 23,768,000 (10,913,000) (1,320,000) 11,594,000
Issuance of common stock 808,878 8,000 5,645,000 5,653,000
Repurchase of common stock (135,351) (1,000) (907,000) (908,000)
Stock dividends 382,000 (382,000)
Repayment on notes receivable
from stockholders (Note 16) 1,116,000 1,116,000
Net income 5,325,000 5,325,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1998 6,597,075 $ 66,000 $ 28,888,000 $ (5,970,000) $ (204,000) $ 22,780,000
---------- --------- -------------- -------------- -------------- --------------
---------- --------- -------------- -------------- -------------- --------------
See notes to consolidated financial statements.
27
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
--------------------------------------
1996 1997 1998
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,531,000 $ 4,030,000 $ 5,325,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 268,000 790,000 2,059,000
Equity in income of investments with related parties and
non-affiliates (178,000) (1,431,000) (612,000)
Gain on sale of joint venture (4,077,000)
Gains on sales of real estate (1,454,000) (7,500,000) (4,233,000)
Gains on restructured notes receivable -- non-cash (537,000) (689,000) (627,000)
Deferred taxes 628,000
Extraordinary items, net (79,000)
Change in assets and liabilities:
Accounts receivable 751,000 (24,000) (5,656,000)
Other assets (720,000) (184,000) (1,403,000)
Accounts payable (191,000) (227,000) 1,086,000
Accrued expenses and other liabilities (937,000) 2,343,000 11,168,000
----------- ----------- ------------
Net Cash Provided By (Used In) Operating Activities 533,000 (2,971,000) 3,658,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (197,000) (178,000) (7,280,000)
Dispositions of contracts, furniture, fixtures and equipment 559,000 18,000
Purchase and additions to real estate held for sale (21,341,000) (18,841,000) (122,671,000)
Proceeds from sales of real estate held for sale 25,914,000 36,304,000 21,743,000
Proceeds from sale of joint venture 5,348,000
Additions to notes receivable (13,015,000) (26,235,000)
Payments from notes receivable 4,930,000 13,293,000
Additions to goodwill (16,412,000)
Stockholders (loans to) repayments from (1,320,000) 1,116,000
Distributions from joint ventures 20,000 2,775,000 2,271,000
Contributions to joint ventures (3,607,000) (2,153,000) (7,240,000)
----------- ----------- ------------
Net Cash (Used In) Provided By Investing Activities (11,667,000) 21,517,000 (136,049,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 26,577,000 14,320,000 114,679,000
Repayment of mortgage loans payable (30,510,000) (19,734,000) (14,651,000)
Borrowings under lines of credit 15,345,000 14,063,000 40,348,000
Repayment of lines of credit (7,453,000) (13,941,000) (35,873,000)
Borrowings under notes payable 10,128,000 3,737,000 19,740,000
Repayment of notes payable (1,933,000) (7,168,000) (10,213,000)
Issuance of subordinated debt 21,000,000
Cash -- restricted (increase) decrease (217,000) 222,000 (7,994,000)
Common stock (repurchase) issuance (1,094,000) (1,498,000) 4,745,000
----------- ----------- ------------
Net Cash Provided By (Used In) Financing Activities 10,843,000 (9,999,000) 131,781,000
----------- ----------- ------------
Net (decrease) increase in cash (291,000) 8,547,000 (610,000)
CASH, BEGINNING OF YEAR 2,192,000 1,901,000 10,448,000
----------- ----------- ------------
CASH, END OF YEAR $ 1,901,000 $10,448,000 $ 9,838,000
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 2,113,000 $ 2,930,000 $ 7,754,000
Interest capitalized $ 57,000 $ 340,000 $ 640,000
Income taxes $ 34,000 $ 246,000 $ 633,000
See notes to consolidated financial statements.
28
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 1--ORGANIZATION
Kennedy-Wilson, Inc., a Delaware corporation, incorporated in 1992, and its
wholly owned subsidiaries (the "Company") provide real estate property
management, brokerage and marketing services throughout the U.S., and in Japan,
primarily to institutional investors, financial institutions, developers and
government agencies. The Company also acquires, renovates and resells commercial
and residential real estate; invests in non-performing note receivable
portfolios; and invests in various real estate joint ventures. In July 1998, the
Company acquired from Heitman Financial Ltd., a wholly owned subsidiary of
United Asset Management Corporation, all of the outstanding shares of Heitman
Properties, Ltd., a property management company for approximately $21 million.
The Company used the purchase method of accounting to record the transaction.
Accordingly, the results of operations of Heitman Properties, Ltd. (renamed
Kennedy-Wilson Properties, Ltd.) are included in the consolidated financial
statements from the date of acquisition (see Note 19).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and joint ventures in
which the Company has a controlling interest. For foreign operations, assets and
liabilities are translated at year-end exchange rates, and income statement
items are translated at average exchange rates prevailing during the year. All
significant inter-company transactions have been eliminated.
REVENUE RECOGNITION--Property management fees are recognized over time as earned
based upon the terms of the management agreement. Brokerage commissions are
generally recognized when all services to be provided by the Company have been
performed and title to real property has passed from the seller to the buyer.
Residential real estate sales revenue and gains on sale of commercial property
are recognized at the close of escrow when title to the real property passes to
the buyer. The Company follows the guidelines for profit recognition as set
forth by Statement of Financial Accounting Standards (SFAS) NO. 66 ACCOUNTING
FOR SALES OF REAL ESTATE. Gains on notes receivable are recognized ratably upon
constructive receipt of cash or a restructured note including a significant cash
component.
INVESTMENTS IN AFFILIATES AND JOINT VENTURES--The Company accounts for
investments in affiliates and joint ventures with a non-controlling interest of
50% or less using the equity method.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
GOODWILL--The Company's purchase of Heitman Properties, Ltd., a property
management company in July 1998 resulted in goodwill totaling approximately
$16.0 million. Goodwill results from the difference between the purchase price
and the fair value of assets acquired based upon the Purchase Method of
accounting for business combinations under ACCOUNTING PRINCIPALS BOARD OPINION
NUMBER 16. The allocated amount, as determined by Company management, is being
amortized over 30 years using the straight-line method. Goodwill is reviewed for
impairment on a regular basis by Company management by comparison to future
expected undiscounted cash flows. Amortization of goodwill for the year ended
1998 totaled $244,000.
29
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
CASH AND CASH EQUIVALENTS--Cash consists of cash and all highly liquid
investments purchased with maturities of three months or less and refundable
deposits in escrow.
RESTRICTED CASH--Restricted cash consists of cash reserves for capital
expenditures, tenant improvements, property taxes and insurance, as required by
the Company's mortgage lenders.
LONG LIVED ASSETS--During 1996, the Company adopted SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Among other provisions, the statement changed current accounting practices for
the evaluation of impairment of long-lived assets. The adoption did not have a
material effect on the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company reports the fair value of
financial instruments in accordance with SFAS 107, Disclosures about Fair Value
of Financial Instruments. The estimated fair value of the Company's financial
instruments is determined using available market information and appropriate
valuation methodologies. Considerable judgment, however, is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions or estimation methodologies
may have a material impact on the estimated fair value amounts.
Cash, accounts receivable and accounts payable are carried at their book values
as the recorded amount of these instruments approximates fair market value due
to their short term maturities. Notes receivable approximate market value as
they are negotiated based upon market values of loans with similar
characteristics. Bank lines of credit, and short and long term debt approximate
fair market value as the interest rates are comparable to the rates currently
being offered to the Company.
CONCENTRATION OF CREDIT RISK--Financial instruments that subject the Company to
credit risk consist primarily of accounts and notes receivable and cash and cash
equivalents. Credit risk is generally diversified due to the large number of
entities composing the Company's customer base and their geographic dispersion
throughout the U.S. and in Japan. The Company performs ongoing credit
evaluations of its customers and debtors. Cash and cash equivalents are invested
in institutions insured by government agencies. Certain accounts contain
balances in excess of the insured limits.
INFLATION--The Company's long-term leases contain provisions designed to
mitigate the adverse impact of inflation on its results from operations. Such
provisions include escalation clauses, which generally increase rental rates
during the terms of the respective agreements. Such escalation clauses are often
related to increases in the CPI or similar inflation indices. In addition, many
of the Company's leases and management agreements are for terms of less than ten
years, which permits the Company to seek to increase rents and fees at market
rates if they are below then existing market rates. Many of the Company's leases
require the tenants to pay a pro rata share of operating expenses, including
common area maintenance, real estate taxes, insurance and utilities, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation.
EARNINGS PER SHARE--In accordance with SFAS No. 128, EARNINGS PER SHARE, basic
income per share for any period is computed by dividing net income by the
weighted average number of shares of common stock outstanding during such
period. Diluted net income per share for any period is computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during such period.
30
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The basic weighted average number of shares used to compute net income per share
(adjusted for the 20% stock dividend in 1997 and the 200% and 50% stock
dividends in 1998) was 6,254,470, 6,104,497, and 7,086,848 for the years ended
December 31, 1998, 1997 and 1996, respectively. The diluted weighted average
number of shares used to compute net income per share were 6,801,356, 6,187,280
and 7,093,958 for the years ended December 31, 1998, 1997 and 1996,
respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS--SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INVESTMENTS AND HEDGING ACTIVITIES was issued June 1998, applicable for all
fiscal years beginning after June 15, 1999. At this time, management has not
completed their analysis of this pronouncement's impact on the Company's
financial statements.
RECLASSIFICATION--Certain reclassifications have been made to the 1997 and 1996
balances to conform with the 1998 presentation.
NOTE 3--NOTES RECEIVABLE
Notes receivable consists primarily of non-performing notes and related assets
acquired from financial institutions. A majority of these notes are typically
collateralized by real estate, personal property or guarantees.
31
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 4--REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial, residential properties and
land stated at cost plus additional capital improvements less accumulated
depreciation and amortization of $1,026,000 and $119,000 at December 31, 1998
and 1997 respectively.
Real estate held for sale includes the following:
DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
COMMERCIAL PROPERTIES AND LAND:
1055 Wilshire Blvd., Los Angeles, California--281,649 Sq. Ft. office building $ 24,937,000
6380 Wilshire Blvd., Los Angeles, California--132,730 Sq. Ft. office building 16,223,000
5900 Sepulveda Blvd., Van Nuys, California--74,428 Sq. Ft. office building 6,771,000
7080 Hollywood Blvd., Los Angeles, California--161,140 Sq. Ft. office building 19,821,000
6255 Sunset Blvd., Los Angeles, California--306,025 Sq. Ft. office building 29,166,000
Zeller, Long Beach, California--1 residential and 2 commercial buildings 41,000
802 Huntington Dr., Monrovia, California--20,876 Sq. Ft. automotive center 1,399,000
1304 15th St., Santa Monica, California--37,000 Sq. Ft. office building $ 3,089,000
Santa Monica, California, lots 4 in 1998, 3 in 1997 1,800,000 2,402,000
4350 11th Ave., Los Angeles, California--9,000 Sq. Ft. office building 438,000 336,000
301 S. Fair Oaks Dr., Pasadena, California--51,710 Sq. Ft. office building 8,808,000 8,886,000
------------- --------------
14,135,000 109,982,000
------------- --------------
RESIDENTIAL PROPERTIES AND LAND:
Vista Paseo Heights, Palm Desert, California--23 housing lots 2,902,000
Cathedral City, California,--112 housing lots 2,386,000
Vulcan Mtn., San Diego, California--155 acres of land 283,000
Riverside, California--3.78 acres of land 87,000
Koala, Hawaii--3,000 acres of land 4,611,000
Pacific Palisades, California--3 residential homes in 1998; 1 in 1997 608,000 2,156,000
Riverside, California--31 housing lots 293,000
Los Angeles, CA--residential home 237,000
Villa Del Este, Corona Del Mar, California--14 condominium units 112,000
Vista Del Valle, Granada Hills, California, 10 housing lots 2,810,000
Juneau, Alaska--9 housing lots 433,000
------------- --------------
4,493,000 12,425,000
------------- --------------
$ 18,628,000 $ 122,407,000
------------- --------------
------------- --------------
32
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 5--INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of partnerships and joint venture interests ranging
from 6% to 50%, some with former related parties, that were formed to acquire,
manage, develop and or sell real estate assets. These investments are accounted
for under the equity method. Summarized financial data of the ventures are as
follows:
DECEMBER 31, 1996
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 463,000 $ 15,000 $ 478,000
Receivables 32,000 44,000 76,000
Real estate 31,018,000 5,829,000 36,847,000
------------- ------------- -------------
Total assets $ 31,513,000 $ 5,888,000 $ 37,401,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Accounts payable and accrued expense $ 173,000 $ 38,000 $ 211,000
Mortgages payable 18,354,000 4,480,000 22,834,000
------------- ------------- -------------
Total liabilities 18,527,000 4,518,000 23,045,000
------------- ------------- -------------
PARTNERS' CAPITAL
Kennedy-Wilson 3,118,000 685,000 3,803,000
Related parties 9,868,000 9,868,000
Other partners 685,000 685,000
------------- ------------- -------------
Total partners' capital 12,986,000 1,370,000 14,356,000
------------- ------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 31,513,000 $ 5,888,000 $ 37,401,000
------------- ------------- -------------
------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ ------------- ------------
STATEMENT OF INCOME
Revenues $2,195,000 $ 390,000 $ 2,585,000
Expenses 1,690,000 258,000 1,948,000
------------ ------------- ------------
Net income $ 505,000 $ 132,000 $ 637,000
------------ ------------- ------------
------------ ------------- ------------
Net income allocated to:
Kennedy-Wilson $ 112,000 $ 66,000 $ 178,000
Related parties 393,000 66,000 459,000
Other partners
------------ ------------- ------------
Net income $ 505,000 $ 132,000 $ 637,000
------------ ------------- ------------
------------ ------------- ------------
33
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 3,319,000 $ 1,159,000 $ 4,478,000
Receivables 1,816,000 455,000 2,271,000
Real estate 52,050,000 972,000 53,022,000
------------- ------------- -------------
Total assets $ 57,185,000 $ 2,586,000 $ 59,771,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Accounts payable and accrued expense $ 2,248,000 $ 524,000 $ 2,772,000
Mortgages payable 43,836,000 43,836,000
------------- ------------- -------------
Total liabilities 46,084,000 524,000 46,608,000
------------- ------------- -------------
PARTNERS' CAPITAL
Kennedy-Wilson 3,509,000 1,390,000 4,899,000
Related parties 7,592,000 7,592,000
Other partners 672,000 672,000
------------- ------------- -------------
Total partners' capital 11,101,000 2,062,000 13,163,000
------------- ------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 57,185,000 $ 2,586,000 $ 59,771,000
------------- ------------- -------------
------------- ------------- -------------
34
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
STATEMENT OF INCOME
Revenues $ 12,913,000 $ 9,284,000 $ 22,197,000
Expenses 12,238,000 7,393,000 19,631,000
------------- ------------- -------------
Net income $ 675,000 $ 1,891,000 $ 2,566,000
------------- ------------- -------------
------------- ------------- -------------
Net income allocated to:
Kennedy-Wilson $ 115,000 $ 1,316,000 $ 1,431,000
Related partners 560,000 560,000
Other partners 575,000 575,000
------------- ------------- -------------
Net income $ 675,000 $ 1,891,000 $ 2,566,000
------------- ------------- -------------
------------- ------------- -------------
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 10,588,000
Receivables 3,278,000
Real estate 109,507,000
-----------------
Total assets $ 123,373,000
-----------------
-----------------
LIABILITIES
Accounts payable and accrued expense $ 7,626,000
Mortgages payable 73,342,000
-----------------
Total liabilities 80,968,000
-----------------
PARTNERS' CAPITAL
Kennedy-Wilson 9,209,000
Other partners 33,196,000
-----------------
Total partners' capital 42,405,000
-----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 123,373,000
-----------------
-----------------
35
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
YEAR ENDED
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
STATEMENT OF INCOME:
Revenues $ 49,049,000
Expenses 45,070,000
-----------------
Net Income $ 3,979,000
-----------------
-----------------
Net income allocated to:
Kennedy-Wilson $ 612,000
Other partners 3,367,000
-----------------
Net Income $ 3,979,000
-----------------
-----------------
In November 1998, the Company sold its 25% interest in the joint venture known
as Downtown Properties LLC for approximately $5.5 million. The company
recognized a gain on sale of approximately $4.1 million.
The agreement for one of the investments with non-affiliates, known as Hilltop
Colony LLC, was amended in 1997, resulting in approximately $335,000 of
additional net income allocated to the Company in 1997.
NOTE 6--CONTRACTS, FURNITURE, FIXTURES AND EQUIPMENT AND OTHER ASSETS
In July 1998, the Company allocated approximately $7.3 million to the property
management contracts acquired as part of the acquisition of Heitman Properties,
Ltd. The Company is amortizing these contracts over a 7 year period. In 1998,
the Company recorded $545,000 in amortization expense for these contracts.
Contracts, furniture fixtures, equipment and other assets consist of the
following:
DECEMBER 31,
--------------------
1997 1998
--------- ---------
Contracts $7,262,000
Office furniture and equipment $ 192,000 851,000
Leasehold improvements 20,000
Equipment under capital leases 44,000 6,000
--------- ---------
256,000 8,119,000
Less accumulated depreciation and amortization (100,000) (706,000)
--------- ---------
156,000 7,413,000
Prepaid insurance, taxes and commissions 337,000 671,000
Loan fees 225,000 130,000
Deposits and prepaid rents 120,000 386,000
Investments in marketable securities 250,000
Other 167,000 388,000
--------- ---------
$1,005,000 $9,238,000
--------- ---------
--------- ---------
36
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 7--BORROWINGS UNDER LINES OF CREDIT
In 1998, the Company entered into a loan agreement that provides the Company
with a $21 million revolving credit facility (the "facility"). The facility is
available for acquisitions and working capital. The loans under the facility
bear interest at three month LIBOR plus 2%, payable monthly. At December 31,
1998, LIBOR was approximately 5.1%. The facility expires in June 2000. The
principal amount of outstanding loans was $13,057,000 at December 31, 1998 and
$8,952,000 at December 31, 1997.
The Company's Japanese subsidiary has unsecured yen denominated lines of credit
pursuant to which it can borrow up to $1.0 million. At December 31, 1998, yen
borrowings in the principal amount of $457,000 were outstanding under these
lines of credit and $87,000 at December 31, 1997. These borrowings bear interest
rates from 1.9% to 2.6% per annum.
NOTE 8--NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable (see Note 3), and include the following:
DECEMBER 31,
---------------------
1997 1998
--------- ----------
Note payable to FBR Asset Investment Corporation, fixed interest
rate of 17% per annum, 13% payable monthly, 4% payable at
maturity, due in full at the earlier of (i) the closing of a
public offering or (ii) June 3, 1999, whichever comes first $7,500,000
Note payable, fixed interest rate of 12%, interest payable monthly,
due July 1, 1999, collateralized by a note receivable 2,289,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 9.25% at December 31, 1998, due April 30, 1999 502,000
Note payable, variable interest based on Prime Rate plus 4%, 11.75%
at December 31, 1998, collateralized by a 3,000-acre parcel of
land in Hawaii due April 30, 1999 4,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due June 1998 $1,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due May 1998 3,764,000
--------- ----------
$4,764,000 $14,291,000
--------- ----------
--------- ----------
37
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 9--MORTGAGE LOANS PAYABLE
Mortgage Loans Payable include the following:
DECEMBER 31,
-------------------------
1997 1998
------------ -----------
COMMERCIAL PROPERTIES:
Mortgage note payable, variable interest based on the LIBOR plus
1.75%, 7.50% at December 31, 1998, principal and interest
payable monthly, due December 1, 2004, collateralized by 301
S. Fair Oaks., Pasadena, California $ 7,300,000 $ 7,613,000
Mortgage note payable, fixed interest of 10%, principal and
interest payable from excess cash flow as defined, due
November 24, 2007, collateralized by 301 S. Fair Oaks.,
Pasadena, California 1,250,000 1,250,000
Mortgage note payable, variable interest based on LIBOR plus
3.5%, 8.75% at December 31, 1998, principal and interest
payable monthly, due March 31, 2001, collateralized by 6380
Wilshire., Los Angeles, California 13,263,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
March 31, 2001, secured by common shares of the single purpose
entity holding title to 6380 Wilshire., Los Angeles,
California 2,561,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, principal and interest
payable monthly, due January 30, 2001, collateralized by 5900
Sepulveda., Los Angeles, California 4,951,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
January 23, 2001, secured by common shares of the single
purpose entity holding title to 5900 Sepulveda., Los Angeles,
California 1,610,000
Mortgage note payable, variable interest based on LIBOR plus
4.88%, 10.44% at December 31, 1998, principal and interest
payable monthly, due February 28, 2001, collateralized by 1055
Wilshire, Los Angeles, California 10,894,000
Mortgage note payable, variable interest based on LIBOR plus
2.5%, 8.10% at December 31, 1998, interest payable monthly,
due February 28, 2001, collateralized by 1055 Wilshire, Los
Angeles, California 7,948,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due February 28, 2001, secured by common shares of
the single purpose entity holding title to 1055 Wilshire., Los
Angeles, California 4,688,000
38
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Mortgage note payable, variable interest base on the monthly
weighted average interest rate for the Eleventh District
Savings and Loan Associations plus 2.5%, 10% at December 31,
1998, principal and interest payable monthly, due May 1, 2002,
collateralized by an automotive center in Monrovia, California 1,096,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
6255 Sunset, Los Angeles, California 28,500,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due September 15, 2001, secured by common shares of
the single purpose entity holding title to 6255 Sunset., Los
Angeles, California 5,300,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
7080 Hollywood, Los Angeles, California 16,800,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due August 30, 2001, secured by common shares of a
single purpose entity holding title to 7080 Hollywood., Los
Angeles, California 3,359,000
Mortgage note payable, variable interest based on LIBOR, 8.32%
at December 31, 1997, principal and interest payable monthly,
due September 1, 2003, collateralized by 1304 15th Street.,
Santa Monica, California 2,952,000
Mortgage note payable, variable interest based on Prime Rate
plus 1%, 9.50% at December 31, 1998, principal and interest
payable monthly, due September 1, 2003, collateralized by 15th
Street lot., Santa Monica, California 885,000
------------ -----------
12,387,000 109,833,000
------------ -----------
39
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
RESIDENTIAL PROPERTIES:
Mortgage note payable, variable interest base on Prime Rate plus
1.25%, 9% at December 31, 1998, principal and interest payable
monthly, due March 1, 1999, collateralized by 23 housing lots
in Palm Desert, California 2,191,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, interest payable monthly,
due March 19, 1999, collateralized by three single family
homes located in Pacific Palisades, California 1,628,000
Mortgage note payable, variable interest base on Prime Rate plus
1%, 8.75% at December 31, 1998, interest payable monthly, due
November, 20 1999, collateralized by 112 housing lots in
Cathedral City, California 1,478,000
Mortgage note payable, variable interest base on Prime Rate plus
4%, 9.25% at December 31, 1997, principal and interest payable
monthly, due October 31, 1999, collateralized by 10
residential homes, Granada Hills, California 2,294,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, interest payable monthly, due November, 20 1999,
collateralized by 14 condominium units, Corona Del Mar,
California 421,000
------------ -----------
2,715,000 5,297,000
------------ -----------
Total Mortgage Loans Payable $ 15,102,000 $115,130,000
------------ -----------
------------ -----------
All of the mortgage loans payable are secured by deeds of trust on the
respective real estate properties (see Note 4). Aggregate maturities of notes
and mortgage notes payable are as follows:
1999 $ 5,582,000
2000 408,000
2001 99,412,000
2002 1,114,000
2003 83,000
Thereafter 8,531,000
-----------
$115,130,000
-----------
-----------
40
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 10--SUBORDINATED DEBT
In July 1998, the Company incurred $21 million in subordinated debt to finance
its purchase of Heitman Properties, Ltd. The debt has a fixed interest rate of
14%, payable monthly and a maturity date of January 15, 2000. The Company has
the option to prepay $7 million after January 15, 1999 and before July 16, 1999
and the option to prepay $14 million thereafter. The debt is secured by the
common stock of a wholly-owned subsidiary Kennedy-Wilson Properties, Ltd.
NOTE 11--RELATED PARTY TRANSACTIONS
On November 5, 1998, Goodwin Gaw resigned from his position as a member of our
Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares (as adjusted for the December 15, 1998 50% stock dividend) of our common
stock for $6.716 per share for a total of $906,750. The closing price for our
shares on the NASDAQ National Market on that date was $7.281 per share. All
135,000 shares were subsequently retired. As at December 31, 1998 Mr. Gaw no
longer had an ownership interest in the Company, and had resigned from his
positions with the Company.
In March 1998, the Company acquired 40% interest in a joint venture Beverly
Crescent, LLC, with a former related party. The joint venture which purchased a
note collateralized by a hotel in Beverly Hills, CA. The Company's original
investment was approximately $300,000. In May 1998, the Company sold its
interest in the joint venture and recorded a gain of approximately $298,000.
In January 1998, the Company acquired a 15% interest in a joint venture Downtown
Properties, NY. LLC, with a former related party, which owns a commercial
property with approximately 1.0 million square foot of rental space, located in
Manhattan, New York. The Company's investment at December 31, 1998 was
approximately $4.2 million.
In 1998, the firm of Kulik, Gottesman & Mouton Ltd., was paid a total of
$496,000 in attorney fees. In addition, Kent Mouton, a partner in the firm and a
member of the Company's Board of Directors, was paid a total of $27,500 in
director's fees. For 1997, the amounts were $470,000 and $21,000, respectively.
In 1997, the Company entered into a joint venture with parties who are
affiliated with Goodwin Gaw, who at that time, was one of the Company's Managing
Directors, a member of the Board of Directors, and a significant stockholder.
The joint venture was formed to invest in a Los Angeles office building. See
Note 5.
During 1998 and 1997, the Company received brokerage and leasing commissions
from affiliates and partnerships with related parties in the amounts of
$1,201,000 and $894,000 respectively.
During 1998 and 1997, the Company received $179,000 and $156,000, respectively,
in commissions from the sale of properties owned by a partnership which includes
William J. McMorrow, the Company's Chief Executive Officer and Chairman of the
Board, and Lewis A. Halpert, a director, Executive Managing Director and
President of the Company's Brokerage Group, as principals. The Company was also
reimbursed $210,000 for marketing expenses in 1997.
In 1996, the Company accrued and subsequently paid $209,000 as profit
participation to William J. McMorrow and Lewis A. Halpert for a loan advanced to
the Company in 1995. The loan terms were reviewed and approved by disnterested
members of the Company's Board of Directors.
41
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 12--INCOME TAXES
The provisions for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Current
Federal $ 80,000 $ 104,000
State $ 60,000 200,000 105,000
--------- --------- ---------
60,000 280,000 209,000
Deferred 628,000
--------- --------- ---------
Total $ 60,000 $ 280,000 $ 837,000
--------- --------- ---------
--------- --------- ---------
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Tax computed at statutory rate $1,200,000 $1,472,000 $2,156,000
State income net of federal benefit 40,000 132,000 145,000
Loss on disposition of foreign subsidiary (1,189,000)
Foreign income 153,000 (119,000)
Usage of net operating loss carryforward (1,490,000) (1,361,000)
Other 9,000 13,000 16,000
--------- --------- ---------
Provision for income taxes $ 60,000 $ 280,000 $ 837,000
--------- --------- ---------
--------- --------- ---------
42
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following summarizes the effect of deferred income tax items and the impact
of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------- ----------- ------------- -------------
Prepaid expenses $ (117,000) $ (208,000)
Accrued reserves $ 110,000 $ 267,000
Deferred auction marketing expenses 22,000 51,000
Foreign subsidiary 1,647,000
Deferred gain on sale of asset (791,000)
Asset basis and depreciation differences 372,000 (3,454,000)
Charitable contribution carryover 26,000
Federal net operating loss carryover 1,719,000 74,000
Valuation allowance (1,341,000)
------------- ----------- ------------- -------------
Total $ 908,000 $ (908,000) $ 2,039,000 $ (3,662,000)
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
As of December 31, 1998, the Company has available a net operating loss
carryforward approximately $219,000 to offset future federal taxable income.
This carryforward expires through the year 2011. The Company has tax credits to
carryforward of approximately $173,000 to offset future federal income taxes.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--Future minimum rental commitments, net of sublease income, as
of December 31, 1998 under the non-cancelable operating leases are as follows:
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
1999 $ 1,865,000
2000 1,748,000
2001 1,687,000
2002 933,000
2003 612,000
Thereafter
------------
Future minimum lease payments $ 6,845,000
------------
------------
Approximately $2,627,000 is due the Company in years 1999 through 2002 under
sublease agreements.
Rental expense amounted to $931,000, $433,000, and $200,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS--The Company has entered into employment agreements with
all of its principal officers which provide for annual base compensation in the
aggregate amount of $1,255,000 and expire at various dates through December
1999. The employement agreements provide for the payment of an annual bonus
based upon the achievement of certain agreed-upon earnings objectives. The
Company also has employment agreements with various other non-officer employees
which provide
43
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
for minimum annual compensation of $2,021,000 in total, and expiring at various
dates through December 1999.
LITIGATION--The Company is currently a defendant in certain routine litigation
arising in the ordinary course of business. It is management's opinion that the
outcome of these actions will not have a material effect on the financial
position or results of operations of the Company.
NOTE 14--STOCK OPTION PLANS AND WARRANTS
The Company currently has the 1992 Incentive and Non-statutory Stock Option
Plan, which includes a Plan A and a Plan B and the 1992 Non-Employee Director
Stock Option Plan ("Plan C"). An aggregate of 1,080,000 shares of common stock
are reserved for issuance under Plan A and B. The Company has 81,000 shares of
common stock reserved for issuance under Plan C. Plan A permits the granting of
Incentive Stock Options to employees, including employee-directors. Plan B
permits the granting of nonstatutory stock options to employees, including
employee-directors and consultants. Plan C permits the granting of options to
non-employee-directors. Options granted under Plan A and B have an option price
of 100% of the fair market value of the common stock on the date of grant. Under
Plan C each director, upon being elected to the Board of Directors, is
automatically granted an option to purchase 13,500 shares at the fair market
value at the date of grant. Additionally, each director is granted an option to
purchase an additional 540 shares at the fair market value on the date of grant
when re-elected. The vesting schedule for options granted under Plan A and Plan
B is determined by a committee of the Board of Directors and the Compensation
Committee of the Board of Directors is currently responsible. Options granted
under Plan C become exercisable on the first anniversary of the date of the
initial grant provided that the optionee continues to serve as a director for at
least one year from the date of such initial grant. Options granted under Plan A
may be exercised for a period of up to five years from the grant date; options
granted under Plan B may be exercised for a period of up to 10 years from the
grant date. Under Plan C, options expire on the earlier of the tenth anniversary
of the date of grant and 90 days after the individual ceases to be a director of
the Company.
44
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Details of activity under the plans for the years ended December 31, 1996, 1997
and 1998 are as follows:
OUTSTANDING EXERCISE PRICE WEIGHTED AVERAGE
STOCK OPTIONS OPTIONS PER SHARE EXERCISE PRICE
- ---------------------------------------------- ----------- -------------- -----------------
Balance January 1, 1996 163,782 $ 12.96-$0.93 $ 8.11
Granted 162,540 $ 1.55-$0.95 $ 1.23
Forfeited (28,836) $ 12.96 $ 12.96
-----------
Balance December 31, 1996 297,486 $ 12.96-$0.93 $ 3.72
Granted 558,000 $ 3.72-$2.17 $ 2.61
Forfeited (23,166) $ 12.96-$2.17 $ 12.96
-----------
Balance December 31, 1997 832,320 $ 12.96-$2.17 $ 2.72
Granted 420,900 $ 3.67-$8.33 $ 6.74
Exercised (120,450) $ 0.95-$3.73 $ 1.63
Forfeited (16,200) $ 3.01-$7.41 $ 3.74
-----------
Balance December 31, 1998 1,116,570 $ 0.95-$8.33 $ 4.11
-----------
-----------
NUMBER OF
RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISABLE
EXERCISE OUTSTANDING SHARES WEIGHTED AVERAGE REMAINING SHARES
PRICES AT 12/31/98 EXERCISE PRICE CONTRACTUAL LIFE AS OF 12/31/98
- -------------- ------------------ ----------------- ------------------- -----------------
$ 1.00- $1.07 108,000 $ 1.01 2.02 72,000
$ 1.55- $2.13 378,000 $ 1.96 3.18 117,000
$ 3.33- $3.72 295,800 $ 3.67 3.90 56,550
$ 7.00- $8.33 292,650 $ 7.81 4.65
$ 0.93-$12.96 42,120 $ 8.67 4.81 42,120
---------- -------
1,116,570 287,670
---------- -------
---------- -------
The Company has adopted the disclosure-only provision of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION" and will continue to use the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," and related interpretations. Accordingly, no
compensation cost has been recognized for the options granted under the Stock
Plan. Had compensation cost for the Company's Stock Plan been determined based
on the fair value at the grant date consistent with the provisions of SFAS No.
123, the Company's net income on a pro forma basis at December 31, 1998 would
have been $4,114,085. In addition, on a pro forma basis, the Company's basic and
diluted net income per share at December 31, 1998, would have been $0.66 and
$0.60, respectively. The effect for 1997 and 1996, was not disclosed as it was
not material.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (a) no dividend yield, (b) expected volatility of the Company's
stock of 63%, (c) risk free interest rate of 4.75%, (d) expected option life of
three years. The effects of applying SFAS No. 123 may not be representative of
the effects on disclosed pro forma net income for future years because options
vest over several years and additional awards can be made each year.
45
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 15--CAPITAL STOCK TRANSACTIONS
ISSUANCE OF CAPITAL STOCK AND WARRANTS
In July 1998, Colony Investors III, L.P. acquired a 10% equity position in the
Company. The purchase involved a private placement sale of 660,128 shares of the
Company's common stock and warrants exercisable for seven years to purchase
198,039 shares of the Company's common stock.
In June 1998, as part of the loan (see Note 8) obtained from FBR Assets
Investment Corporation, the Company issued warrants of 131,096 shares which
represent 2% of the outstanding shares on a fully diluted bases on June 3, 1998.
The warrants have an exercise price of $7.56 per share which reflects the
average of the closing price for a share of Common Stock on NASDAQ for the
twenty business days proceeding December 4, 1998. The warrants have an
expiration date of June 3, 2003.
STOCK REPURCHASE
In November 1998, the Company purchased 135,000 shares of the Company's stock
from a former officer and director. See Note 11.
STOCK DIVIDEND
In December 1998, the Company declared a 3 for 2 stock split in the form of a
50% dividend. In March 1998, the Company declared a 3 for 1 stock split in the
form of a 200% stock dividend. In October 1997, the Company declared a twenty
percent stock dividend. All historical share and per share amounts have been
retroactively restated to reflect the dividends.
INCREASE IN AUTHORIZED CAPITAL
On April 29, 1998 at a Regular Meeting of the Company's stockholders, the
Company's Certificate of Incorporation was amended to increase the authorized
capital stock to 10 million of common shares and 2 million preferred shares. On
December 15, 1997, at a Special Meeting of the Stockholders, an amendment to the
Company's Certificate of Incorporation was passed effecting an increase to the
number of authorized shares from 2,500,000 to 6,000,000, consisting of 5,000,000
shares of common stock and 1,000,000 shares of preferred stock.
NOTE 16--EMPLOYEE BENEFIT ARRANGEMENTS
EMPLOYEE PROFIT SHARING PLAN
The Company maintains a profit sharing plan covering all full time employees
over the age of 21, who have completed three months of service prior to January
1 and July 1 of each year. Contributions to the profit sharing plan are made
solely at the discretion of the Company's Board of Directors. No contributions
were made for the years ended December 31, 1998, 1997 and 1996.
In addition, the Company has a qualified profit sharing plan under provisions of
Section 401(k) of the Internal Revenue Code. Under this plan, participants are
able to make salary deferral contributions of up to 15% of their total
compensation, up to a specified maximum. The 401(k) plan also includes
provisions which authorize the Company to make discretionary contributions.
During 1998 and 1997 the Company made matching contributions of $27,000 and
$24,000, respectively to this plan.
46
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
DEFERRED COMPENSATION PLAN
In 1997, the Company established a non-qualified deferred compensation plan to
provide specified benefits to a select group of management or highly compensated
employees and directors who contribute materially to the continued growth,
development and future business success of the Company. Under this plan,
participants are able to make salary deferral contribution of up to 100% of
their total compensation. The plan also includes provisions which authorize the
Company to make discretionary contributions. During 1998 and 1997, the Company
made matching contributions of $1,078,000 and $314,000, respectively.
NOTES RECEIVABLE FROM STOCKHOLDERS
In December 1997, a group of key employees, including its principal executive
officers, purchased 73,314 shares of the Company's outstanding stock for cash in
a private transaction with an institutional investor. The purchase represents
approximately 5.6% of the Company's outstanding shares. The Company provided
recourse loans for the employees to purchase the stock totaling approximately
$1.3 million. The terms of the notes receivable are Prime plus 1% (9.5% at
December 31, 1997) interest payable semi-annually with a maturity date of the
earlier of 3 years, or at termination of employment, or sale of stock by the
employee. As at December 31, 1998 and 1997 $204,000 and $1,320,000 were
outstanding on these loans, respectively.
NOTE 17--EXTRAORDINARY ITEMS
During 1997, the Company recognized a $79,000 extraordinary gain comprised of a
$288,000 gain from debt extinguishment and a $209,000 loss from loan prepayment
penalties.
NOTE 18--SEGMENT INFORMATION
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments.
In the 1998 property management segment, approximately $7.4 million or 52% of
the fees are generated by property management contracts with Heitman Financial
Ltd.
47
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1996 and balance sheet data as of December 31, 1996.
1996 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
Revenues $ 5,888,000 $ 25,983,000 $ 96,000 $ 31,967,000
Operating expenses 5,087,000 20,037,000 3,252,000 28,376,000
------------ ------------- ------------- -------------
Income before provision for income taxes 801,000 5,946,000 (3,156,000) 3,591,000
Provision for income taxes 60,000 60,000
------------ ------------- ------------- -------------
Net income $ 801,000 $ 5,946,000 $ (3,216,000) $ 3,531,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
Total assets $ 1,154,000 $ 48,387,000 $ 1,573,000 $ 51,114,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Total liabilities $ 774,000 $ 29,484,000 $ 10,474,000 $ 40,732,000
Stockholders' equity 380,000 18,903,000 (8,901,000) 10,382,000
------------ ------------- ------------- -------------
Total liabilities and stockholders' equity $ 1,154,000 $ 48,387,000 $ 1,573,000 $ 51,114,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1997 and balance sheet data as of December 31, 1997.
1997 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
Revenues $ 5,895,000 $ 21,085,000 $ 19,000 $ 26,999,000
Operating expenses 4,719,000 12,502,000 5,547,000 22,768,000
------------ ------------- ------------- -------------
Income before provision for income taxes 1,176,000 8,583,000 (5,528,000) 4,231,000
Provision for income taxes 280,000 280,000
------------ ------------- ------------- -------------
Income before provision for extraordinary items 1,176,000 8,583,000 (5,808,000) 3,951,000
Extraordinary items 213,000 (134,000) 79,000
------------ ------------- ------------- -------------
Net income $ 1,176,000 $ 8,796,000 $ (5,942,000) $ 4,030,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
Total assets $ 1,132,000 $ 37,117,000 $ 7,469,000 $ 45,718,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Total liabilities $ 290,000 $ 19,919,000 $ 13,915,000 $ 34,124,000
Stockholders' equity 842,000 17,198,000 (6,446,000) 11,594,000
------------ ------------- ------------- -------------
Total liabilities and stockholders' equity $ 1,132,000 $ 37,117,000 $ 7,469,000 $ 45,718,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
48
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1998 and balance sheet data as of December 31, 1998.
1998 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATE
------------- ------------ ------------- -------------- -------------
Revenues $ 14,194,000 $ 4,917,000 $ 31,604,000 $ 157,000 $ 50,872,000
Operating expenses 8,311,000 3,182,000 22,250,000 10,967,000 44,710,000
------------- ------------ ------------- -------------- -------------
Income before provision for income
taxes 5,883,000 1,735,000 9,354,000 (10,810,000) 6,162,000
Provision for income taxes 837,000 837,000
------------- ------------ ------------- -------------- -------------
Net income $ 5,883,000 $ 1,735,000 $ 9,354,000 $ (11,647,000) $ 5,325,000
------------- ------------ ------------- -------------- -------------
------------- ------------ ------------- -------------- -------------
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------- ------------ -------------- ------------- --------------
Total assets $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
Total liabilities $ 3,111,000 $ 959,000 $ 128,034,000 $ 28,932,000 $ 161,036,000
Subordinated debt 21,000,000 21,000,000
Stockholders' equity 24,586,000 1,409,000 32,503,000 (35,718,000) 22,780,000
------------- ------------ -------------- ------------- --------------
Total liabilities and stockholders'
equity $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
49
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 19--UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following pro forma consolidated statement of income give effect to the
acquisition of all of the outstanding shares of Heitman Properties, Ltd, a
property management company, in July 1998. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable. This unaudited pro forma condensed consolidated information does not
purport to represent what the actual results of operations of the Company would
have been assuming the acquisition had been completed as set forth above, nor do
they purport to predict the results of operations for future periods.
1997 1998
PRO FORMA PRO FORMA
------------- -------------
Total Revenue $ 63,525,000 $ 68,737,000
Total Operating Expenses 50,074,000 58,957,000
------------- -------------
Income Before Income Taxes 13,451,000 9,780,000
Provision for Income Taxes 3,691,000 2,176,000
------------- -------------
Net Income $ 9,760,000 $ 7,604,000
------------- -------------
------------- -------------
SHARE DATA
Pro forma basic net income per share $ 1.60 $ 1.22
Pro forma basic weighted average shares 6,104,497 6,254,470
Pro forma diluted net income per share $ 1.58 $ 1.12
Pro forma diluted weighted average shares 6,187,280 6,801,356
50
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 20--UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
1997
-------------------------------------------------------
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ -------------
Revenues $ 5,870,000 $ 3,966,000 $ 5,814,000 $ 11,349,000
Total operating expenses 5,234,000 3,767,000 5,282,000 8,485,000
------------ ------------ ------------ -------------
Income before provision for taxes and extraordinary
items 636,000 199,000 532,000 2,864,000
Provision for income taxes 50,000 50,000 65,000 115,000
------------ ------------ ------------ -------------
Income before extraordinary items 586,000 149,000 467,000 2,749,000
Extraordinary items -- 288,000 -- (209,000)
------------ ------------ ------------ -------------
Net income $ 586,000 $ 437,000 $ 467,000 $ 2,540,000
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
SHARE DATA
Basic net income per share before extraordinary items $ 0.09 $ 0.02 $ 0.08 $ 0.46
Basic net income per share $ 0.09 $ 0.07 $ 0.08 $ 0.43
Basic weighted average shares 6,463,211 6,075,270 5,957,469 5,932,058
Diluted net income per share before extraordinary items $ 0.09 $ 0.02 $ 0.08 $ 0.45
Diluted net income per share $ 0.09 $ 0.07 $ 0.08 $ 0.42
Diluted weighted average shares 6,528,483 6,151,593 6,065,619 6,057,639
1998
--------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 (I) DEC. 31 (I)
------------ ------------ ------------- -------------
Revenues $ 4,397,000 $ 6,459,000 $ 20,834,000 $ 19,182,000
Total operating expenses 3,625,000 6,221,000 19,132,000 15,732,000
------------ ------------ ------------- -------------
Income before provision for taxes 772,000 238,000 1,702,000 3,450,000
Provision for income taxes 98,000 36,000 311,000 392,000
------------ ------------ ------------- -------------
Net income $ 674,000 $ 202,000 $ 1,391,000 $ 3,058,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SHARE DATA
Basic net income per share $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share $ 0.11 $ 0.03 $ 0.20 $ 0.43
Diluted weighted average shares 6,366,289 6,583,598 7,093,199 7,150,513
- ------------------------
(i) includes acquisition of Heitman Properties, Ltd.
51
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
Information relating to the Directors and Executive Officers of the Company
will be set forth in the Company's definitive proxy statement which is to be
filed pursuant to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 1998, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation will be set forth in the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A within 120 days after the end of the Company's fiscal year ended December
31, 1998 and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and
Management will be set forth in the Company's definitive proxy statement which
is to be filed pursuant to Regulation 14A within 120 days after the end of the
Company's fiscal year ended December 31, 1998, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions will
be set forth in the Company's definitive proxy statement which is to be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1998, and such information is incorporated herein by
reference.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules in Item 8 hereof.
(2) Financial Statement Schedules.
SCHEDULE III - REAL ESTATE OWNED S-1
Supplemental financial statement schedules not listed above are omitted
because either they are not applicable, not required or because the information
required is included in the consolidated financial statements, including the
notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
3.1* Certificate of Incorporation of the Company, as amended to date.
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the Company's 1992 Registration Statement on Form S-1
(Registration No. 33-46978) and incorporated herein by this reference).
4.1 Form of Common Stock Certificate (Filed as Exhibit 4.1 to the Company's 1992 Registration Statement on
Form S-1 (Registration No. 33-46978) and incorporated herein by this reference).
10.1 Employee Profit Sharing Plan and Trust, as amended to date. (Filed as Exhibit 10.11 to the Company's
1992 Registration Statement on Form S-1 (Registration No. 33-46978) and incorporated herein by this
reference).
10.2* Deferred Compensation Plan dated September 1, 1997.
10.3 1992 Non-employee Director Stock Option Plan. (Filed as Exhibit 10.26 to the Company's 1992
Registration Statement on Form S-1 (Registration No. 33-46978) and incorporated herein by this
reference).
10.4 1992 Incentive and Nonstatutory Stock Option Plan. (Filed as Exhibit 4 to the Company's 1993
Registration Statement on Form S-8 (Registration No. 33-73324) and incorporated herein by this
reference).
10.4.1* 1993 Amendment to 1992 Incentive and Nonstatutory Stock Option Plan.
10.5 Employment Agreement dated August 14, 1992 between the Company and William J. McMorrow. (Filed as
Exhibit 10.2 to the Company's 1992 Registration Statement on Form S-1 (Registration No. 33-46978) and
incorporated herein by this reference).
10.5.1* Fifth Amendment to Employment Agreement dated as of May 19, 1997 between the Company and William J.
McMorrow.
10.5.2* Sixth Amendment to Employment Agreement dated as of August 20, 1998 between the Company and William J.
McMorrow.
10.6* Limited Liability Company Operating Agreement of KW-A, LLC dated as of July 17, 1998.
10.7* Employment Agreement dated as of July 17, 1998 between KW-A, LLC and Barry Schlesinger.
53
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.8* Executive Services Agreement dated as of July 17, 1998 between the Company and KW-A, LLC.
10.9 Employment Agreement dated as of January 1, 1997 between the Company and Richard Mandel. (Filed as
Exhibit 10.9 to the Company's 1996 Annual Report on Form 10-K and incorporated herein by this
reference).
10.9.1* First Amendment to Employment Agreement dated as of May 19, 1997 between the Company and Richard
Mandel.
10.9.2* Second Amendment to Employment Agreement dated as of January 1, 1998 between the Company and Richard
Mandel.
10.10* Employment Agreement dated January 1, 1996 between the Company and Lewis Halpert.
10.10.1 First Amendment to Employment Agreement dated January 1, 1997 between the Company and Lewis Halpert.
(Filed as Exhibit 10.12 to the Company's 1997 Annual Report on Form 10-K and incorporated herein by
this reference).
10.10.2* Second Amendment to Employment Agreement dated as of January 1, 1998 between the Company and Lewis
Halpert.
10.11 Employment Agreement dated April 1, 1996 between the Company and Freeman Lyle. (Filed as Exhibit 10.13
to the Company's 1997 Annual Report on form 10-K and incorporated herein by this reference).
10.11.1* Second Amendment to Employment Agreement dated April 1, 1998 between the Company and Freeman Lyle.
10.11.2* Third Amendment to Employment Agreement dated as of August 15, 1998 between the Company and Freeman
Lyle.
10.12* Unsecured Promissory Note dated December 22, 1997 by Freeman Lyle in favor of the Company.
10.13* Office Lease dated as of September 1, 1998 between the Company and Wilshire-Camden Associates.
10.14 Indemnification Agreement dated August 13, 1992 among the Company, Kennedy-Wilson International, Inc.,
William J. McMorrow, William R. Stevenson, Lewis A. Halpert and Kenneth V. Stevens. (Filed as Exhibit
10.27 to the Company's 1992 Registration Statement on Form S-1 (Registration No. 33-46978) and
incorporated herein by this reference).
10.15 Form of Stock Option Agreement under the Company's 1992 Incentive and Nonstatutory Stock Option Plan.
(Filed as Exhibit 10.23 of the Company's 1992 Annual Report on Form 10-K and incorporated herein by
this reference).
10.16 Form of Stock Option Agreement under the Company's 1992 Non-employee Director Stock Option Plan. (Filed
as Exhibit 10.24 of the Company's 1992 Annual Report on Form 10-K and incorporated herein by this
reference).
10.17* Amended and Restated Revolving Credit Agreement dated as of September 10, 1998 between the Company and
East-West Bank.
10.18* Loan Agreement dated as of July 28, 1998 between Kennedy-Wilson Properties, Ltd. and East-West Bank.
10.19* Guaranty dated as of July 28, 1998 by the Company in favor of East-West Bank.
10.20* Loan Commitment Letter dated July 2, 1998 between KW-KAU, LLC, Kennedy-Wilson International, Inc. and
Old Standard Life Insurance Company.
54
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.21 Loan and Warrant Agreement dated June 3, 1998 between the Company and FBR Asset Investment Corporation.
(Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A dated August 14, 1998 and
incorporated herein by this reference).
10.21.1* Loan Modification Agreement dated November 30, 1998 between the Company and FBR Asset Investment
Corporation.
10.22 Common Stock Registration Rights Agreement dated as of June 3, 1998 between the Company and FBR Asset
Investment Incorporation. (Filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q/A
dated August 14, 1998 and incorporated herein by this reference).
10.23 Form of Warrant issued by the Company to FBR Asset Investment Corporation. (Filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q/A and incorporated herein by this reference).
10.24 Bridge Loan Agreement dated as of July 16, 1998 among the Company, Kennedy-Wilson International, Inc.,
K-W Properties, Kennedy-Wilson Properties, Ltd. and Colony K-W LLC. (Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K/A dated September 30, 1998 and incorporated herein by this
reference).
10.25 Investor's Agreement dated July 16, 1998 between the Company and Colony Investors III, L.P. (Filed as
Exhibit 10.5 to the Registrant's Current Report on Form 8-K/A dated September 30, 1998 and
incorporated herein by this reference).
10.26 Registration Rights Agreement dated as of July 16, 1998 between the Company and Colony Investors III,
L.P. (Filed as Exhibit 10.4 to the Company's Current Report on Form 8-K/A dated September 30, 1998
and incorporated herein by this reference).
10.27 Warrant Agreement dated as of July 16, 1998 between the Company and Colony Investors III, L.P. (Filed
as Exhibit 10.4 to the Company's Current Report on Form 8-K/A dated September 30, 1998 and
incorporated herein by this reference).
10.28 Form of Warrant issued July 16, 1998 by the Company to Colony Investors III, L.P. (Filed as Exhibit
10.4 to the Company's 1998 Current Report on Form 8-K dated September 30, 1998 and incorporated
herein by this reference).
10.29* Agreement of Limited Partnership of Colony-KW Partners, L.P.
21* List of Subsidiaries of the Company.
23* Consent of Deloitte & Touche LLP.
27* Financial Data Schedule.
- ------------------------
* Filed herewith.
(B) CURRENT REPORTS ON FORM 8-K.
None.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KENNEDY-WILSON, INC.
Date: March 12, 1999
By: /s/ WILLIAM J. MCMORROW
-----------------------------------------
William J. McMorrow
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE 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 in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ WILLIAM J. MCMORROW Chief Executive Officer
- ------------------------------ (Principal Executive March 12, 1999
William J. McMorrow Officer)
Executive Vice President,
/s/ FREEMAN A. LYLE Chief Financial Officer
- ------------------------------ and Secretary (Principal March 12, 1999
Freeman A. Lyle Financial and Accounting
Officer)
/s/ LEWIS A. HALPERT
- ------------------------------ Executive Managing March 12, 1999
Lewis A. Halpert Director and Director
/s/ RICHARD A. MANDEL
- ------------------------------ Managing Director and March 12, 1999
Richard A. Mandel Director
President of
/s/ BARRY S. SCHLESINGER Kennedy-Wilson
- ------------------------------ Properties, Ltd., and March 12, 1999
Barry S. Schlesinger Director
/s/ THOMAS BARRACK
- ------------------------------ Director March 12, 1999
Thomas Barrack
56
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ KENT MOUTON
- ------------------------------ Director March 12, 1999
Kent Mouton
/s/ DONALD PRELL
- ------------------------------ Director March 12, 1999
Donald Prell
57
KENNEDY-WILSON, INC.
SCHEDULE III - REAL ESTATE OWNED
FOR YEAR ENDING DECEMBER 31, 1998
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST ACQUISITION
---------------------------- --------------------------
BUILDING AND IMPROVE- CARRYING
ENCUMBRANCE LAND IMPROVEMENTS MENTS COSTS
------------- ------------- ------------- ------------- ----------
COMMERCIAL PROPERTIES:
4 vacant lots, Santa
Monica,
California......... $ $ 2,402,000 -- -- --
1055 Wilshire Blvd.,
Santa Monica,
California
282,000 square foot
office building.... 18,842,000 6,125,000 $ 19,102,000 $ 180,000 --
6380 Wilshire Blvd.,
Los Angeles,
California
133,000 square foot
office building.... 13,263,000 6,000,000 7,362,000 1,549,000 $1,312,000
5900 Sepulveda Blvd.,
Van Nuys,
California
74,000 square foot
office building.... 4,951,000 1,667,000 5,148,000 104,000 --
7080 Hollywood Blvd.,
Los Angeles,
California
161,000 square foot
office building.... 16,800,000 5,782,000 14,014,000 108,000 --
6255 Sunset Blvd.,
Los Angeles,
California
282,000 square foot
office building.... 28,500,000 3,222,000 25,652,000 414,000 --
802 Huntington Drive,
Monrovia,
California
21,000 square foot
office building.... 1,096,000 413,000 998,000 -- --
4350 11th Ave., Los
Angeles, California
9,000 square foot
office building.... -- 336,000 -- --
Two commercial
buildings,
Long Beach,
California
2,000 square foot
office buildings... 41,000
301 S. Fair Oaks,
Pasadena,
California
55,000 square foot
office building.... 8,863,000 1,841,000 6,987,000 249,000 --
------------- ------------- ------------- ------------- ----------
92,315,000 27,452,000 79,640,000 2,604,000 1,312,000
RESIDENTIAL PROPERTIES:
Pacific Palisades,
California
3 residential
homes.............. 1,628,000 960,000 789,000 306,000 101,000
Palm Desert,
California
23 housing lots.... 2,191,000 1,535,000 1,125,000 242,000
Cathedral City,
California
112 housing lots... 1,478,000 1,800,000 578,000 8,000
3,000 acres of land,
Koala, Hawaii...... 4,000,000 4,110,000 -- 501,000
San Diego, California
155 acres of
land............... 283,000
Riverside, California
3.7 acres of
land............... 87,000
------------- ------------- ------------- ------------- ----------
$ 9,297,000 $ 8,775,000 $ 789,000 $ 2,009,000 $ 852,000
------------- ------------- ------------- ------------- ----------
Total.............. $101,612,000 $ 36,227,000 $ 80,429,000 $ 4,613,000 $ 852,000
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Balance at beginning
of year............ $ 18,628,000
Additions during
period:
Acquisitions..... 120,057,000
Improvements..... 5,465,000
Other:........... -- 125,522,000
-------------
Deductions during
period:
Disposition of
real estate
sold........... 21,743,000
Other:........... -- 21,743,000
------------- -------------
Balance at end of
year............... $ 122,407,000
-------------
-------------
GROSS AMOUNTS AT WHICH CARRIED
AT CLOSE OF PERIOD
-----------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE OF
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION
----------- ------------- ------------ -------------- ------------ ------------
COMMERCIAL PROPERTIES:
4 vacant lots, Santa
Monica, 10/96 &
California......... $ 2,402,000 -- $ 2,402,000 N/A 01/98
1055 Wilshire Blvd.,
Santa Monica,
California
282,000 square foot
office building.... 6,125,000 $19,282,000 25,407,000 $ (470,000) 1985 Feb-98
6380 Wilshire Blvd.,
Los Angeles,
California
133,000 square foot
office building.... 6,000,000 10,223,000 16,223,000 1963 Mar-98
5900 Sepulveda Blvd.,
Van Nuys,
California
74,000 square foot
office building.... 1,667,000 5,252,000 6,919,000 (148,000) 1983 Jan-98
7080 Hollywood Blvd.,
Los Angeles,
California
161,000 square foot
office building.... 5,782,000 14,122,000 19,904,000 (83,000) 1968 Sep-98
6255 Sunset Blvd.,
Los Angeles,
California
282,000 square foot
office building.... 3,222,000 26,066,000 29,288,000 (122,000) 1986 Sep-98
802 Huntington Drive,
Monrovia,
California
21,000 square foot
office building.... 413,000 998,000 1,411,000 (12,000) 1986 May-98
4350 11th Ave., Los
Angeles, California
9,000 square foot
office building.... -- 336,000 336,000 N/A 1910 Oct-97
Two commercial
buildings,
Long Beach,
California
2,000 square foot
office buildings... 41,000 41,000 N/A 1947 Jul-98
301 S. Fair Oaks,
Pasadena,
California
55,000 square foot
office building.... 1,841,000 7,236,000 9,077,000 (191,000) 1991 Dec-97
----------- ------------- ------------ --------------
27,452,000 83,556,000 111,008,000 (1,026,000)
RESIDENTIAL PROPERTIES:
Pacific Palisades,
California
3 residential
homes.............. 960,000 1,196,000 2,156,000 N/A 1994 12/97-2/98
Palm Desert,
California
23 housing lots.... 1,535,000 1,367,000 2,902,000 N/A 1998 2/98
Cathedral City,
California
112 housing lots... 1,800,000 586,000 2,386,000 N/A 1998 9/98
3,000 acres of land,
Koala, Hawaii...... 4,110,000 501,000 4,611,000 N/A 4/6/98
San Diego, California
155 acres of
land............... 283,000 283,000 N/A N/A 5/98
Riverside, California
3.7 acres of
land............... 87,000 87,000 N/A N/A 5/98
----------- ------------- ------------ --------------
$ 8,775,000 $ 3,650,000 $ 12,425,000
----------- ------------- ------------ --------------
Total.............. $36,227,000 $87,206,000 $123,433,000 $ (1,026,000)
----------- ------------- ------------ --------------
----------- ------------- ------------ --------------
Balance at beginning
of year............
Additions during
period:
Acquisitions.....
Improvements.....
Other:...........
Deductions during
period:
Disposition of
real estate
sold...........
Other:...........
Balance at end of
year...............
S-1