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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, 2001
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:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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 22, 2002, there were 8,789,288 shares of the Registrant's Common
Stock outstanding. The aggregate market value of the Registrant's Common Stock
held by non-affiliates on March 22, 2002 was approximately $31 million based on
the closing price of $5.67 per share.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy
statement for its 2002 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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1
KENNEDY-WILSON, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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Page
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Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 17
Item 8. Financial Statements and Supplementary Data 19
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 45
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 45
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K 46
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. We deliver a complementary array of real estate services.
Headquartered in Beverly Hills, we have approximately 620 employees in offices
in the U.S. and in Japan. We initially gained recognition in the U.S. real
estate market through our real estate auction services. Over time, we
diversified our business so that we now provide:
. Fund management of real estate and note pool investments;
. Commercial and residential property management and leasing; and
. Commercial and residential brokerage, including auction marketing.
In addition to these real estate related services, we invest through joint
venture funds 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 primarily staffed with Japanese
employees 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 funds with companies and
partnerships affiliated with Colony Capital, Cargill and Morgan Stanley
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
FUND MANAGEMENT
KWI Fund Management Group is a vertically integrated real estate services and
fund management firm. This group organizes and manages closed-end commingled
real estate investment funds that invest in high-quality office, industrial,
retail and multifamily income property located in selected markets in the U.S.
We serve as the general partner of the funds and co-invest with our pension fund
clients as limited partners. We earn fees for services provided to the fund
including fees for acquisition, asset management, property management, leasing,
and disposition services.
KWI Fund I, formed in August 2000, is a $160 million fund comprised of $60
million in equity and $100 million in debt. Through the end of year 2001 KWI
Fund I has acquired 11 office properties and one multifamily property, totaling
approximately 1,745,000 square feet. The properties are located in Los Angeles,
Santa Monica, Houston, Austin, and Atlanta. Future funds are
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expected to be in the $100 million equity range with $250 million in assets. The
funds have the following principal investment objectives :
. Achieve total long-term risk adjusted returns on equity that exceed
market averages;
. Invest in high-quality office, industrial, retail and multifamily
income property located in selected markets;
. Purchase existing income properties, including those that need
additional renovation and capital improvements, in major growth
markets that are expected to maintain above-average employment and
rent growth rates;
. Acquire properties at substantial discounts to replacements cost,
make selective capital improvements that are expected to increase
income and create significant value in excess of the cost;
. Acquire properties generally in the $5 to $25 million per property
price range.
PROPERTY MANAGEMENT AND LEASING
We are 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 ten regional offices -- Beverly Hills, New York, Dallas,
Austin, Houston, San Francisco, Seattle, Walnut Creek, Minneapolis and Chicago
- -- supervising approximately 550 employees who assist in managing more than 420
office and industrial buildings, and multi-unit residential complexes in 22
different states. We have approximately 60 million gross square feet of real
estate under management.
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 leasing
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.
4
REAL ESTATE BROKERAGE
Through our offices in Beverly Hills, New York and Tokyo, 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.
We specialize in marketing institutional properties through privately negotiated
and sealed bid sales. 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,
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 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 primarily located in the U.S.
and Japan.
We also design 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 and financial institutions.
On a national and international basis, 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.
REAL ESTATE INVESTMENTS
We invest in commercial and residential real estate, both in the U.S. and Japan.
We invest primarily through funds with institutional joint venture partners, who
typically contribute the majority of the capital. The investment funds typically
target specific property types. For example, we have a $200 million apartment
fund with Hanover Capital, a division of Marcus & Millichap. In the U.S. and
Japan we have joint venture funds for investments in real estate and distressed
notes with partners such as Cargill, Colony Capital, and Morgan Stanley. These
funds
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enable us to leverage our capital and diversify the risks associated with owning
properties. In addition, we earn fees for services provided to the joint
venture, including due diligence, acquisition, asset management, and disposition
services.
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 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.
One of our strengths is our ability to quickly identify and acquire desirable
real estate assets in privately negotiated transactions. We do so by
capitalizing on the institutional knowledge we have developed through our
brokerage, property management, 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 due diligence is
conducted by our experienced in house team.
Most of the real estate in which we have invested is located in California,
Texas, and Japan. While the current cycle of the U.S. real estate market
presents value-added investment potential, Japan continues to offer significant
opportunistic investments due to the Asian economic downturn. Our brokerage and
property management operations are the source of many of our real estate
acquisitions. These operations provide us with unique investment opportunities
in the form of close relationships with our institutional clients that have
substantial real estate investments. For example, 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 sale. Similarly, a client
in Japan may have the need to sell a real estate holding in a rapid manner with
little publicity. We are often able to meet the needs of these types of clients
by purchasing their properties quickly and discretely for one of our joint
venture funds.
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. We typically purchase notes from financial institutions.
In 1998 we expanded our operations to include the acquisition of pools of
distressed Japanese notes. The notes are typically secured by real estate and
personal property. In addition, the pools also include commercial and
residential properties. The investment strategy is to acquire the notes on a
privately negotiated basis from Japanese financial institutions. Our investments
6
in Japan are typically acquired in joint venture funds with institutional
investors who contribute the majority of the capital. In addition to our
investment interest, we earn fees for services provided to the joint venture,
including due diligence, acquisition, asset management, and disposition
services.
EQUITY INVESTMENTS IN OTHER COMPANIES
Asset One - We own a 40% equity interest in Asset One, a Japanese corporation
with an office in Tokyo. Asset One is a loan servicing company whose business
includes servicing the loans in our distressed Japanese loan pools.
Jutaku Ryutsu - We own 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.
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 or property management
services. 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. We
are in compliance with all material licensing requirements and regulations in
states and countries in which licenses are required and in which we are engaged
in brokerage and property management activities.
In various states, governmental entities license individual auctioneers and/or
administers various regulations governing their activities and may require that
auctioneers post bonds. We are in 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.
COMPETITION
Because of our unique combination of businesses, we compete with brokerage and
property management companies as well as companies that invest in real estate
and distressed notes. The brokerage and property management businesses are both
highly fragmented and competitive. We compete with real estate brokerage
companies on the basis of our relationship with property owners, quality of
service, and commissions charged. We compete with property management and
leasing firms also on the basis of our relationship with clients, the range and
quality of services provided, and fees and commissions charged. Our investment
operations compete to varying degrees with real estate investment partnerships
and other investment companies. We compete with these other investors on the
basis of our relationship with the sellers and the amounts that we pay for the
investments acquired.
7
EMPLOYEES
We have approximately 620 employees in the U.S. and Japan. Our compensation
policies are designed to attract, retain and motivate employees that are an
integral part of our profitability. Our employees typically receive a base
salary and performance based incentives including bonuses based on the
profitably of their operation units. 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
compensation structure also encourages our employees to control costs.
8
ITEM 2. PROPERTIES
Our executive and administrative offices are located at 9601 Wilshire Boulevard,
Suite 220, Beverly Hills, California. 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 116,000 square
feet of leased space, with an annual aggregate base rental of approximately $3.2
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. These matters are generally covered by insurance. While the ultimate
disposition of these proceedings is not known, based upon current available
information, we believe that the outcomes will not have a material adverse
effect on our financial position or results of operations.
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 2001.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Company's Common Stock trades on The NASDAQ National Market under the symbol
"KWIC". The following table sets forth the high and low closing prices of our
Common Stock as reported on the NASDAQ National Market.
2001 2000
------------------ ------------------
High Low High Low
------- ------- ------- -------
First Quarter $ 4.500 $ 3.719 $10.313 $ 5.125
Second Quarter 4.250 3.510 5.750 4.563
Third Quarter 4.550 3.450 6.875 5.125
Fourth Quarter 4.400 3.480 5.500 4.000
As of March 29, 2002, there were approximately 1,200 holders of our Common
Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for each of the
five fiscal years ended December 31, 2001. 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,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands, except share data)
STATEMENTS OF OPERATIONS DATA:
Total revenues $ 65,820 $ 97,051 $ 91,359 $ 50,872 $26,999
Total expenses 62,214 88,811 82,921 44,710 22,768
Income from operations 3,606 8,240 8,438 6,162 4,231
Net income 2,357 4,726 5,609 5,325 4,030
Basic income before
extraordinary items per share $ 0.27 $ 0.52 $ 0.68 $ 0.85 $ 0.65
Basic extraordinary item per share N/A N/A N/A N/A $ 0.01
Basic net income per share $ 0.27 $ 0.52 $ 0.68 $ 0.85 $ 0.66
Basic weighted average shares 8,701 9,018 8,219 6,254 6,104
Diluted income before
extraordinary items per share $ 0.27 $ 0.50 $ 0.58 $ 0.78 $ 0.64
Diluted extraordinary item per share N/A N/A N/A N/A $ 0.01
Diluted net income per share $ 0.27 $ 0.50 $ 0.58 $ 0.78 $ 0.65
Diluted weighted average shares 8,888 10,128 10,015 6,801 6,187
Year ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands)
BALANCE SHEET DATA:
Total assets $129,513 $132,396 $135,150 $204,816 $45,718
Long term debt 25,541 55,653 27,901 136,130 15,102
Total liabilities 77,527 83,132 88,464 182,036 34,124
Total stockholders' equity 51,986 49,264 46,686 22,780 11,594
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are an integrated, international real estate services and investment company
with offices in the United States and in Japan. Through our subsidiaries, we
provide a complementary array of real estate services, including fund
management, property management and leasing, real estate brokerage services
including auction marketing, and asset management. Additionally, on our own
account and through joint venture funds we invest in real estate and note pool
investments both in the U.S. and Japan. Our revenues in 2001, 2000 and 1999 were
$65.8 million, $97.1 million, and $91.4 million, respectively. Total expenses in
2001, 2000 and 1999 were $62.2 million, $88.8 million, and $82.9 million,
respectively. Our net income for the same periods was $2.4 million, $4.7 million
and $5.6 million, respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE
In 2001 our property management and leasing operations generated $33.4 million
of revenues, representing 50.7% of our total revenue, compared to approximately
$39.1 million in 2000. The decline in revenue corresponds to a decline in
leasing revenue, as well as the sale of some of the properties managed by the
Company. Property management and leasing revenue includes asset management,
construction management, and engineering services.
Brokerage commission revenues in 2001 were $12.8 million, representing 19.5% of
total revenues compared to brokerage commission revenues in 2000 of $14.8
million. The decline results primarily from commissions from the sale of two
large office buildings in New York in year 2000. Our brokerage services include
sales and leasing for commercial, industrial, retail and apartment properties.
Sales of residential real estate were approximately $11 million in 2001,
representing 16.7% of total revenues, compared to $30.2 million in 2000. The
sales completed during the year included 44 homes in a 109-home development in
the Palm Springs area. 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 joint venture investments totaled $5.6 million in 2001, or
8.5% of total revenue compared to $6.2 million realized in 2000. Revenue from
joint venture investments includes income from the operation, sale, and fees
earned on numerous investments in the U.S. and Japan, which are owned primarily
in joint venture funds with institutional investor partners. The joint venture
funds invest primarily in real estate and discounted notes secured by real
estate.
Gain on sale of commercial real estate was $281,000 in 2001 compared to no gain
in 2000. During 2001 we sold a parcel of land located in Hawaii.
Gains on restructured notes totaled $966,000 in 2001, or 1.5% of total revenues,
compared to $3.6 million in 2000. The decrease reflects the fact that most of
the large notes have been settled or restructured and we are now in the process
of settling the smaller notes. 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.
OPERATING EXPENSES
Operating expenses in 2001 were $62.2 million, compared to $88.8 million in
2000. Part of the decrease represents the lower cost of goods sold associated
with the sales of residential real estate discussed above. Compensation and
general and administrative cost combined decreased by $9.0 million which
represents a 19.4% reduction from 2000 as a result of our aggressive cost
reduction initiatives.
Brokerage commissions and marketing expenses decreased to $6.9 million in 2001
from $7.9 million in 2000, due to the reduced commissions revenue.
Cost of residential real estate sold was $11.1 million in 2001, a 58.3% decrease
from $26.6 million in 2000. This decrease correlates with the decreased
revenues from the sales of real estate discussed above.
Compensation and related expenses were $26.3 million in 2001, down 13.6% from
$30.4 million in 2000. The decrease was primarily a result of cost reduction
initiatives and staff reductions during the year that reduced the total number
of employees to 620 in 2001 from 820 in 2000.
General and administrative expenses were $11.2 million in 2001, representing a
30.5% decrease from 2000 expenses of $16.1 million. Again, the decrease was due
primarily to the continuing aggressive cost reduction initiatives throughout the
year.
Depreciation and amortization expense decreased to $3.8 million in 2001, a 12.7%
decrease from $4.4 million in 2000. The decrease was due to the sale of a 50%
interest in a commercial office building.
Interest expense was $3.0 million in 2001, a decrease of 16.4% compared to $3.5
million in 2000 due, in part, to declining interest rates.
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COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUE
In 2000 our property management and leasing operations generated $39.1 million
of revenues, representing 40.3% of our total revenue and a 32.5% increase over
property management revenue of approximately $29.5 million in 1999. 2000 was the
first full year of ownership of the five property management companies that were
acquired during 1999. The acquisitions expanded our geographic presence to
include regional offices in San Francisco, Seattle, Austin, Dallas and Houston.
The acquisitions also added retail management, tenant representation leasing,
and fee development to the services we offer clients.
Brokerage commission revenues in 2000 were $14.8 million, representing 15.3% of
total revenues and an 11.4% increase over brokerage commission revenues in 1999
of $13.3 million. Our brokerage services include sales and leasing for
commercial, industrial, retail and apartment properties.
Sales of residential real estate were $30.2 million in 2000, representing 31.1%
of total revenues, compared to $25.7 million in 1999. The sales completed during
the year included the bulk sale of 53 condominium units in a 136-unit building
located in Los Angeles, 48 homes in a 109-home development in the Palm Springs
area and two single family homes in Los Angeles. In 1999, the revenue was
generated from the sales of a 95-unit apartment building located in Los Angeles,
17 units in a 109-unit single family development in the Palm Springs area, 16
units of a 23-unit single family development in Palm Desert, and a single family
home located in Los Angeles. 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 in joint ventures and gain on sale of joint
ventures totaled $6.2 million in 2000, or 6.4% of total revenue compared to $4.5
million realized in 1999. There was no gain on the sale of joint ventures in
2000 as compared to a gain of $2.4 million in 1999 from the sale of our interest
in a joint venture that owned a commercial office building. Revenue from joint
venture investment funds in Japan included continued settlement of the
non-performing note pools and incentive fees earned on both the note pools and
real estate assets acquired through the joint ventures. Equity in income of
investment in joint venture funds also included revenue related to the sale of
investments in apartment buildings and commercial office buildings.
There was no gain on sale of commercial real estate in 2000 compared to $7.1
million in 1999. During 1999 we sold an office building and a parking garage,
both located in Los Angeles, and a parcel of land in Hawaii.
Gains on restructured notes totaled $3.6 million in 2000, or 3.7% of total
revenues, a 25.3% increase over $2.9 million in 1999. The gain reflects our
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continued progress in liquidating our portfolios of distressed notes, both in
the U.S. and in Japan, 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.
There was no net rental income in 2000 compared to $6.4 million in 1999, as a
result of our sale and transfer of all income producing properties in 1999.
OPERATING EXPENSES
Operating expenses in 2000 were $88.8 million, compared to $82.9 million in
1999. Part of the increase represents the higher cost of goods sold associated
with the sales of residential real estate discussed above. The balance of the
increase in operating expense was associated with the five property management
acquisitions, offset by a reduction in interest expense relating to the
commercial buildings that were deconsolidated in 1999.
Brokerage commissions and marketing expenses increased to $7.9 million in 2000
from $3 million in 1999, due to the commissions paid related to commissions
revenue, and due to reclassifications of commission revenue and expense, which
had been shown net in prior years.
Cost of residential real estate sold was $26.6 million in 2000, a 9.5% increase
from $24.3 million in 1999. This increase correlates with the increased revenues
from the sales of real estate discussed above.
Compensation and related expenses were $30.4 million in 2000, up 7.7% from $28.3
million in 1999. The increase in compensation reflects a full year of
compensation relating to the five property management companies acquired in
1999.
General and administrative expenses were $16.1 million in 2000, representing a
29.0% increase over 1999 expenses of $12.4 million. The increase is related to
the acquisition of the five property management companies and included
non-recurring expenses related to the acquisition and integration of these
businesses.
Depreciation and amortization expense increased to $4.4 million in 2000, a 24.3%
increase over $3.5 million in 1999. The increase was due to the amortization of
the goodwill and other assets associated with the acquisition of the property
management companies acquired in 1999.
Interest expense was $3.5 million in 2000, compared to $11.4 million in 1999.
While the interest on the additional $15 million of senior debt resulted in
approximately $1 million of additional interest expense for the six month
period, it is offset by the decrease in interest expense resulting from the
commercial buildings that were deconsolidated in 1999 and the capitalization of
interest expense related to certain real estate investments.
The provision for income taxes was $3.5 million in 2000, a 24.2% increase from
$2.8 million in 1999. The income tax provision increased primarily because the
success of Kennedy-Wilson Japan has caused a greater proportion of our income to
be taxed at the higher Japan rate.
14
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include expenditures for real
estate held for sale, distressed notes pools, and working capital needs.
Historically, we have not required significant capital resources to support our
brokerage and property management operations. We finance our operations with
internally generated funds and borrowings under our revolving lines of credit.
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 default, recourse will be limited to the mortgaged
property serving as collateral.
Cash used in operating activities was about $5.3 million in 2001, compared to
$9.1 million in 2000. The change resulted from an increase in the collection of
accounts receivable, offset by a decline in net income. The cash used in
operating activities was about $6.5 million in 1999. The change from 1999 to
2000 resulted from increases in equity in income of investments in joint
ventures and accounts receivable, and a reduction in accrued expenses.
Cash provided by investing activities was about $11.2 million in 2001, compared
to $7.8 million in 2000. The change resulted primarily from a decline in the
purchase of real estate held for sale, offset by a decline in the settlement of
notes receivable. The cash provided by investing activities was about $1.9
million in 1999. The change in 2000 from 1999 resulted from an increase in
distributions received from our joint venture investments and a decrease in note
acquisitions.
Cash used in financing activities was $9,000 in 2001, compared to cash provided
by financing activities of approximately $1.4 million in 2000. The change
resulted from the issuance of $15 million of senior unsecured notes, offset by
the repayment of $9 million of subordinated debt in 2000 and the repurchase of
common stock. The cash used in financing activities was $31,000 in 1999. The
change in 2000 from 1999 resulted from the net repayment of notes payable and
other borrowings.
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 lines of credit, will provide us with sufficient capital
requirements for the foreseeable future.
Our need, if any, to raise additional funds to meet our capital requirements
will depend on many 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 dividends.
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 Consumer Price Index 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 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Investments
and Hedging Activities ("SFAS 133"). SFAS 133 is effective, as amended, for
fiscal years beginning after June 15, 2000 and requires all derivatives to be
recorded on the balance sheet at fair value as either assets or liabilities
depending on the rights or obligations under the contract. SFAS 133 also
established new accounting methodologies for the following three classifications
of hedges: fair value, cash flow and net investment in foreign operations. The
Company's adoption of SFAS 133 on January 1, 2001 did not have a material impact
on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS 142, which is
effective January 1, 2002, includes requirements to test goodwill and indefinite
lived intangible assets for impairment rather than amortize them. The Company
is currently evaluating the impact that these standards will have on its
financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). SFAS 144 supercedes SFAS 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of and applies to all
long-lived assets, including discontinued operations. SFAS 144 establishes a
single accounting model for the impairment of disposal of long-lived assets,
including discontinued operations. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company has not yet completed its full evaluation of the impact the adoption of
SFAS 144 but does not expect a material impact on the Company's financial
position or results of operations.
15
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, earnings,
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 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;
. 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;
. changes in government regulations that are applicable to our
regulated brokerage and property management businesses; o 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.
16
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, 2001 and
2000. The expected maturity categories take into consideration actual
amortization of principal and do 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, 2001 and 2000. (See Consolidated
Financial Statements - Note 2 - Fair Value of Financial Instruments) The Company
decreased its borrowings with variable interest rates to $38.4 million in 2001
from $42.9 million in 2000. Management does not perceive a long-term risk
associated with the loans relating to its commercial and residential real
estate, since typically properties are sold within a one to three year period
and in most cases, the debt is non-recourse to the Company. Additionally,
management closely monitors the fluctuation in interest rates, and if rates were
to increase significantly, the Company believes that it would be able either to
hedge the change in the interest rate or to refinance the loans with fixed
interest rate debt. All instruments included in this analysis are non-trading.
Principal maturing in: Fair Value
----------------------------------------------------------------- December 31,
2002 2003 2004 2005 2006 Thereafter Total 2001
------- ------- ------- ------- ------- ---------- ------- -----------
(in thousands)
Interest rate
sensitive assets
Cash and cash
equivalents $ 3,356 $ 3,356 $ 3,356
Average interest
rate 1.63% 1.63%
------- ------- ------- ------- ------- ------- ------- -------
$ 3,356 $ -- $ -- $ -- $ -- $ -- $ 3,356 $ 3,356
======= ======= ======= ======= ======= ======= ======= =======
Interest rate
sensitive liabilities
Variable rate
borrowings $36,184 $ 1,504 $ 626 $ 61 $38,375 $38,375
Average interest
rate 4.93% 2.88% 3.46% 4.41% 4.82%
Fixed rate
borrowings 1,983 763 801 $21,786 25,333 25,333
Average interest
rate 6.08% 2.20% 2.20% 9.94% 9.19%
------- ------- ------- ------- ------- ------- ------- -------
$38,167 $ 2,267 $ 1,427 $ 61 $21,786 $ -- $63,708 $63,708
======= ======= ======= ======= ======= ======= ======= =======
Weighted average
interest rate 4.99% 2.65% 2.75% 4.41% 9.94% -- 6.55%
======= ======= ======= ======= ======= ======= =======
17
Principal maturing in: Fair Value
----------------------------------------------------------------- December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ------- ------- ------- ---------- ------- ------------
(in thousands)
Interest rate
sensitive assets
Cash and cash
equivalents $ 21 $ 21 $ 21
Average interest
rate 5.28% 5.28%
------- ------- ------- ------- ------- ------- ------- -------
$ 21 $ -- $ -- $ -- $ -- $ -- $ 21 $ 21
======= ======= ======= ======= ======= ======= ======= =======
Interest rate
sensitive liabilities
Variable rate
borrowings $ 7,252 $31,754 $ 612 $39,618 $39,618
Average interest
rate 10.00% 9.35% 2.50% 9.36%
Fixed rate
borrowings 1,333 1,047 $21,628 24,008 24,008
Average interest
rate 8.50% 8.50% 9.73% 9.61%
------- ------- ------- ------- ------- ------- ------- -------
$ 8,585 $32,801 $ 612 $ -- $ -- $21,628 $63,626 $63,626
======= ======= ======= ======= ======= ======= ======= =======
Weighted average
interest rate 9.77% 9.32% 2.50% -- -- 9.73% 9.61%
======= ======= ======= ======= ======= ======= =======
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements
Page
----
Independent Auditors' Report 20
Consolidated Balance Sheets as of December 31, 2001, and 2000 21
Consolidated Statements of Income
for the Three Years Ended December 31, 2001 22
Consolidated Statements of Stockholders' Equity
for the Three Years Ended December 31, 2001 23
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 2001 24
Notes to Consolidated Financial Statements 26
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kennedy-Wilson, Inc.
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Kennedy-Wilson,
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Kennedy-Wilson, Inc. and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. 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
March 22, 2002
20
Kennedy-Wilson, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
------------------------------
2001 2000
------------- -------------
Assets
Cash and cash equivalents $ 11,121,000 $ 5,228,000
Cash - restricted 628,000 696,000
Accounts receivable 7,653,000 12,399,000
Notes receivable 15,130,000 11,320,000
Real estate held for sale 4,649,000 19,248,000
Investments in joint ventures 47,124,000 42,459,000
Contracts and other assets, net 19,243,000 16,599,000
Goodwill, net 23,965,000 24,447,000
------------- -------------
Total Assets $ 129,513,000 $ 132,396,000
============= =============
Liabilities and Stockholders' Equity
Liabilities
Accounts payable $ 484,000 $ 2,283,000
Accrued expenses and other liabilities 5,560,000 6,610,000
Accrued salaries and benefits 3,843,000 6,138,000
Deferred and accrued income taxes 3,932,000 4,475,000
Notes payable 10,022,000 8,423,000
Borrowings under lines of credit 29,907,000 28,938,000
Mortgage loans payable 1,993,000 4,637,000
Senior unsecured notes 14,286,000 14,128,000
Subordinated debt 7,500,000 7,500,000
------------- -------------
Total liabilities 77,527,000 83,132,000
------------- -------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $0.01 par value: 5,000,000
shares authorized; none issued as of
December 31, 2001 and 2000 -- --
Common stock, $0.01 par value: 50,000,000
shares authorized; 8,789,288 and 8,648,640
shares issued and outstanding as of
December 31, 2001 and 2000, respectively 88,000 87,000
Additional paid-in capital 47,853,000 44,958,000
Restricted stock - deferred compensation (2,677,000) --
Retained earnings 6,722,000 4,365,000
Notes receivable from stockholders -- (146,000)
------------- -------------
Total stockholders' equity 51,986,000 49,264,000
------------- -------------
Total Liabilities and
Stockholders' Equity $ 129,513,000 $ 132,396,000
============= =============
See notes to consolidated financial statements.
21
Kennedy-Wilson, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenue
Property management and leasing fees $33,388,000 $39,141,000 $29,547,000
Commissions 12,835,000 14,838,000 13,316,000
Sales of residential real estate 10,993,000 30,166,000 25,731,000
Equity in joint venture income 5,592,000 6,236,000 2,049,000
Gain on sale of joint venture -- -- 2,406,000
Gain on sale of commercial
real estate 281,000 -- 7,069,000
Gain on restructured notes
receivable 966,000 3,606,000 2,877,000
Rental income, net -- -- 6,352,000
Interest and other income 1,765,000 3,064,000 2,012,000
----------- ----------- -----------
Total revenue 65,820,000 97,051,000 91,359,000
----------- ----------- -----------
Operating Expenses
Commissions and marketing expenses 6,913,000 7,869,000 3,002,000
Cost of residential real estate sold 11,073,000 26,563,000 24,254,000
Compensation and related expenses 26,308,000 30,440,000 28,274,000
General and administrative 11,163,000 16,052,000 12,444,000
Depreciation and amortization 3,806,000 4,359,000 3,506,000
Interest expense 2,951,000 3,528,000 11,441,000
----------- ----------- -----------
Total operating expenses 62,214,000 88,811,000 82,921,000
----------- ----------- -----------
Income before provision for
income taxes 3,606,000 8,240,000 8,438,000
Provision for income taxes 1,249,000 3,514,000 2,829,000
----------- ----------- -----------
Net Income $ 2,357,000 $ 4,726,000 $ 5,609,000
=========== =========== ===========
Share Data:
Basic net income per share $ 0.27 $ 0.52 $ 0.68
Basic weighted average shares 8,700,883 9,018,250 8,218,983
Diluted net income per share $ 0.27 $ 0.50 $ 0.58
Diluted weighted average shares 8,888,498 10,127,807 10,014,601
See notes to consolidated financial statements.
22
Kennedy-Wilson, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Restricted (Accumulated Notes
Common Stock Additional Stock- Deficit)/ Receivable
------------------ Paid-in Deferred Retained From
Shares Amount Capital Compensation Earnings Stockholders Total
--------- ------- ----------- ------------ ----------- ------------ -----------
Balance,
January 1, 1999 6,597,075 $66,000 $28,888,000 $(5,970,000) $ (204,000) $22,780,000
Issuance of
common stock 2,490,587 25,000 18,452,000 18,477,000
Repurchase of
common stock (21,000) (184,000) (184,000)
Repayment on notes
receivable from
stockholders 4,000 4,000
Net income 5,609,000 5,609,000
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1999 9,066,662 91,000 47,156,000 (361,000) (200,000) 46,686,000
Issuance of
common stock 78,500 1,000 264,000 265,000
Repurchase of
common stock (496,522) (5,000) (2,462,000) (2,467,000)
Repayment on notes
receivable from
stockholders 54,000 54,000
Net income 4,726,000 4,726,000
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2000 8,648,640 87,000 44,958,000 4,365,000 (146,000) 49,264,000
Issuance of
restricted stock 70,000 1,000 2,974,000 $(2,975,000) --
Amortization of
deferred compensation 298,000 298,000
Issuance of
common stock 144,000 1,000 238,000 239,000
Repurchase of
common stock (73,352) (1,000) (317,000) (318,000)
Repayment on notes
receivable from
stockholders 146,000 146,000
Net income 2,357,000 2,357,000
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2001 8,789,288 $88,000 $47,853,000 $(2,677,000) $ 6,722,000 $ -- $51,986,000
========= ======= =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
23
Kennedy-Wilson, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 2,357,000 $ 4,726,000 $ 5,609,000
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 3,806,000 4,359,000 3,506,000
Equity in joint venture income (5,592,000) (6,236,000) (2,049,000)
Gains on sale of joint venture - - (2,406,000)
Gains on sales of real estate (281,000) - (8,546,000)
Gains on restructured notes receivable - non-cash - (744,000) (1,791,000)
Interest on senior unsecured notes - non-cash 158,000 - -
Compensation expense for restricted stock 298,000 - -
Change in assets and liabilities:
Accounts receivable 4,746,000 (3,865,000) (1,860,000)
Contracts and other assets (5,087,000) (3,069,000) (1,680,000)
Accounts payable (1,799,000) (120,000) 651,000
Accrued expenses (3,888,000) (4,191,000) 2,072,000
------------ ------------ ------------
Net cash used in operating activities (5,282,000) (9,140,000) (6,494,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of contracts and other assets (200,000) (637,000) (4,806,000)
Dispositions of contracts and other assets - - 3,000
Collections of notes receivable 5,396,000 12,079,000 10,982,000
Additions to notes receivable (9,206,000) (843,000) (14,984,000)
Purchase and additions to real estate held for sale (3,965,000) (26,984,000) (28,037,000)
Proceeds from sales of real estate held for sale 18,564,000 25,759,000) 45,684,000
Proceeds from sale of joint venture - - 6,550,000
Acquisition of property management companies (400,000) (2,094,000) (7,549,000)
Distributions from joint ventures 21,719,000 19,716,000 2,495,000
Contributions to joint ventures (20,792,000) (20,642,000) (14,475,000)
Cash - restricted decrease 68,000 1,405,000 6,067,000
------------ ------------ ------------
Net cash provided by investing activities 11,184,000 7,759,000 1,930,000
------------ ------------ ------------
Cash flow from financing activities:
Issuance of mortgage loans payable 2,730,000 7,727,000 34,055,000
Repayment of mortgage loans payable (5,374,000) (8,851,000) (56,937,000)
Borrowings under lines of credit 27,766,000 32,542,000 27,374,000
Repayment of lines of credit (26,797,000) (31,137,000) (13,355,000)
Borrowings under notes payable 10,447,000 9,265,000 15,708,000
Repayment of notes payable (8,848,000) (10,055,000) (20,786,000)
Issuance of senior unsecured notes - 14,128,000 -
Cost of obtaining financing - (1,105,000) 113,000
Issuance of subordinated debt - - 7,500,000
Repayment of subordinated debt - (9,000,000) (12,000,000)
Issuance of common stock 239,000 265,000 18,477,000
Repurchase of common stock (318,000) (2,467,000) (184,000)
Loan repayments from stockholders 146,000 54,000 4,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (9,000) 1,366,000 (31,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,893,000 (15,000) (4,595,000)
Cash and cash equivalents, beginning of year 5,228,000 5,243,000 9,838,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 11,121,000 $ 5,228,000 $ 5,243,000
============ ============ ============
(Continued)
24
Kennedy-Wilson, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Supplemental Disclosures of Cash Flow Information:
Year ended December 31,
-------------------------------------
2001 2000 1999
---------- ---------- -----------
Cash Paid During the Year For:
Interest $4,248,000 $5,804,000 $13,039,000
Interest capitalized $2,288,000 $2,496,000 $ 998,000
Income taxes $ 565,000 $ 300,000 $ 1,367,000
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During 2000 the Company acquired a preferred stock interest in a single purpose
entity with the following consideration, reduction of real estate held for sale
of $16.4 million and reduction of mortgage notes payable and other liabilities
of $5.6 million, offset against an investment in joint ventures of $10.8
million (See Note 12 - Related Party Transactions).
During 2000 the Company acquired a preferred stock interest in a single purpose
entity with the following consideration, reduction of prepaid expenses of $1.2
million and reduction of accounts payable of $80,000, offset against an
investment in joint ventures of $1.12 million (See Note 12 -Related Party
Transactions).
During 1999 the Company acquired a preferred stock interest in five single
purpose entities with the following consideration, reduction of real estate held
for sale and other assets of $85.3 million and reduction of mortgage notes
payable and other liabilities of $80.6 million, offset against an investment in
joint ventures of $4.7 million (See Note 12 - Related Party Transactions).
Also during 1999, the Company's other assets increased approximately $2.8
million and accrued liabilities increased approximately $2.8 million due to the
acquisition of computer and telephone equipment under capital leases.
See notes to consolidated financial statements.
25
Kennedy-Wilson, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION
Kennedy-Wilson, Inc., a Delaware corporation, and its subsidiaries (the
"Company"), provides real estate property management, brokerage and marketing
services in 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 real estate and
distressed note joint venture funds with institutional investor clients.
In 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. During 1999, the
Company acquired Coastal Commercial Real Estate Services, Inc., a Los Angeles-
based property management and leasing company; Jones Lang Wooton California,
Inc., a regional property management firm,; TRF Management Corp., a commercial
property management and brokerage firm primarily in the pacific northwest; Fults
& Associates, Inc, a property management firm with a portfolio primarily in the
south and southwest markets and SynerMark Companies, a property management
company based primarily in Texas. These transactions were accounted for using
the purchase method of accounting. Accordingly, the results of operations of
these acquisitions are included in the consolidated financial statements from
the date of acquisition.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and joint ventures in which the Company has a
controlling interest. All material intercompany transactions and balances have
been eliminated. Assets and liabilities denominated in foreign currencies are
translated at rates of exchange prevailing on the date of the consolidated
balance sheet, while income statement items are translated at average rates of
exchange for the year. The foreign currency translation adjustment is not
material.
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. 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 requirements for profit
recognition as set forth by Statement of Financial Accounting Standards No. 66,
Accounting for Sales of Real Estate. The Company presents sales of commercial
real estate on a net gain on sale basis due to the fact that these properties
are typically held for two to three years and generate rental income and
operating expenses during the holding period. Residential real estate is
accounted for as inventory because these properties are generally held for less
than one year and do not generate income during the holding period. Accordingly,
gross revenue and cost of sales are presented separately on the statements of
income. Revenues on notes receivable are recognized based on the following
criteria. Payments on performing notes are applied to principal and interest
based on their terms. Cash payments on defaulted notes are applied to the cost
basis until fully recovered before any revenue is recognized. When notes
purchased are subsequently structured into performing collateralized notes, with
a market rate of interest and an initial cash payment of 15% has been collected,
the difference between the cost basis of the asset and the fair value of the
note is recorded as revenue.
INVESTMENTS IN JOINT VENTURES - The Company has a number of partnership and
joint venture interests ranging from 2% to 50% that were formed to acquire,
manage, develop and/or sell real estate. These investments are accounted for
under the equity method. Investments in joint ventures also include mezzanine
loans to real estate developers for new single-family residential developments.
These investments are accounted for under the cost method.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the Unites States of America
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
26
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 - Goodwill results from the difference between the purchase price and
the fair value of the net 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 cash flows. During 2001 and 2000, additional earnouts were added to
goodwill in the amount of $400,000 and $2,094,000, respectively. Payouts in
future years are anticipated. Amortization of goodwill totaled approximately
$882,000, $742,000 and $612,000 in 2001, 2000 and 1999, respectively.
Accumulated amortization was $2,478,000 and $1,596,000 at December 31, 2001 and
2000, respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consists of cash and all
highly liquid investments purchased with maturities of three months or less.
RESTRICTED CASH - Restricted cash consists of non-refundable deposits on
acquisitions of real estate and marketing funds advanced by clients.
LONG-LIVED ASSETS - The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that an asset's carrying
value may exceed the undiscounted expected future cash flows to be derived from
that asset. Whenever undiscounted expected future cash flows are less than the
carrying value, the asset will be reduced to an amount equal to the net present
value of the expected future cash flows and an impairment loss will be
recognized.
NOTES RECEIVABLE - The Company accounts for impaired loans in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan. Accordingly, impaired loans are measured based upon the
present value of expected future cash flows, discounted at the loans' effective
interest rate or, if readily determinable, the loans' observable market price or
the fair value of the collateral if the loan is collateral dependant.
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 judgement, 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.
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate 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 risks 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
27
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 of 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 Consumer Price Index 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 the 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 - 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Investments and Hedging Activities ("SFAS
133"). SFAS 133 is effective, as amended, for fiscal years beginning after June
15, 2000 and requires all derivatives to be recorded on the balance sheet at
fair value as either assets or liabilities depending on the rights or
obligations under the contracts. SFAS 133 also established new accounting
methodologies for the following three classifications of hedges: fair value,
cash flow and net investment in foreign operations. The Company's adoption of
SFAS 133 on January 1, 2001 did not have a material impact on the Company's
financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS 142, which is
effective January 1, 2002, includes requirements to test goodwill and indefinite
lived intangible assets for impairment rather than amortize them. The Company is
currently evaluating the impact that these standards will have on its financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). SFAS 144 supercedes SFAS 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of and applies to all
long-lived assets, including discontinued operations. SFAS 144 establishes a
single accounting model for the impairment of disposal of long-lived assets,
including discontinued operations. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company has not yet completed its full evaluation of the impact the adoption of
SFAS 144 but does not expect a material impact on the Company's financial
position or results of operations.
MINORITY INTEREST - In 2000, the Company sold shares of Kennedy-Wilson Japan,
one of its subsidiaries, to third party investors and certain employees, the
minority interest of which is not material.
28
RECLASSIFICATION - Certain reclassifications have been made to the 2000 and 1999
balances to conform with the 2001 presentation.
NOTE 3 - NOTES RECEIVABLE
Notes receivable consists primarily of non-performing note pools and related
assets acquired from financial institutions in the U.S. and Japan. Notes
receivable consist of the following:
December 31,
----------------------------
2001 2000
---------- ----------
Note receivable, fixed rate of 10%, payable in full March 2004 subject to
borrower's right to extend the maturity date for three consecutive one-year
periods, collaterized by land in Hawaii $ 5,425,000 -
Note receivable, fixed rate of 10%, interest due monthly, maturity date of May
2002, secured by Purchase Money Mortgage, Security Agreement and Financing
Statement covering property located in Waikoloa and Ouli, Hawaii 2,150,000 $3,025,000
Note receivable, fixed rate of 9.25%, interest due monthly, maturity date of
January 2007, secured by real property in Virginia 1,753,000 1,708,000
Note receivable, fixed rate of 14.36%, principal and interest due monthly,
maturity date of April 2009, secured by Subordinated Deed of Trust with
Assignments of Rent covering real property in California - 2,973,000
Other note receivable pools in the U.S. and Japan with
various interest rates and maturity dates, secured by
real estate, personal property or guarantees 5,802,000 3,614,000
----------- -----------
$15,130,000 $11,320,000
=========== ===========
NOTE 4 - REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial and residential properties
and land and it is accounted for at the lower of carrying amount or fair value
less cost to sell. Both commercial and residential real estate are classified as
held for sale as the Company's intent is to acquire and dispose of properties as
part of its normal course of business. Residential real estate, which is
typically not held for more than one-year, is accounted for as inventory and is
not depreciated. Commercial real estate is generally held for a period of one to
three years and is depreciated unless it is subject to a plan of disposition.
Except for the land in Hawaii and San Diego, all properties are encumbered by
mortgage loans that are non-recourse. Real estate held for sale includes the
following:
December 31,
--------------------------
2001 2000
----------- -----------
Commercial land:
Santa Monica, California - 4 lots $ 4,066,000 $ 2,890,000
Houston, Texas - 7 acres 300,000 --
Hawaii - 542 acres -- 10,073,000
----------- -----------
4,366,000 12,963,000
----------- -----------
Residential properties and land:
Cathedral City, California - 109 lots -- 6,002,000
San Diego, California - 155 acres 283,000 283,000
----------- -----------
283,000 6,285,000
----------- -----------
$ 4,649,000 $19,248,000
=========== ===========
Depreciation expense totaled $0, $130,000 and $912,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
29
NOTE 5 - INVESTMENTS IN JOINT VENTURES
The Company has a number of partnership and joint venture interests ranging from
2% to 50% that were formed to acquire, manage, develop and/or sell real estate.
These investments are accounted for under the equity method. Investments in
joint ventures also include mezzanine loans to real estate developers for new
single-family residential developments. These investments are accounted for
under the cost method. Summarized financial data of the ventures are as
follows:
December 31,
--------------------------
2001 2000
------------ ------------
Balance sheets for equity method investments:
Cash and cash equivalents $ 29,821,000 $ 21,361,000
Receivable 57,258,000 36,457,000
Real estate 408,842,000 279,477,000
------------ ------------
Total assets $495,921,000 $337,295,000
============ ============
Accounts payable and accrued expenses $130,329,000 $ 41,236,000
Mortgages payable 293,091,000 244,011,000
------------ ------------
Total liabilities 423,420,000 285,247,000
Partners' capital
Kennedy-Wilson 26,414,000 24,864,000
Other partners 46,087,000 27,184,000
------------ ------------
Total partners' capital 72,501,000 52,048,000
------------ ------------
Total liabilities and partners' capital $495,921,000 $337,295,000
============ ============
Total investments comprise the following:
Investments, equity method - affiliates $ 3,014,000 $11,635,000
Investments, equity method - non-affiliates 23,400,000 13,229,000
----------- -----------
Total investments, equity method 26,414,000 24,864,000
----------- -----------
Investments, cost method - affiliates 3,550,000 2,471,000
Investments, cost method - non-affiliates 17,160,000 15,124,000
----------- -----------
Total investments, cost method 20,710,000 17,595,000
----------- -----------
Total investments $47,124,000 $42,459,000
=========== ===========
Year ended December 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Statements of income:
Revenues $192,763,000 $83,460,000 $63,921,000
Expenses 152,214,000 81,325,000 55,962,000
------------ ----------- -----------
Net income $ 40,549,000 $ 2,135,000 $ 7,959,000
============ =========== ===========
Net income allocation:
Kennedy-Wilson $ 5,049,000 $ 1,787,000 $ 2,049,000
Other partners 35,500,000 348,000 5,910,000
------------ ----------- -----------
Net income $ 40,549,000 $ 2,135,000 $ 7,959,000
============ =========== ===========
Total income from joint ventures:
Equity method investments $ 5,049,000 $ 1,787,000 $ 2,049,000
Cost method investments 543,000 4,449,000 --
------------ ----------- -----------
$ 5,592,000 $ 6,236,000 $ 2,049,000
============ =========== ===========
In 1999, the Company sold its 15% interest in the joint venture known as
Downtown Properties NY LLC for approximately $6.5 million.
The Company has certain investments in joint ventures in which the Company's
investment is in the form of preferred stock. These investments are accounted
for under the equity method of accounting. The Financial Accounting Standards
Board is currently considering new rules in accounting for the consolidation of
joint venture investments and investments utilizing preferred stock. Under such
new rules, the Company may have to consolidate these entities in the future.
Should the Company consolidate these entities, there would be no effect on net
income, and there would be an increase in assets and liabilities at December 31,
2001 in the amounts of $15.6 million and $14.8 million, respectively.
30
NOTE 6 - CONTRACTS AND OTHER ASSETS
The Company amortizes acquired property management contracts over a seven-year
period. Contracts and other assets consist of the following:
December 31,
--------------------------------
2001 2000
------------ ------------
Contracts $ 9,448,000 $ 9,448,000
Office furniture and equipment 3,464,000 3,337,000
Leasehold improvements 1,056,000 1,065,000
Equipment under capital leases 1,689,000 1,746,000
------------ ------------
15,657,000 15,596,000
Less: Accumulated depreciation
and amortization (7,012,000) (4,601,000)
------------ ------------
8,645,000 10,995,000
Prepaid expenses 4,807,000 1,894,000
Loan fees 895,000 1,122,000
Deposits, prepaid rents and other 4,896,000 2,588,000
------------ ------------
$ 19,243,000 $ 16,599,000
============ ============
Depreciation and amortization expense was $2,924,000, $2,439,000 and $1,448,000
for 2001, 2000 and 1999, respectively.
NOTE 7 - NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable and property management companies, and included the following:
December 31,
------------------------
2001 2000
----------- ----------
Note payable, fixed rate of 9.75% for first year, then variable based on weekly
average yield on United States Treasury securities adjusted to the constant
maturity of one year plus 3.75%, 9.75% and 9.84% at December 31, 2001 and
2000, respectively, interest payable monthly, due May 2002 $ 1,620,000 $2,277,000
Note payable, variable interest based on prime rate plus 1.5%, interest payable
monthly, 11% at December 31, 2000, due July 2001 -- 1,738,000
Note payable, fixed rate of 8.5%, interest accrued monthly, principal payment of
$300,000 due January 2000, three additional principal and interest payments of
$666,667, due on each anniversary date, due October 2002 605,000 1,186,000
31
Note payable, fixed rate of 8.5%, interest accrued monthly, three principal and
interest payments of $666,667 due on each anniversary date, due November 2002 615,000 1,195,000
Note payable, variable based on weekly average yield on United States Treasury
securities adjusted to the constant maturity of one year plus 4%, 7.5% and
10.17% at December 31, 2001 and 2000, respectively, payable monthly, due
September 2002 279,000 279,000
Yen-denominated borrowings with interest rates
ranging from 1.925% to 4.625%, due from 2002 to 2005 6,903,000 1,748,000
----------- ----------
$10,022,000 $8,423,000
=========== ==========
The maturity of notes payable for the years 2002, 2003, 2004 and 2005 are $6,267,000, $2,267,000, $1,427,000 and $61,000,
respectively.
NOTE 8 - BORROWINGS UNDER LINES OF CREDIT
The Company has entered into a loan agreement with East West Bank that provides
the Company with a credit facility (the "facility") for use in acquisitions and
working capital purposes in the amount of $15 million and $19 million at
December 31, 2001 and 2000, respectively. The loans under the facility bear
interest at the three-month LIBOR plus 3%, payable monthly. At December 31, 2001
and 2000, the facility had an interest rate of 5.081% and 9.736%, respectively.
The facility expires in June 2002. The principal amount of outstanding loans was
$14,801,000 and $18,109,000 at December 31, 2001 and 2000, respectively.
The Company has entered into an unsecured revolving loan agreement with United
California Bank (formerly Tokai Bank of California) for $13 million. The loan
bears interest at the lesser of LIBOR plus three hundred basis points or Prime
Rate, payable monthly. At December 31, 2001 and 2000, the loan had an interest
rate of 4.75% and 9.5%, respectively. The loan expires June 30, 2002. The
principal amount of outstanding loans was $11,771,000 and $10,232,000 at
December 31, 2001 and 2000, respectively.
The Company's Japanese subsidiary has unsecured yen-denominated lines of credit
pursuant to which it can borrow up to $4.2 million. At December 31, 2001 and
2000, yen borrowings in the principal amount of $3,335,000 and $597,000,
respectively were outstanding under these lines of credit. These borrowings bear
interest rates from 1.375% to 2.5% per annum and become due on various dates in
2002.
The Company's ability to borrow under these facilities is subject to compliance
with certain financial covenants. As of December 31, 2001, the Company was in
compliance with the covenants.
NOTE 9 - MORTGAGE LOANS PAYABLE
December 31,
-----------------------
2001 2000
---------- ----------
Mortgage note payable, variable interest based on greater of 7.5% or prime rate
32
plus 1%, 7.5% at December 31, 2001, interest payable monthly, due April
2002, collateralized by four lots on 15th Street in Santa Monica, California $1,993,000 --
Mortgage note payable, variable interest based on prime rate plus 1.5%, 11% at
December 31, 2000, interest payable monthly, due January 2001, collateralized
by four lots on 15th Street in Santa Monica, California -- $1,000,000
Mortgage note payable, variable interest based on prime rate plus 1%,
interest payable monthly, due between March and July 2001,
collateralized by 109 housing lots in Cathedral City, California -- 3,637,000
---------- ----------
$1,993,000 $4,637,000
========== ==========
NOTE 10 - SENIOR UNSECURED NOTES
In June 2000, the Company issued $15 million of 12% Senior Notes (the "notes")
due June 22, 2006 with interest payable quarterly commencing June 30, 2000.
Provisions of the notes include restrictions of investments, liens, dividends,
assets sales and other restricted payments. The Company may, at its option,
prepay the notes in full at 104% of their principal amount beginning June 22,
2002, and thereafter at prices declining annually to 100% on and after June 22,
2005. The notes are not subject to any sinking fund requirements.
In connection with the issuance of the notes, the Company issued warrants to the
purchasers of the notes for the purchase of 597,888 shares of the common stock
of the Company at an exercise price of $6.25 per share. The warrants expire June
22, 2008. The warrants contain a put provision that requires the Company, at the
option of the note holders, to repurchase the common shares issued upon exercise
of the warrants at the prevailing market price, during years four through six
of the warrant term.
The fair value of the warrants was estimated using a combination of the Black-
Scholes Option Pricing Model and Monte Carlo Simulation. The estimated fair
value of the warrants at issuance was recorded as deferred loan costs and
deducted from the note balance. The deferred loan costs are being amortized on a
straight-line basis over the life of the notes. A liability was also recorded
for the fair value of the warrants, which is adjusted quarterly to record the
warrants at their estimated fair value while they are outstanding, with the
change in value recorded as an increase or decrease to interest expense. The
estimated fair value of the warrants was $714,000 and $914,000 at December 31,
2001 and 2000, respectively, and is included in accrued expenses and other
liabilities.
NOTE 11 - SUBORDINATED DEBT
The Company has issued convertible subordinated debentures in the aggregate
principal amount of $7.5 million. The debentures have a term of seven years and
an interest rate of 6%, payable monthly. The debentures are presently
convertible into 750,000 shares of Company's common stock at any time by the
holders at a conversion price of $10 per share, subject to adjustment.
NOTE 12 - RELATED PARTY TRANSACTIONS
In 1999, the Company transferred to Camden Investment Property Group Inc.,
("Camden"), an entity controlled by executives of the Company, all of the common
33
stock of the single purpose entities which were formed to acquire the commercial
properties known as 1055 Wilshire Blvd., 6380 Wilshire Blvd., 5900 Sepulveda
Blvd., and 7080 Hollywood Blvd. in exchange for cash of $200,000 and 4,000
shares of preferred stock in these entities. The Company's cost basis in the
preferred stock is equivalent to its net book value in the transferred
properties less the cash advance by Camden. These properties were sold in 2000.
The Company also transferred 40% of its membership interest in 301 South Fair
Oaks, LLC, the owner of 301 S. Fair Oaks, to Camden in exchange for $50,000. The
property was sold in 2001.
In 2000, the Company transferred to Maple Investment Property Group Inc.,
("Maple"), an entity controlled by executives of the Company, all of the common
stock of a single purpose entity which was formed to acquire the property known
as 612 S. Flower Street, in exchange for cash of $300,000 and 1,000 shares of
preferred stock in Maple. The Company's cost basis in the preferred stock is
equivalent to its net book value in the transferred property less the cash
payment by Maple. The property was sold in 2001 to a partnership in which the
Company retained a 50% ownership interest.
In 2000, the Company transferred to Rexford Investment Property Group Inc.,
("Rexford"), an entity controlled by executives of the Company, all of the
common stock of a single purpose entity which was formed to develop an
Internet-based real estate auction brokerage and related services business, in
exchange for cash of $50,000 and 1,000 shares of preferred stock in Rexford. The
Company's cost basis in the preferred stock is equivalent to its net book value
in the transferred business less the cash payment by Rexford.
In 2001, the Company transferred to Balcones Austin Investment Group, Inc.
("Balcones"), an entity controlled by executives of the Company, all of the
common stock of a single purpose entity which was formed to acquire two
industrial projects and two parcels of vacant land for industrial development,
in exchange for cash of $60,000 and 1,000 shares of preferred stock in Balcones.
The Company's cost basis in the preferred stock is equivalent to its net book
value less the cash payment by Balcones. The Company guaranteed 25% (which
equates to $2.7 million) of the property mortgage until the debt coverage ratio
of the property is at least 1.35 to 1.00. Also in 2001, the Company transferred
to Balcones all of the common stock of a single purpose entity which was formed
to purchase and develop a build-to-suit project for a community college. The
development was completed and the project sold in 2001.
In 2001, the Company transferred to Bedford Investment Property Group, Inc.
("Bedford"), an entity controlled by executives of the Company, all of the
common stock of a single purpose entity which was formed to acquire an apartment
building, in exchange for $25,000 and 1,000 shares of preferred stock in
Bedford. The property was sold in 2001.
In 2001, the Company transferred to Roxbury Investment Property Group, Inc.
("Roxbury"), an entity controlled by executives of the Company, all of the
common stock of a single purpose entity which owned an office building and a
parking lot, in exchange for $25,000 and 1,000 shares of preferred stock in
Roxbury. The Company's cost basis in the preferred stock is equivalent to its
net book value less the cash payment by Roxbury. The office building was sold in
2001.
In 2001, the firm of Kulik, Gottesman & Mouton Ltd. was paid $205,000 for legal
services provided by the firm and director's fees for Kent Mouton, a partner in
the firm and a member of the Company's Board of Directors. For 2000 and 1999,
the amounts were $324,000 and $408,500, respectively.
In 2001, the firm of Solomon, Winnett & Girard was paid $181,000 for accounting
services provided by the firm. Jerry Solomon, a partner in the firm, joined the
Company's Board of Directors in 2001 and was paid director's fees in the amount
of $4,500.
During 2001, 2000 and 1999, the Company received property management, brokerage,
leasing commissions and other fees from affiliates in the amounts of $9,979,000,
$4,455,000 and $2,290,000, respectively.
34
NOTE 13 - INCOME TAXES
The Company's income before provision for income taxes is as follows:
Year ending December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
United States $1,062,000 $3,796,000 $6,537,000
Foreign 2,544,000 4,444,000 1,901,000
---------- ---------- ----------
Total $3,606,000 $8,240,000 $8,438,000
========== ========== ==========
The provision for income taxes consists of the following:
Year ending December 31,
------------------------------------------------
2001 2000 1999
----------- ----------- ----------
Current
Federal $ 361,000 $ 2,395,000 $1,795,000
State 51,000 332,000 263,000
Foreign 3,218,000 900,000 587,000
----------- ----------- ----------
3,630,000 3,627,000 2,645,000
Deferred (2,381,000) (113,000) 184,000
----------- ----------- ----------
Total $ 1,249,000 $ 3,514,000 $2,829,000
=========== =========== ==========
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
Year ending December 31,
---------------------------------------
2001 2000 1999
----------- ---------- -----------
Tax computed at statutory rate $ 1,259,000 $2,884,000 $ 2,953,000
State income net of federal benefit 70,000 214,000 175,000
Foreign income 82,000 109,000 (226,000)
Other (162,000) 307,000 (73,000)
----------- ---------- -----------
Provision for income taxes $ 1,249,000 $3,514,000 $ 2,829,000
=========== ========== ===========
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,
-----------------------------
2001 2000
----------- -----------
Deferred tax assets:
Accrued reserves $ 136,000 $ 35,000
Auction marketing expenses 9,000 8,000
Foreign tax credit 1,085,000 --
Deferred compensation 1,072,000 1,167,000
----------- -----------
Total deferred tax assets 2,302,000 1,210,000
----------- -----------
Deferred tax liabilities:
Prepaid expenses (2,187,000) (134,000)
35
Depreciation (965,000) (1,791,000)
----------- -----------
Total deferred tax liabilities (3,152,000) (1,925,000)
----------- -----------
Net deferred tax liability $ (850,000) $ (715,000)
=========== ===========
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under scheduled capital and operating leases, net
of subleases, that have initial or remaining noncancelable terms in excess of
one year are as follows:
Capital Operating
Year Leases Leases
- ---- ---------- ----------
2002 $ 366,000 $2,878,000
2003 88,000 2,551,000
2004 62,000 1,524,000
2005 -- 1,028,000
2006 -- 720,000
Thereafter -- 133,000
---------- ----------
Total minimum payments $ 516,000 $8,834,000
Amount representing interest (125,000) ==========
----------
Obligations under capital leases $ 391,000
==========
Net rental expense amounted to $3,527,000, $2,731,000, and $1,953,000 for the
years ended December 31, 2001, 2000 and 1999, 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 $1,715,000 and expire at various dates through December
2003, with one expiring in December 2009. The employment 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 for minimum annual compensation of
$2,674,000 in total, expiring at various dates through March 2003.
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 15 - 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 1,700,000 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.
36
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 the Compensation Committee of the Board of Directors. 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. 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. 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.
The following table sets forth activity under the plans:
Weighted
Average
Range of Exercise
Options Exercise Prices Price
--------- --------------- --------
Outstanding, January 1, 1999 1,116,570 $ 0.93 - $12.96 $4.11
Granted 402,180 $ 7.09 - $10.43 $8.09
Exercised (110,550) $ 0.95 - $ 3.72 $2.66
Forfeited (54,540) $ 1.57 - $12.96 $7.22
---------
Balance, December 31, 1999 1,353,660 $ 0.93 - $12.96 $5.28
Granted 74,000 $ 5.25 - $ 8.00 $5.94
Exercised (78,500) $ 1.07 - $ 8.33 $2.46
Forfeited (84,600) $ 7.38 - $10.43 $8.36
---------
Balance, December 31, 2000 1,264,560 $ 0.93 - $12.96 $5.32
Granted 246,040 $ 3.80 - $ 4.50 $3.87
Exercised (144,000) $ 0.95 - $ 1.81 $1.45
Forfeited (108,000) $ 7.38 - $ 8.33 $8.11
---------
Balance, December 31, 2001 1,258,600 $ 0.93 - $12.96 $5.20
=========
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Weighted
37
Number Weighted Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices 12/31/01 Contractual Life Price 12/31/01 Price
- --------------- ----------- ---------------- -------- ----------- --------
$ 0.93 - $ 2.13 230,580 1.15 $ 2.02 230,580 $ 2.02
$ 3.33 - $ 4.50 468,790 3.14 $ 3.79 222,750 $ 3.69
$ 5.25 - $ 6.13 60,000 3.46 $ 5.46 19,998 $ 5.46
$ 7.00 - $ 9.00 485,730 2.01 $ 7.83 374,876 $ 7.84
$12.96 13,500 0.62 $12.96 13,500 $12.96
--------- -------
1,258,600 861,704
========= =======
The number of options exercisable at December 31, 2001, 2000 and 1999 were
861,704, 852,088 and 553,419, respectively.
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
options plans. Had compensation cost for the Company's stock options plans 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 for
the years ended December 31, 2001, 2000 and 1999 would have been $2,058,000,
$4,312,000 and $4,819,000, respectively. In addition, on a pro forma basis, the
Company's basic and diluted net income per share for the year ended December 31,
2001, would have been $0.24 and $0.23, respectively. For the year ended December
31, 2000, the Company's basic and diluted net income per share, on a proforma
basis, would have been $0.46 and $0.41, respectively. For the year ended
December 31, 1999, the Company's basic and diluted net income per share, on a
pro forma basis, would have been $0.59 and $0.48, respectively. 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 56%, (c) risk
free interest rate of 6% for all periods, (d) expected option life of three
years.
At December 31, 2001, total warrants for the purchase of 927,000 shares of the
Company's common stock were outstanding. The warrants have exercise prices
ranging from $6.25 to $10.00 per share and expire between 2003 and 2008.
NOTE 16 - CAPITAL STOCK TRANSACTIONS
Effective January 1, 2001 the Company granted 700,000 shares under a restricted
stock agreement with the Company's chairman pursuant to the terms of his
employment agreement.
In 2000, the Company announced a stock buy back program for up to one million
shares. During the years ended December 31, 2001 and 2000, the Company acquired
approximately 73,000 and 497,000 shares, respectively.
In 2000, in connection with the issuance of the 12% Senior unsecured notes, the
Company issued warrants to the purchasers of the notes for the purchase of
597,888 shares of the common stock of the Company at an exercise price of $6.25
per share. The warrants expire June 22, 2008. See Note 10.
In 1999, the Company purchased, at fair value, 21,000 shares of the Company's
common stock from one of the holders of the debentures.
Also in 1999, the Company completed a public offering of 2,300,000 shares of its
common stock, resulting in net proceeds of approximately $18 million. The
proceeds of the offering were used to pay down existing debt.
38
NOTE 17 - 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, 2001,
2000 and 1999.
In addition, the Company has a qualified plan under the 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 2001, 2000 and
1999 the Company made matching contributions of $197,000, $226,000 and $39,000,
respectively, to this plan.
DEFERRED COMPENSATION PLAN - The Company has a non-qualified deferred
compensation plan to provide specified benefits to a select group of management
and key 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 contributions of up to 100% of
their total compensation. The plan also includes provisions, which authorize the
Company to make discretionary contributions. During 2001, 2000 and 1999, the
Company made matching contributions of $0, $1,078,000 and $1,000,000,
respectively.
NOTES RECEIVABLE FROM STOCKHOLDERS - In 1997, a group of key employees,
including its principal executive officers, purchased 329,913 shares of the
Company's outstanding stock for cash in a private transaction with an
institutional investor. The Company provided recourse loans for the employees to
purchase the stock totaling approximately $1.3 million. The balance outstanding
as of December 31, 2001 and 2000 was $0 and $146,000, respectively. The interest
rate on the notes receivable was prime plus 1%, with interest payable
semi-annually, and the notes matured upon the termination of employment or the
sale of the stock by the employee.
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. The Company's segment disclosure with respect to the determination
of segment profit or loss and segment assets is based on these services and its
various investments:
PROPERTY MANAGEMENT - The Company is a nationwide commercial and residential
property management and leasing company, providing a full range of services
relating to property management. The Company also provides asset management
services for some of our joint ventures.
BROKERAGE - Through its various offices, the Company provides specialized
brokerage services for both commercial and residential real estate and provides
other real estate services such as property valuations, development and
implementation of marketing plans, arranging financing, sealed bid auctions and
open bid auctions.
INVESTMENTS - With joint venture partners and on its own, the Company invests in
commercial and residential real estate and purchases and manages pools of
distressed notes. The Company's current real estate portfolio focuses on
39
commercial buildings and multiple and single-family residences. The Company has
entered into joint ventures with large international investors to invest in
Japanese real estate and note pools. The Company also makes mezzanine loans to
real estate developers for new single-family, residential developments.
The Company did not generate material intersegment revenues for the periods
ended December 31, 2001, 2000 and 1999. The Company does not disclose based on
geographic segments due to immateriality. The Company does not include capital
expenditures by segment as part of the decision making process. The amounts
representing investments with related parties and non-affiliates are included in
the investment segment.
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 2001 and balance sheet data as of December 31, 2001.
2001 Reconciliation of Reportable Segment Information
Property
Management Brokerage Investments Corporate Consolidated
---------- ----------- ----------- ----------- ------------
Property management and leasing fees $27,242,000 $ 5,031,000 $ 1,115,000 $ 33,388,000
Commissions 2,016,000 9,216,000 1,603,000 12,835,000
Sales of residential real estate 10,993,000 10,993,000
Equity in joint venture income 4,608,000 984,000 5,592,000
Gain on sale of commercial real estate 281,000 281,000
Gain on restructured notes receivable 679,000 287,000 966,000
Intestest and other income 594,000 337,000 $ 834,000 1,765,000
----------- ----------- ----------- ----------- ------------
Total revenue 29,258,000 20,409,000 15,319,000 834,000 65,820,000
----------- ----------- ----------- ----------- ------------
Depreciation and amortization 3,806,000 3,806,000
Interest expense 981,000 1,970,000 2,951,000
Other expenses 26,781,000 12,951,000 12,584,000 3,141,000 55,457,000
----------- ----------- ----------- ----------- ------------
Total operating expenses 26,781,000 12,951,000 13,565,000 8,917,000 62,214,000
----------- ----------- ----------- ----------- ------------
Income before provision for income taxes $ 2,477,000 $ 7,458,000 $ 1,754,000 $(8,083,000) $ 3,606,000
=========== =========== =========== =========== ============
Total assets $15,976,000 $31,598,000 $42,348,000 $39,591,000 $129,513,000
=========== =========== =========== =========== ============
40
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 2000 and balance sheet data as of December 31, 2000.
2000 Reconciliation of Reportable Segment Information
Property
Management Brokerage Investments Corporate Consolidated
------------ ------------ ------------ ------------ ------------
Property management and
leasing fees $ 37,458,000 $ 1,491,000 $ 192,000 $ 39,141,000
Commissions 2,349,000 8,177,000 4,312,000 14,838,000
Sales of residential real
estate 30,166,000 30,166,000
Equity in joint venture income 1,913,000 4,323,000 6,236,000
Gain on restructured notes
receivable 1,531,000 2,075,000 3,606,000
Interest and other income 479,000 1,125,000 $ 1,460,000 3,064,000
------------ ------------ ------------ ------------ ------------
Total revenue 39,807,000 13,591,000 42,193,000 1,460,000 97,051,000
------------ ------------ ------------ ------------ ------------
Depreciation and amortization 133,000 4,226,000 4,359,000
Interest expense 607,000 2,921,000 3,528,000
Other expenses 37,114,000 8,078,000 31,248,000 4,484,000 80,924,000
------------ ------------ ------------ ------------ ------------
Total operating expenses 37,114,000 8,078,000 31,988,000 11,631,000 88,811,000
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes $ 2,693,000 $ 5,513,000 $ 10,205,000 $(10,171,000) $ 8,240,000
============ ============ ============ ============ ============
Total assets $ 18,287,000 $ 22,649,000 $ 50,523,000 $ 40,937,000 $132,396,000
============ ============ ============ ============ ============
41
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1999 and balance sheet data as of December 31, 1999.
1999 Reconciliation of Reportable Segment Information
Property
Management Brokerage Investments Corporate Consolidated
------------ ------------ ------------ ------------ ------------
Property management and
leasing fees $ 26,622,000 $ 2,925,000 $ 29,547,000
Commissions 2,749,000 9,489,000 $ 1,078,000 13,316,000
Sales of residential real
estate 25,731,000 25,731,000
Equity in joint venture income 736,000 1,313,000 2,049,000
Gain on sale of joint venture 2,406,000 2,406,000
Gain on sale of commercial
real estate 1,129,000 5,940,000 7,069,000
Gain on restructured notes
receivable 2,877,000 2,877,000
Rental income, net 6,352,000 6,352,000
Interest and other income 274,000 1,258,000 $ 480,000 2,012,000
------------ ------------ ------------ ------------ ------------
Total revenue 29,371,000 16,959,000 44,549,000 480,000 91,359,000
------------ ------------ ------------ ------------ ------------
Depreciation and amortization 912,000 2,594,000 3,506,000
Interest expense 9,299,000 2,142,000 11,441,000
Other expenses 22,157,000 5,409,000 26,868,000 13,540,000 67,974,000
------------ ------------ ------------ ------------ ------------
Total operating expenses 22,157,000 5,409,000 37,079,000 18,276,000 82,921,000
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes $ 7,214,000 $ 11,550,000 $ 7,470,000 $(17,796,000) $ 8,438,000
============ ============ ============ ============ ============
Total assets $ 15,021,000 $ 16,670,000 $ 54,104,000 $ 49,355,000 $135,150,000
============ ============ ============ ============ ============
42
NOTE 19 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Year ended December 31,
--------------------------------------
2001 2000 1999
---------- ----------- -----------
Basic earnings per share:
Net income available to stockholders $2,357,000 $ 4,726,000 $ 5,609,000
========== =========== ===========
Basic per share amount $ 0.27 $ 0.52 $ 0.68
Weighted average shares 8,700,883 9,018,250 8,218,983
Diluted earnings per share:
Net income $2,357,000 $ 4,726,000 $ 5,609,000
Income effect of dilutive
securities, tax effected -- 297,000 204,000
---------- ----------- -----------
Net income available to stockholders $2,357,000 $ 5,023,000 $ 5,813,000
========== =========== ===========
Diluted per share amount $ 0.27 $ 0.50 $ 0.58
Weighted average shares 8,700,883 9,018,250 8,218,983
Weighted average shares,
convertible debentures -- 750,000 534,246
Options and warrants 187,615 359,557 1,261,372
---------- ----------- -----------
Total diluted shares 8,888,498 10,127,807 10,014,601
========== =========== ===========
The stock options and warrants excluded from the computation of diluted earnings
per share due to their antidilutive effect were 2,303,314, 2,330,922, and
1,132,870 for the years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 20 - UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
The following unaudited pro forma consolidated statement of income gives effect
to the acquisition of five property management companies acquired during 1999.
The proforma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. This unaudited pro forma
condensed information does not purport to represent what the actual results of
operations of the Company would have been assuming the acquisitions had been
completed as set forth above, nor do they purport to predict the results of
operations for future periods.
1999
Pro Forma
Total revenue $105,590,000
Total operating expenses 95,352,000
------------
Income before income taxes 10,238,000
43
Provision for income taxes 3,414,000
------------
Net income $ 6,824,000
============
Pro forma basic net income per share $ 0.83
Pro forma basic weighted average shares 8,218,983
Pro forma diluted net income per share $ 0.70
Pro forma diluted weighted average shares 10,014,601
NOTE 21 - UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Year ended December 31, 2001
Total revenue $17,681,000 $17,448,000 $14,781,000 $15,910,000
Total operating expenses 17,060,000 16,427,000 13,747,000 14,980,000
----------- ----------- ----------- -----------
Income before income taxes 621,000 1,021,000 1,034,000 930,000
Provision for income taxes 236,000 388,000 394,000 231,000
----------- ----------- ----------- -----------
Net income $ 385,000 $ 633,000 $ 640,000 $ 699,000
=========== =========== =========== ===========
Basic net income per share $0.04 $0.07 $0.07 $0.08
Diluted net income per share $0.04 $0.07 $0.07 $0.08
Year ended December 31, 2000
Total revenue $39,422,000 $20,960,000 $15,522,000 $21,147,000
Total operating expenses 37,174,000 19,163,000 14,086,000 18,388,000
----------- ----------- ----------- -----------
Income before income taxes 2,248,000 1,797,000 1,436,000 2,759,000
Provision for income taxes 564,000 617,000 488,000 1,845,000
----------- ----------- ----------- -----------
Net income $ 1,684,000 $ 1,180,000 $ 948,000 $ 914,000
=========== =========== =========== ===========
Basic net income per share $0.19 $0.13 $0.11 $0.10
Diluted net income per share $0.17 $0.12 $0.10 $0.10
NOTE 22 - SUBSEQUENT EVENT
In February 2002, the Company completed an initial public offering of the shares
of its subsidiary, Kennedy-Wilson Japan, on NASDAQ-Japan (stock symbol 4321).
The initial public offering consisted of 4,500 newly issued shares and 2,500
shares sold by the Company. The Company retained ownership of a majority of the
subsidiary's shares after the public offering. Gross proceeds from the offering
were $23.2 million.
44
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A
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, 2001, 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, 2001 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, 2001, 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, 2001, and such information is incorporated herein by
reference.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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.
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
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 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 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 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 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
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.
46
10.5.2 Sixth Amendment to Employment Agreement dated as of August 20, 1998
between the Company and William J. McMorrow.
10.5.3 Seventh Amendment to Employment Agreement dated as of August 9, 1999
between the Company and William J. McMorrow.
10.5.4 Eighth Amendment to Employment Agreement dated as of December 13,
1999 between the Company and William J. McMorrow.
10.5.5* Ninth Amendment to Employment Agreement dated as of October 1, 2000
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.
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.
10.9.3 Third Amendment to Employment Agreement dated as of January 1, 1999
between the Company and Richard Mandel.
10.9.4 Fourth Amendment to Employment Agreement dated as of January 1, 1999
between the Company and Richard Mandel.
10.9.5* Fifth Amendment to Employment Agreement dated as of October 1, 2000
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.
10.10.3 Third Amendment to Employment Agreement dated as of January 1, 1999
between the Company and Lewis Halpert.
10.10.4* Fourth Amendment to Employment Agreement dated as of January 1, 2000
between the Company and Lewis Halpert.
47
10.10.5* Fifth Amendment to Employment Agreement dated as of October 1, 2000
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 April 1, 1998
between the Company and Freeman Lyle.
10.11.3 Fourth Amendment to Employment Agreement dated as of April 1, 1999
between the Company and Freeman Lyle.
10.11.4* Fifth Amendment to Employment Agreement dated as of January 1, 2000
between the Company and Freeman Lyle.
10.11.5* Sixth Amendment to Employment Agreement dated as of January 1, 2001
between the Company and Freeman Lyle.
10.11.6* Seventh Amendment to Employment Agreement dated as of March 28, 2001
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 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.
48
10.20 Loan Commitment Letter dated July 2, 1998 between KW-KAU, LLC,
Kennedy-Wilson International, Inc. and Old Standard Life Insurance
Company.
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 to be 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.
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.
10.30 Purchase and Sale of Stock Between K-W Properties and Camden
Investment Property Group Inc
10.31 Purchase and Sale of Membership Interest in Del Mar Pasadena, LLC
between K-W Del Mar Group, Inc. and Camden Investment Properties
Group Inc.
10.32 Note Purchase Agreement, dated as of June 22, 2000, by and between
Kennedy-Wilson, Inc. and GATX Capital Corp.
49
10.33 Note Purchase Agreement, dated as of June 22, 2000, by and between
Kennedy-Wilson, Inc. and Combined Insurance Company of America.
10.34 Note Purchase Agreement, dated as of June 22, 2000, by and between
Kennedy-Wilson, Inc. and Virginia Surety Company, Inc.
10.35 Note Purchase Agreement date as of June 22, 2000, by and between
Kennedy-Wilson, Inc. and Resource Life Insurance Company.
10.36 12% Senior Note due June 22, 2006, dated June 22, 2000, made payable
to GATX Capital Corp., duly executed by Kennedy-Wilson, Inc. in the
amount of $10,000,000.
10.37 12% Senior Note due June 22, 2006, dated June 22, 2000, made payable
to Combine Insurance Company of America, duly executed by
Kennedy-Wilson, Inc. in the amount of $2,000,000.
10.38 12% Senior Note due June 22, 2006, dated June 22, 2000, made payable
to Virginia Surety Company, duly executed by Kennedy-Wilson, Inc. in
the amount of $2,000,000.
10.39 12% Senior Note due June 22, 2006, dated June 22, 2000, made payable
to Resource Life Insurance Company, duly executed by Kennedy-Wilson,
Inc. in the amount of $1,000,000.
10.40 Warrants to Purchase Shares of Common Stock, dated June 22, 2000,
duly executed by Kennedy-Wilson, Inc. in favor of GATX Capital Corp.
10.41 Warrants to Purchase Shares of Common Stock, dated June 22, 2000,
duly executed by Kennedy-Wilson, Inc. in favor of Combined Insurance
Company of America.
10.42 Warrants to Purchase Shares of Common Stock, dated June 22, 2000,
duly executed by Kennedy-Wilson, Inc. in favor of Virginia Surety
Company, Inc.
10.43 Warrants to Purchase Shares of Common Stock, dated June 22, 2000,
duly executed by Kennedy-Wilson, Inc. in favor of Resource Life
Insurance Company
10.44 First Amendment to Loan Agreement dated as of June 6, 2000 between
Kennedy-Wilson International, Kennedy-Wilson Properties, Ltd. and
K-W Properties Inc., and East-West Bank.
10.45 Second Amendment to Loan Agreement dated as of June 6, 2000 between
Kennedy-Wilson International and Kennedy-Wilson Properties, Ltd.,
K-W Properties Inc., and East-West Bank.
10.46 Third Modification Agreement to Loan Agreement dated as of June 20,
2000 between Kennedy-Wilson International and Kennedy-Wilson
Properties, Ltd., K-W Properties Inc., and Tokai Bank of California.
10.47 Fourth Modification Agreement to Loan Agreement dated as of July 7,
2000 between Kennedy-Wilson International and Kennedy-Wilson
Properties, Ltd., K-W Properties Inc., and Tokai Bank of California.
21* List of Subsidiaries of the Company.
50
* Filed herewith.
(b) Current reports on Form 8-K
None.
51
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 29, 2002
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
---- ----- ----
/s/ WILLIAM J. McMORROW Chairman of the Board and March 29, 2002
- -------------------------- Chief Executive Officer
William J. McMorrow (Principal Executive Officer)
/s/ FREEMAN A. LYLE Executive Vice President, March 29, 2002
- -------------------------- Chief Financial Officer and
Freeman A. Lyle Secretary (Principal Financial
and Accounting Officer)
/s/ LEWIS A. HALPERT Executive Managing Director March 29, 2002
- -------------------------- and Director
Lewis A. Halpert
/s/ RICHARD A. MANDEL Managing Director and Director March 29, 2002
- --------------------------
Richard A. Mandel
/s/ BARRY SCHLESINGER Chairman, KWI Fund Management March 29, 2002
- -------------------------- Group and Director
Barry Schlesinger
/s/ MARY RICKS Managing Director and Director March 29, 2002
- --------------------------
Mary Ricks
/s/ THOMAS BARRACK Director March 29, 2002
- --------------------------
Thomas Barrack
/s/ KENT MOUTON Director March 29, 2002
- --------------------------
Kent Mouton
/s/ DONALD PRELL Director March 29, 2002
- --------------------------
Donald Prell
/s/ JERRY R. SOLOMON Director March 29, 2002
- --------------------------
Jerry R. Solomon
52
Kennedy-Wilson, Inc.
Schedule III - Real Estate Owned
December 31, 2001
Costs Capitalized
Initial Cost Subsequent to Acquisition
------------------------- -----------------------------
Building and Carrying
Encumbrance Land Improvements Improvements Costs
------------ ----------- ------------ ------------ -----------
Commercial properties:
- ----------------------
4 vacant lots,
Santa Monica, California $ 1,993,000 $ 2,402,000 $ $ 1,348,000 $ 316,000
7 acres of land,
Houston, Texas 300,000
------------ ----------- ---------- ----------- -----------
1,993,000 2,702,000 1,348,000 316,000
------------ ----------- ---------- ----------- -----------
Residential properties:
- -----------------------
155 acres of land,
San Diego, California 283,000
------------ ----------- ---------- ----------- -----------
-- 283,000
------------ ----------- ---------- ----------- -----------
$ 1,993,000 $ 2,985,000 $ 1,348,000 $ 316,000
============ =========== ========== =========== ===========
Balance at beginning of year $19,248,000
Additions during year:
Acquisitions $ 300,000
Improvements 3,251,000
Capitalized carrying costs 413,000 3,964,000
------------
Deductions during year:
Disposition of real estate (18,563,000) (18,563,000)
------------ -----------
Balance at end of year $ 4,649,000
===========
Gross Amount
Carried at End of Period
---------------------------
Building and
Land Improvements Total
--------- ------------ -----------
Commercial properties:
- ----------------------
4 vacant lots,
Santa Monica, California $ 2,402,000 $ 1,664,000 $ 4,066,000
7 acres of land,
Houston, Texas 300,000 300,000
----------- ----------- -----------
2,702,000 1,664,000 4,366,000
----------- ----------- -----------
Residential properties:
- -----------------------
155 acres of land,
San Diego, California 283,000 283,000
----------- ----------- -----------
283,000 283,000
----------- ----------- -----------
$ 2,985,000 $ 1,664,000 $ 4,649,000
=========== =========== ===========
Balance at beginning of year
Additions during year:
Acquisitions
Improvements
Capitalized carrying costs
Deductions during year:
Disposition of real estate
Balance at end of year
The aggregate cost of real estate owned for Federal income tax purposes is
$4,965,000.
53