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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, 1999
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 .
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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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
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REGISTERED
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None None
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 28, 2000, there were outstanding 9,085,773 shares of the
Registrant's Common Stock. The aggregate market value of the Registrant's Common
Stock held by non-affiliates on March 28, 2000 was approximately $34,707,680
based on the closing price of $5.69 per share.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy
statement for its 1999 Annual Meeting of Stockholders, to be held at a future
date, are incorporated by reference into Part III of this report.
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KENNEDY-WILSON, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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CAPTION Page
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PART I
ITEM 1. Business..................................................................................... 3
ITEM 2. Properties................................................................................... 11
ITEM 3. Legal Proceedings............................................................................ 11
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................... 11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 12
ITEM 6. Selected Financial Data...................................................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 14
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.................................... 22
ITEM 8. Financial Statements and Supplementary Data.................................................. 23
PART III
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 53
ITEM 10. Directors and Executive Officers of the Registrant........................................... 53
ITEM 11. Executive Compensation....................................................................... 53
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................... 53
ITEM 13. Certain Relationships and Related Transactions............................................... 53
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.............................. 54
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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 854 full and 53
part time employees in offices throughout the U.S. and in an office in Japan. We
initially gained recognition in the U.S. real estate market through our
residential real estate auction services. Over time, we diversified our business
so that we now provide:
- - Commercial and residential property management and leasing;
- - Management of real estate and note pool investments; and
- - Commercial and residential brokerage, including auction marketing.
In addition to these real estate related services, we invest for our
account in:
- - Commercial and residential real estate; and
- - Pools of secured and unsecured distressed notes
- - Ventures in internet related real estate companies
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
eight 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 relationships with
companies and partnerships affiliated with Colony Capital, Inc. and Cargill,
Incorporated to invest in Japanese real estate and distressed notes. We believe
that these joint venture parties were attracted to us, in large part, by our
strong Japanese presence. See Note 18 to the Company's financial statements.
OUR BUSINESS OPERATIONS
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 854 full-time and 53 part-time employees
who assist in managing more than 125 office and industrial buildings, commercial
garages and multi-unit residential complexes in 26 different states and the
District of Columbia. We have approximately 75 million gross square feet of real
estate under management.
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As part of our strategy for providing our property management clients
with the best services possible, we apply the same approach in managing our
clients' properties as we do in managing our own, where our primary objective is
to maximize the return on investment. To this end, we work with each client to
ascertain its goals and expectations and to design strategic plans for marketing
and improving each property in a way that increases the client's returns. We
also strive to maximize our clients' returns by reducing property operating
expenses through the discounts and lower prices that we generally obtain for
vendor services and supplies such as janitorial and gardening services and
office supplies. As a result of our national purchasing programs and service
provider alliances, we can generally secure these services and supplies for less
than the manager of a single property.
We are actively seeking to expand our property management and leasing
operations through the acquisition of property management and leasing companies,
the marketing of our property management services to our existing brokerage
clients and the development of new, institutional clients. We also charge our
property managers and leasing agents with the responsibility of bringing in new
business and we compensate them with bonuses when they are successful in doing
so. In addition to expanding our property management business in the U.S., we
also intend to expand that business into Japan in concert with our efforts to
invest in Japanese real estate.
REAL ESTATE BROKERAGE
Through our offices in Beverly Hills, New York and Tokyo, and with the
assistance of our affiliate in Hong Kong, Kennedy-Goldman, Ltd., we provide
specialized brokerage services for both commercial and residential real estate.
We market and sell on behalf of our clients and ourselves:
- - Office and retail buildings;
- - Multi- and single-family residences;
- - Industrial sites;
- - Hotels and resorts; and
- - Undeveloped land.
The properties for which we have brokered sales are located throughout the U.S.
with a significant concentration in California. We have also sold properties in
Japan and Canada.
We strive to achieve the best results for our clients and to provide
superior customer service that focuses on personalized attention, frequent
updates on marketing efforts and utilization of our international relationships
and our complementary array of real estate services. The following is a sample
of the real estate services that we provide in connection with our brokerage
activities:
- - Property valuations;
- - Development and implementation of marketing plans;
- - Sealed bid auctions; and
- - Open bid auctions.
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When we receive a new brokerage engagement, we begin by developing with
our client a sales strategy that we believe will maximize the sales proceeds
while taking into account our client's individual situation, including time
parameters, sensitivity to publicity and cash flow needs. We also investigate
and analyze, among other things, the physical condition of the property, its
cash flow and tenant characteristics, market rents and market dynamics within
submarkets and comparable transactions. We conduct commercial property sales
primarily through private negotiations and, to a lesser extent, sealed bid
sales. We conduct residential property sales primarily through sealed bid and
open bid auctions and conventional brokerage activities.
As part of our effort to ensure that our various offices work together
to provide the brokerage and marketing services that a particular client may
need, our compensation practices reward employees in all offices that
participate in a marketing effort for a particular client. We believe that our
compensation practice is particularly effective when our Asian clients are
selling their U.S. real estate holdings.
COMMERCIAL BROKERAGE SERVICES.
We specialize in marketing commercial properties with privately
negotiated sealed bid sales. As part of our efforts to market each commercial
property, we develop and implement cost effective marketing campaigns ranging
from local to worldwide in scope. Each marketing campaign is tailored to the
client's objectives and the property's characteristics. We also market
properties directly to various investors with whom we maintain ongoing business
relationships. We believe that through these efforts, we create a sales
environment intended to enable our clients to obtain the highest possible prices
for their properties.
We obtain our commercial brokerage engagements primarily through our
existing relationships with over 100 institutional and corporate owners of real
estate primarily located in the U.S. Our clients are located in the U.S., Japan,
Canada, Australia and Hong Kong.
Traditionally, our commercial brokerage marketing in Asia focused
primarily on selling properties located in the U.S. for Asian clients. Over the
years, we have built relationships with large Japanese financial institutions,
developers, investors and property owners and have developed what we believe to
be a reputation among them as successful marketer of commercial and residential
real estate in the U.S. In 1995, in order to establish ourselves as brokers in
the Japanese real estate market, we opened our office in Tokyo and are now
brokering the sales of commercial property in Japan.
When we engage in a competitive bidding process for brokerage
engagements, our brokerage commission rates are often structured to demonstrate
our confidence in our ability to sell the property at a favorable price.
For example, we might offer a property owner a market or below-market brokerage
commission rate for selling a property at the price the owner initially expects
and a higher rate for selling the property for a higher price. On average, our
commercial brokerage assignments last for six months from the listing of the
property to the payment of a brokerage commission upon its sale.
RESIDENTIAL BROKERAGE SERVICES.
We specialize in designing marketing programs to sell single-family home
developments and condominium projects using conventional sales and
auction-marketing programs. We also design and implement sealed bid marketing
programs for exclusive estates and land for residential development. Our
clients include builders, developers, private sellers, financial institutions
and government agencies.
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AUCTION SERVICES.
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. The typical auction marketing program spans
approximately four months from the time that we sign the agreement with our
client to the date of the auction.
REAL ESTATE INVESTMENTS AND ASSET MANAGEMENT
We invest in commercial and residential real estate with joint venture
partners and on our own account. We also provide asset management services for
some of our joint ventures.
Our current investment portfolio and our plans for future investments
focus on commercial buildings and multiple and single family residences.
Generally, we purchase properties that are subperforming in a manner which we
believe can be rectified with our expertise or financial resources. For example,
a developer of a residential real estate project may find it difficult or
impossible to finish the project because it cannot properly market the finished
product or has insufficient cash flow. In such a situation, we can purchase the
project at a discounted price then apply our marketing expertise and draw on our
financial resources to finish the project and sell it as a whole or to
individual home buyers for a profit. With regard to commercial properties, we
acquire subperforming buildings, make the improvements necessary to attract
tenants, lease to new tenants and then sell the buildings. We refer to this
process as stabilizing the asset.
We believe that one of our strengths is our ability to quickly identify
and acquire desirable real estate assets. We do so by capitalizing on the
institutional knowledge we have developed through our brokerage and investment
business and by conducting quick and thorough investigations and analyses of the
properties, their financial condition and what we believe to be their financial
potential. We have extensive experience in identifying and analyzing the factors
that impact property values in the regions in which we do business, such as new
construction, the marketability of certain neighborhoods, leasing trends and the
types of businesses seeking various types of commercial space. Our
investigations and analyses are conducted by an experienced in-house team,
occasionally supplemented by outside due diligence professionals.
To date, a significant portion of the real estate in which we have
invested is located in California. While we believe the current cycle of the
U.S. commercial real estate market has matured, we think that Japan offers
significant real estate opportunities due to the recent Asian economic downturn.
Presently our brokerage operations are the source of many of our real estate
acquisitions in the U.S. These operations provide us with unique investment
opportunities in the form of close relationships with clients that have
substantial real estate investments. We expect our property management and
brokerage operations to continue to provide select opportunities for us to
acquire additional U.S. real estate investments suitable for our stabilization
techniques.
Occasionally, our clients desire to sell some or all of their real
estate holdings through means other than conventional brokerage or auction
services. For example, financial institutions are generally not in the business
of holding and managing property and they may have regulatory or internal
requirements that mandate the rapid sale of real property acquired through
foreclosure. Thus, a financial institution client that has acquired a property
through a foreclosure may desire to sell it in less time than it would take for
a conventional brokerage or auction sale. Similarly, as a result of the current
economic conditions in Asia, a client in Asia may have the need or desire to
sell a real estate holding in a rapid manner with little publicity. In the past,
we have been able to meet the needs of these types of clients by purchasing
their properties quickly and discretely for our own account.
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Depending on the size of the property, the availability of capital and
our assessment of risks, we either acquire a property as part of a joint venture
or entirely for our own account. Historically, we have used joint ventures to
acquire larger commercial buildings, typically those with more than 250,000
square feet of space. In these transactions, our joint venture partner typically
contributed the majority of the capital while we contribute the remainder of the
capital along with our marketing expertise. In some cases we have provided the
joint venture fee based asset management services. These transactions have
offered us the ability to leverage our capital and diversify the risks
associated with owning these larger properties.
We generally finance the acquisitions of our wholly owned real estate
with mortgage loans and mezzanine financing. In our typical mezzanine financing
transaction, we are required to make an equity investment of 25% to 35% of the
purchase price, of which 70% to 80% of that equity investment is financed by the
mezzanine lender. The remainder of the investment is generally financed by a
mortgage lender. Typically, the mezzanine lender receives interest on its loan
and a share of the sale proceeds. The share of the sale proceeds is generally
determined by the amount of the loan and the period of time which the property
is held. In this type of arrangement, we control the management of the property,
including the timing and marketing of the property's sale.
We are pursuing joint ventures with large international investors,
particularly in Japan. To this end, we have entered into a limited partnership
agreement with affiliates of Colony Capital to invest up to $100.0 million of
which $2.0 million will be invested by us, in Japanese real estate and pools of
distressed notes. The investment strategy of the Kennedy-Wilson/Colony
partnership is to take advantage of depressed Japanese real estate prices and
the weakened Japanese economy by purchasing Japanese real estate and distressed
notes at discounted prices. Once the partnership acquires an asset, whether a
pool of notes or real estate, we manage that investment on behalf of the
partnership for a fee.
DISTRESSED NOTE POOL INVESTMENTS
Since 1994, we have been purchasing and managing pools of distressed
notes. Generally, distressed notes are those where the borrower has stopped
making payments or is late in making payments. Our note pools contain notes that
are secured and unsecured. The secured notes are collateralized by real estate
or personal property.
Historically, we have acquired these pools from regulatory agencies such
as the Federal Deposit Insurance Corporation and the Resolution Trust
Corporation. We have also purchased notes from various U.S. private sellers,
such as banks, savings institutions, mortgage companies and insurance companies.
Most of these notes were originated by lenders in California, Texas, Florida and
Hawaii.
Recently, we expanded our operations to include the acquisition of note
pools of distressed Japanese notes. In September 1998, the Kennedy-Wilson/Colony
partnership purchased for $24.0 million a pool of distressed Japanese notes with
a face value in excess of $400.0 million, some of which are secured by real
estate and personal property. In addition, the pool also included commercial
and residential properties. Since 1998, the Company has purchased 10 more note
portfolios in Japan with capital partners such as Colony and Cargill.
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In March 1999, we entered into a joint venture agreement with an entity
affiliated with Cargill, Incorporated. The present investment strategy of the
Kennedy-Wilson/Cargill joint venture is to acquire on a privately negotiated
basis pools of distressed Japanese real estate secured notes that cost from $3.0
million to $10.0 million. In addition to our 5.0% contribution, we will provide
the Kennedy-Wilson/Cargill joint venture asset management and disposition
services on a fee basis. During 1999, the joint venture acquired seven note
pools for approximately $32 million.
MEZZANINE LENDING
In 1997, we began making mezzanine loans to real estate developers for
new single-family, residential developments. Total project costs for these
developments typically range from $5.0 to $25.0 million, and our mezzanine loans
typically range from $500,000 to $1.0 million. We expect to hold these loans for
a period of less than two years. Presently, the borrowers pay interest at 10%
per annum, and we are entitled to a participation in any profits from the
development. We also, generally, collect at the closing of each loan a 1% set-up
fee. We have made six loans of this type, each of which remains outstanding. The
aggregate outstanding principal balance of all six loans including accrued
interest is approximately $8.6 million.
EQUITY INVESTMENTS IN OTHER COMPANIES
Asset One. In April 1998 we acquired a 40% equity interest in Asset One,
a Japanese corporation with an office in Tokyo. Asset One is a loan servicing
company, part of Asset One's business includes servicing the loans in our
distressed Japanese loan pools.
Jutaku Ryutsu. In March 1998 we acquired a 30% equity interest in Jutaku
Ryutsu, a Japanese corporation with offices in Tokyo, Osaka and Fukuoka, Japan.
Jutaku Ryutsu is a brokerage company that specializes in selling real estate
assets between $500,000 and $10 million in value. Jutaku Ryutsu assists us with
our acquisition due diligence on our Japanese loan pools and real estate and the
disposition of those assets.
Kennedy Goldman. In June 1997 we acquired, a 20% equity interest in
Kennedy Goldman (HK) Limited, a Hong Kong corporation, located in Hong Kong.
Kennedy Goldman is a real estate services company specializing in leasing and
real estate investment brokerage in Hong Kong. We acquired this interest in
order to maintain a presence in the Hong Kong real estate market and business
relations with Asian real estate investors. We have the right to elect one
director on Kennedy Goldman's Board of Directors.
Kennedy-Wilson Real Estate Technology Division. In December 1999, the
Company formed this group to manage the Company's business-to-business
venture capital investments in real estate related technology companies.
Kennedy-Wilson has made investments in eProperty.com, the Company's
PropertyFirst.com proprietary online real estate transaction and services
company and a leading commercial multiple listing company on the internet.
Subsequent to year-end, the Company closed a bridge financing for Infocrossing,
Inc., a collocation service provider, and Struxicon, a vertical construction
portal. These technology investments are reflective of the Company's ability to
leverage its existing relationships. For example, the Company's commercial
brokerage business led to Kennedy-Wilson's investment in PropertyFirst. The
Company access to building owners in the 75 million square feet under management
made the Company an investor and partner in Struxicon. The Company's ability to
source potential data center sites prompted Infocrossing, Inc. to invite the
Company as an investor. Kennedy-Wilson's technology investments are expected to
enable to the Company to provide a wide range of Internet business solutions
to its clients.
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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. In California, we must have an officer licensed as a real
estate broker in order to be exempt from California's lender licensing
requirements with respect to the real estate secured mezzanine loans that we
make. Each of our employees that performs certain brokerage functions in any
particular state must be a licensed real estate salesperson in that state and he
or she must work under the supervision of a broker licensed by that state. In
addition to these licensing requirements, certain state governmental entities,
such as the California Department of Real Estate, regulate our brokerage and
property management operations by requiring our resident operative subsidiary to
be licensed. We believe that we are in compliance with all material licensing
requirements and regulations in states and countries in which licenses are
required and in which we are engaged in material brokerage and property
management activities.
In various states, governmental entities license individual auctioneers
and/or administers various regulations governing their activities and may
require that auctioneers post bonds. We believe that 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, auction, leasing and property management companies as well as
companies, partnerships, trusts and individuals that invest in real estate and
distressed notes. We believe that the brokerage and property management
industries are both highly fragmented and highly competitive. We must compete
with conventional property management companies and commercial and residential
real estate brokers as well as other auction companies. Several of these
companies are significantly larger than us and possess greater financial
resources. We compete with real estate brokerage and auction-marketing companies
on the basis of brokerage commissions charged, marketing expenses paid and
quality of service. We compete with property management and leasing firms on the
basis of management fees and leasing commissions charged and the range and
quality of services provided.
Our investment operations compete to varying degrees with real estate
investment partnerships and other investment companies. Many of these
competitors have significantly greater capital resources. Some of these
competitors, however, focus on acquisitions, which are larger in size than those
historically targeted by us. We believe that we also compete to a lesser degree
with real estate investment trusts that seek to acquire similar assets. We
compete with these other investors on the basis of the amounts that we pay for
the investments acquired.
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EMPLOYEES
We have approximately 854 full-time and 53 part-time employees in the
U.S. and in Japan. None of our employees are represented by a collective
bargaining agreement. Our compensation policies are designed to attract, retain
and motivate the employees that are an integral part of our profitability.
Generally, executive officers and brokers receive a base salary and a variety of
performance based rewards including stock options and bonus based on the
profitably of their operation units. These employees, other than those in our
property management and leasing group, receive a relatively low base salary,
with the bulk of their salary being paid in the form of a performance based
bonuses. The upper level employees in the property management and leasing group
receive a market based salary and performance based bonuses. In either case, the
bonuses are based in part upon the profitability of the group with which the
employees are affiliated as well as our overall performance. As a result,
employees are encouraged to meet individual goals as well as to contribute their
expertise and efforts on behalf of their group. In addition to promoting the
generation of revenues, our bonus structure also encourages our employees to
control costs because the bonuses paid are based on the profits of their
operations.
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ITEM 2. PROPERTIES
Our executive and administrative offices are located at 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California, and consist of approximately
26,000 square feet in an office building managed by us. We also lease space for
our regional and branch offices and sublease space to third parties. These
facilities, including our Beverly Hills headquarters, comprise a total of
approximately 126,998 square feet of leased space, with an annual aggregate base
rental of approximately $2.8 million. Each of these leases is scheduled to
expire within the next five years. We believe that we will be able to renew any
expiring lease or obtain suitable office space to replace such leased facility,
as necessary, without any material increase in our rental costs.
As described above, we also buy and sell real estate in the ordinary
course of our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business and routine. These matters are generally covered by insurance. The
ultimate disposition of these ordinary proceedings is not presently
determinable. However, based upon current available information, we believe that
the outcomes of these proceedings will not have a material adverse effect on our
financial position or results of operations and that the existing proceedings,
individually or collectively, are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our stockholders during the
fourth quarter of 1999.
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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 sale
prices per share of our Common Stock as reported in the NASDAQ National Market,
adjusted for a 200% stock dividend paid April 10, 1998 and a 50% stock dividend
paid December 15, 1998, where appropriate.
HIGH LOW
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1998-
First Quarter $ 8.78 $ 3.67
Second Quarter $ 12.67 $ 6.33
Third Quarter $ 9.00 $ 6.00
Fourth Quarter $ 8.50 $ 5.00
1999-
First Quarter $13.375 $ 7.250
Second Quarter $10.500 $ 8.563
Third Quarter $10.688 $ 7.813
Fourth Quarter $10.125 $ 7.500
As of March 28, 2000, there were approximately 1,068 holders of our Common
Stock. Since the completion of our initial public offering in August 1992, we
have not paid any cash dividends, and we have no present intention to commence
the payment of cash dividends. However, our Board of Directors may determine to
pay cash dividends on our Common Stock in the future depending on our results of
operations, financial condition, contractual restrictions and other factors our
Board may deem relevant from time to time.
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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, 1999. The data set forth below should be
read in conjunction with the Consolidated Financial Statements and related Notes
to Consolidated Financial Statements appearing elsewhere herein and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
YEAR ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Total revenues ............................................. $ 20,610 $ 31,967 $ 26,999 $ 50,872 $ 88,610
Total expenses ............................................. $ 33,752 $ 28,376 $ 22,768 $ 44,710 $ 80,172
Income (loss) from operations .............................. $(13,142) $ 3,591 $ 4,231 $ 6,162 $ 8,438
Net income (loss) .......................................... $(13,186) $ 3,531 $ 4,030 $ 5,325 $ 5,609
Basic income (loss) before extraordinary items per share ... $ (1.74) $ 0.50 $ 0.65 $ 0.85 $ 0.68
Basic extraordinary item per share ......................... N/A N/A 0.01 N/A N/A
Basic net income per share ................................. $ (1.74) $ 0.50 $ 0.66 $ 0.85 $ 0.68
Basic weighted average shares .............................. 7,575 7,087 6,104 6,254 8,219
Diluted income before extraordinary items per share ........ N/A $ 0.50 $ 0.64 $ 0.78 $ 0.58
Diluted extraordinary item per share ....................... N/A N/A $ 0.01 N/A N/A
Diluted net income per share ............................... N/A $ 0.50 $ 0.65 $ 0.78 $ 0.58
Diluted weighted average shares ............................ N/A 7,094 6,187 6,801 10,015
AS OF DECEMBER 31,
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1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets ........................................... $ 37,651 $ 51,114 $ 45,718 $204,816 $135,150
Long term debt ......................................... $ 24,449 $ 20,516 $ 15,102 $136,130 $ 27,901
Total liabilities ...................................... $ 29,706 $ 40,732 $ 34,124 $182,036 $ 88,464
Total stockholders' equity ............................. $ 7,945 $ 10,382 $ 11,594 $ 22,780 $ 46,686
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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 throughout the United States and in Japan. Through our
subsidiaries, we provide a complementary array of real estate services, such as
property management and leasing, real estate brokerage services including
auction marketing, Asian real estate operations, asset management, and real
estate technology products and services. Additionally, on our own account and
through joint venture we invest in real estate and note pool investments. Our
revenues in 1997, 1998 and 1999 were $27.0 million, $50.9 million, and $88.6
million, respectively. Our net income for the same periods was $4.0 million,
$5.3 million, and $5.6 million, respectively.
In 1998, we substantially increased our activities in Japan, including a
joint venture with an affiliate of Colony Capital, Inc. This joint venture
provides a framework for the investment of up to $100.0 million, $2.0 million of
which would be invested by us, in Japanese real estate and pools of distressed
notes, of which approximately half has been invested to date. Under the terms of
the joint venture agreement, we provide Japanese real estate expertise and
receive acquisition, management and disposition fees. The joint venture
agreement also requires us to provide 2.0% of the required equity in any
investment. In addition, we made minority investments in brokerage and loan
servicing businesses in Japan and have expanded the size of our direct employee
base in Japan to eight real estate professionals. As part of our strategy, we
plan to grow our business in Japan, continuing to emphasize fee-based sources of
income. In furtherance of this strategy, we entered into a joint venture and
strategic alliance with an affiliate of Cargill, Incorporated in March 1999 to
invest in small- and medium-sized pools of distressed notes. In 1999 we started
Pacific Servicing Company, Ltd., a licensed Japanese loan servicing and a wholly
own subsidiary of Kennedy-Wilson Japan, to handle over 1,000 non-performing
loans for the Company and its co-investors, Colony and Cargill.
When we sell residential real property, we recognize as gross revenues
the total sales price of residential real estate property and we recognize as an
expense the purchase price and improvements associated with that real estate.
Therefore, a sale of residential real property in any reported period has a
disproportionate effect on revenues and expense in that period relative to sales
of other investments and our other business lines. Our commercial real property
investments are accounted for on a net gain on sale basis.
In July of 1998 we acquired Heitman Properties, Ltd., a nationwide
commercial and residential property management and leasing company which had
approximately 48 million square feet of property under management. We funded
this acquisition with a $21.0 million loan from Colony-KW, LLC, an affiliate of
Colony. We made this acquisition, and the acquisition of five other property
management companies during 1999, as part of a strategy to increase recurring
fee income as a percentage of total revenues. In April 1999, we acquired Coastal
Commercial Real Estate Services Inc., a Los Angeles based company that manages
and leases a portfolio of approximately 6 million square feet of real estate
primarily located in Arizona, Texas and California. In June 1999, we acquired
Jones Lang Wooton California, Inc., a regional property management firm that
manages and leases a portfolio of approximately 7 million square feet of office
and industrial real estate located in northern and southern California. In
September 1999, we acquired TRF Management Corp, a commercial property
management and brokerage firm that manages a portfolio of approximately 4
million square feet of real estate primarily in the pacific northwest. In
October 1999, we purchased Fults Real Estate Services, a Texas-based property
management and brokerage company with a portfolio of approximately 8.4 million
square feet under management. In November 1999, we acquired SynerMark Holdings,
a full service real estate company, providing asset and property management,
development, financing, leasing, and construction services for a portfolio of
office, industrial, residential, and retail properties primarily located
throughout Texas with a portfolio totaling approximately 6.4 million square
feet. All of these transactions were accounted for using the purchase method of
accounting. The purchase prices were allocated to the fair values of contracts
and furniture and fixtures, with any
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residual amounts allocated to goodwill.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
TOTAL REVENUES
Total revenues for 1999 were $88.6 million, which represents a 74.2%
increase over $50.9 million in 1998. Earnings before taxes for 1999 were $8.4
million, which represents a 36.9% increase over 1998 of $6.2 million. Net income
for 1999 was $5.6 million, which represents a 5.3% increase over $5.3 million in
1998.
Property Management. In 1999 our property management and leasing
operations generated $29.6 million of revenues, representing 33.4% of our total
revenue and a 108.2% increase over property management revenue of approximately
$14.2 million in 1998. In July 1998, we acquired Heitman Properties, Ltd., from
Heitman Financial, Inc., and renamed it Kennedy-Wilson Properties, Ltd. During
1999, we acquired five additional property management companies and consolidated
them under Kennedy-Wilson Properties, Ltd's, umbrella. As of December 31, 1999,
we had under management a portfolio of approximately 75 million square feet of
commercial, industrial and apartment properties located in 26 states and the
District of Columbia.
Brokerage. Brokerage commission revenues in 1999 were $10.6 million,
representing 11.9% of total revenues and a 115% increase over brokerage
commission revenues in 1998 of $4.9 million. During 1999, the brokerage division
sold approximately $1.4 billion of real estate in approximately 35 sales
transactions. This compares with approximately 30 transactions in 1998 with an
approximate aggregate value of $522.9 million. Residential brokerage sales
accounted for $596,000 and $745,000 in 1999 and 1998, respectively. This
reflects a continued trend toward increased brokerage commissions from
commercial sales and decreased brokerage commissions from residential sales.
Commercial properties typically have higher sales prices but lower brokerage
commission rates compared to residential properties. The costs associated with a
commercial assignment tend to be lower than those associated with residential
assignments.
Investments. Sales of residential real estate were $25.7 million in
1999, representing 29.0% of total revenues, compared to $13.8 million in 1998,
which represented 27.2% of total revenue. Total revenue from residential real
estate sales increased 86.2%. This increase is due to sales from four projects
in 1999, including a single family home in West Los Angeles, sixteen units of a
23-unit single family development in Palm Desert, the bulk sale of a 95-unit
apartment in West Los Angeles and 17 units in a 109 unit single family
development in Cathedral City, CA. This compares to revenues in 1998 from the
sale of a 10-unit single family home development in north Los Angeles, seven
units of the 23 unit single family development in Palm Desert, and the bulk sale
of a 24-unit condominium project in West 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 with related parties and non-affiliates
and gain on sale of partnerships totaled $4.5 million in 1999, or 5.1% of total
revenue compared to $4.7 million realized in 1998. In 1999, gain on sale of
partnership interest was $2.4 million from the sale of our interest in a joint
venture that owned a commercial office building. In 1998, we sold our interest
in a joint venture that owned two commercial office buildings in downtown Los
Angeles. In both cases, we sold our interest in the joint venture because we had
completed the process of stabilizing the properties. Revenue from joint venture
investments in Japan was $1.6 million in 1999 representing a 232% increase over
the 1998 revenue of $482,000 due to increased settlement of the non performing
note pools acquired through the joint ventures. The revenue related to these
investments was $689,000 and $590,000 in 1999 and 1998, respectively.
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Gain on sale of commercial real estate was $7.1 million in 1999 or 7.9%
of total revenues compared to $2.7 million in 1998 or 5.2% of total revenue.
During 1999, we sold a 306,000 square foot office building and a five-story
parking garage both located in Los Angeles and 1000 acres of land on the island
of Hawaii. During 1998, we sold two commercial properties, consisting of a
36,000 square foot building in Santa Monica, and a 28,000 square foot building
in downtown Los Angeles. The commercial buildings were sold after the completion
of the stabilization process.
Gains on restructured notes totaled $2.9 million in 1999, or 3.3% of
total revenues, a 26.4% decrease from $3.9 million in 1998. This decrease can be
attributed to a reduction in the number of U.S. note purchases in 1999. The gain
in both years reflects our continued progress in liquidating our portfolios of
distressed notes that were purchased at substantial discounts to face value. Our
strategy to collect the note balances consists of either restructuring the note
to performing status, negotiating a payoff, or foreclosing and selling the
related collateral.
Net rental income was $6.4 million in 1999, or 7.2% of total revenues,
representing a 38.6% increase from $4.6 million in 1998 or 9% of total revenue.
The increase reflects a full year of income on properties purchased during the
last six months of 1998, as well as income resulting from our aggressive leasing
program.
TOTAL OPERATING EXPENSES.
Operating expenses in 1999 were $80.2 million, representing a 79.2%
increase over $44.7 million in 1998. 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 primarily
associated with the five property management acquisitions, as well as a full
year of expense relating to the July 1998 acquisition of Heitman Properties,
Ltd. Additionally, a full year of interest expense associated with the
commercial properties acquired in the third and fourth quarters in 1998,
contributed to the overall increase in expenses.
Brokerage commissions and marketing expenses decreased 52.4% to $253,000
in 1999 from $532,000 in 1998, primarily as a result of the decreased auction
sales, which are typically more expensive than sealed bid sales or traditional
brokerage sales.
Cost of residential real estate sold was $24.3 million in 1999, a 98.0%
increase from $12.2 million in 1998. The increase correlates with the increased
revenues from the sales of residential real estate discussed above.
Compensation and related expenses was $28.3 million in 1999, up 93.9%
from $14.6 million in 1998. The increase reflects a full year of compensation
expense relating to the acquisition of Heitman Properties, Ltd. in July of 1998
and increases relating to the acquisition of five additional property management
companies in 1999. As a result of these acquisitions, the number of our
employees has increased from 60 employees in the first quarter of 1998 to
approximately 907 employees by December 31, 1999.
General and administrative expenses were $12.4 million in 1999,
representing a 80.6% increase over 1998 expenses of $6.9 million. The increase
is due primarily to the additional expenses associated with our property
management operations and the expansion of our operations in Japan.
Depreciation and amortization expense increased to $3.5 million in 1999,
a 70.3% increase over the $2.1 million in 1998. The increase was due, in part,
to the amortization of the goodwill and property management contracts associated
with the acquisition of the property management companies. In 1998, the
amortization of the goodwill and contracts associated with the purchase of
Heitman Properties, Ltd. from its acquisition in July 1998 and amounted to about
$800,000. In 1999, the amortization expense relating to the Heitman Properties
acquisition as well as the amortization of cost associated with the additional
property management companies acquired amounted to approximately $2.4 million.
In addition, due to improved occupancy in the Company owned buildings, the
amortization of tenant improvements and leasing commissions associated with new
leases amounted to approximately $900,000.
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Interest expense was $11.4 million in 1999, compared to $8.4 million in
1998, representing a 36.2% increase. The increase results from the full year of
interest relating to the commercial buildings purchased in the third and fourth
quarters of 1998.
The provision for income taxes was $2.8 million in 1999, a 238% increase
over the $837,000 in 1998. The tax expense in previous years has been
significantly less than the statutory rate due to a net operating loss
carryforward which has been utilized in reducing the Company's federal tax
liabilities. In 1998, the Company had substantially used up the net operating
loss carryforward, which resulted in a significantly higher tax liability in
1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL REVENUES
Total revenues for 1998 were $50.9 million, which represents an 88.4%
increase over 1997. Earnings before taxes for 1998 were $6.2 million, which
represents a 45.6% increase over 1997. Net income for 1998 was $5.3 million,
which represents a 32.1% increase over 1997. These increases are primarily
attributable to our acquisition of Heitman Properties, Ltd.
Property Management. In 1998 our property management and leasing
operations generated $14.2 million of revenues, representing 27.9% of our total
revenue. On July 17, 1998 we acquired Heitman Properties, Ltd., from Heitman
Financial, Inc., and renamed it Kennedy-Wilson Properties, Ltd. In July 1998 and
December 31, 1998, this subsidiary generated $12.7 million of our $14.2 million
in property management fees and leasing commissions. As of December 31, 1998, we
had under management a portfolio of approximately 48 million square feet of
commercial, industrial and apartment properties located in 26 states and the
District of Columbia.
Brokerage. Brokerage commission revenues in 1998 were $4.9 million,
representing 9.7% of total revenues and a 16.6% decrease over brokerage
commission revenues in 1997 of $5.9 million. There were a total of 30
transactions in 1998 with an aggregate value of $522.9 million, compared to 57
transactions in 1997 with an aggregate value of $423.8 million. This reflects a
continued trend toward increased brokerage commissions from commercial sales and
decreased brokerage commissions from residential sales. Commercial properties
typically have higher sales prices but lower brokerage commission rates compared
to residential properties. The costs associated with a commercial assignment
tend to be lower than those associated with residential assignments.
Investments. Sales of residential real estate were $13.8 million in
1998, representing 27.2% of total revenues, compared to $6.8 million in 1997.
This equates to a 104.8% increase. This increase is due to sales from four
projects in 1998, including a 10 unit single family home development in North
Los Angeles, seven units of a 23 unit single family development in Palm Desert,
and the bulk sale of a 24 unit condominium project in west Los Angeles. This
compares to revenues in 1997 from the sale of 13 units of a 14 unit condominium
project located in Orange County, California, the sale of the remaining seven
units in a condominium project in Hawaii, and the sale of a land lot zoned for
condominium development in Beverly Hills. The sales of residential real estate
for both years reflect our strategy to sell upon completion of planned
improvements, rather than holding for speculation.
Equity in income of investments with related parties and non-affiliates
and gain on sale of partnership increased in total to $4.7 million in 1998, or
9.2% of total revenue, a 227.7% increase from the $1.4 million realized in 1997.
The gain on sale of partnership interest was $4.1 million. The increase was
substantially due to the gain on sale in 1998 of our interest in a joint venture
that owned two commercial office buildings in downtown Los Angeles. We sold our
interest in the joint venture because we had completed the process of
stabilizing the
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properties, which included increasing average occupancy of the properties from
approximately 45% at acquisition in 1996 to approximately 80% at the time of
sale. Both 1998 and 1997 included revenues from the sale of 88 condominium units
from a 109-unit joint venture project located in near downtown Los Angeles. The
sales of these units occurred over the two years as planned improvements to the
units were completed.
Gain on sale of commercial real estate was $2.7 million 1998, or 5.2% of
total revenues, down 58.2% from $6.3 million in 1997. The decline resulted from
the fact that in 1997 we sold five commercial properties including a 46,000
square foot property in Santa Monica, a 50,000 square foot property in West Los
Angeles, 30,000 square foot property in Anaheim, a 61,000 square foot property
in Pasadena and a 20,000 square foot property in Santa Monica. In 1998, we sold
two commercial properties, consisting of a 36,000 square foot building in Santa
Monica, and a 28,000 square foot building in downtown Los Angeles. All
properties were sold after the completion of the stabilization process.
Gains on restructured notes totaled $3.9 million in 1998, or 7.7% of
total revenues, a 3.1% decrease from $4.0 million in 1997. This decrease can be
attributed to a reduction in the number of U.S. note purchases in 1998. The gain
in both years reflects our continued progress in liquidating our portfolios of
distressed notes that were purchased at substantial discounts to face value. Our
strategy to collect the note balances consists of either restructuring the note
to performing status, negotiating a payoff, or foreclosing and selling the
related collateral.
Net rental income was $4.6 million in 1998, or 9.0% of total revenues,
representing a 181.3% increase from $1.6 million in 1997. The increase reflects
our acquisition of approximately 1.1 million square feet of commercial office
properties in 1998. All of these acquisitions represent what we believe are
value-added opportunities in recovering sub markets in Los Angeles county,
including two properties in Hollywood consisting of 467,000 square feet, a
property in downtown Los Angeles consisting of 282,000 square feet, a property
in the Mid-Wilshire District of Los Angeles consisting of 133,000 square feet, a
property in Pasadena consisting of 52,000 square feet, and a property in Van
Nuys consisting of 74,000 square feet.
TOTAL OPERATING EXPENSES.
Operating expenses in 1998 were $44.7 million, representing a 96.4%
increase over $22.8 million in 1997. This increase was due primarily to the
addition of new personnel in connection with the acquisition of Heitman
Properties, Ltd.
Brokerage commissions and marketing expenses decreased 42.7% to $532,000
in 1998 from $928,000 in 1997, primarily as a result of the decreased auction
sales, which are typically more expensive than sealed bid sales or traditional
brokerage sales.
Cost of residential real estate sold was $12.2 million in 1998, a 119.0%
increase from $5.6 million in 1997. The increase correlates with the increased
revenues from the sales of residential real estate discussed above.
Compensation and related expenses was $14.6 million in 1998, up 90.4%
from $7.7 million in 1997. The increase reflects the increase in personnel from
60 employees in 1997 to approximately 700 employees in 1998, primarily as a
result of our acquisition of Heitman Properties, Ltd. In addition, in 1997 we
implemented a deferred compensation program designed to retain and motivate key
employees to help achieve targeted company-wide goals.
General and administrative expenses were $6.9 million in 1998,
representing a 47.8% increase over 1997 expenses of $4.7 million. The increase
is due primarily to the additional expenses associated with our property
management operations.
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Depreciation and amortization expense increased to $2.1 million in 1998,
a 160.6% increase over the $790,000 in 1997. The increase was due to the
increase in the commercial property portfolio to $110.0 million in 1998 from
$14.1 million in 1997. In addition, amortization of the goodwill and property
management contracts associated with the acquisition of Heitman Properties, Ltd.
began from its acquisition in July 1998 and amounted to about $800,000 in 1998.
Interest expense was $8.4 million in 1998, compared to $3.1 million in
1997, representing a 167.5% increase. The increase results from the increase in
total debt to $163.9 million in 1998 from $28.9 million in 1997. It should be
noted that approximately $115.1 million of the debt in 1998 was in the form of
loans incurred concurrently with the acquisition of our commercial and
residential properties as such acquisitions and loans are discussed in the
"Liquidity and Capital Resources" section.
Provision for income taxes was $837,000 in 1998, a 198.9% increase over
the $280,000 in 1997. The tax expense has been significantly less than the
statutory rate due to substantial net operating losses carryforward which have
been utilized in reducing the Company's federal tax liabilities. At December 31,
1998, the Company has available net operating losses carryforward totaling
approximately $219,000.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include expenditures
for real estate held for sale, distressed notes pools, joint venture
investments, the acquisition of property management portfolios, and working
capital needs. Historically, we have not required significant capital resources
to support our brokerage operations. We finance our operations with internally
generated funds and borrowings under our revolving lines of credit as described
below. Our investments in real estate are typically financed by mortgage loans
secured primarily by that real estate. These mortgage loans are generally
nonrecourse in that, in the event of a default, recourse will be limited to the
mortgaged property serving as collateral, subject to certain exceptions that are
standard in the real estate industry. Exceptions where the lender may proceed
against the borrower or guarantor, if any, include the initiation of bankruptcy
proceedings by the borrower, and fraud or misrepresentation in obtaining the
loan.
Cash used in operating activities was about $6.4 million in 1999,
compared to $3.7 million in cash provided by operating activities in 1998. The
change included an increase in other assets attributable primarily to the
property management company. The cash used in operating activities was about
$3.0 in 1997. The change from 1998 included an increase in accounts receivable
attributed primarily to the property management fees which are received one
month in arrears, as well as leasing commission earned but not received, offset
by increased accrued expenses which include bonuses and deferred compensation.
Cash used in investing activities was about $4.1 million in 1999,
compared to cash used in investing activities of $136.0 million in 1998. The
changes resulted from proceeds from sales of commercial and residential real
estate as well as collection of notes receivable and the investments in
privately held internet related real estate companies. Cash provided by
investing activities was about $21.5 million in 1997. The change resulted
primarily from our purchases of real estate held for sale of $123.0 million,
which was attributable to our commercial property acquisitions. In addition, in
1998, we purchased Heitman Properties, Ltd. for about $21.0 million, which was
allocated to contracts, furniture and fixtures, and goodwill.
Cash provided by financing activities was about $5.9 million in 1999,
compared to cash provided by financing activities of approximately $131.8
million in 1998. The changes resulted from the $18.5 million raised in the
public offering completed in 1999 and borrowings under various credit facilities
offset by the repayment of mortgage loans on the sale of commercial and
residential properties, and the partial repayment of subordinated debt. Cash
used in financing activities was about $10.0 million in 1997.
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The change resulted from $114.7 million in mortgage loans payable related
primarily to the purchase of the commercial properties referred to above as well
as the increase of $7.5 million in restricted cash reserves established by the
lenders for these properties. In addition, we issued $21.0 million in
subordinated debt related to the purchase of Heitman Properties, Ltd., received
$5.2 million in proceeds from the sale to Colony Investors III, L.P. of 660,128
shares of the Company's common stock and $7.5 million proceeds in convertible
debentures with a related party of Cahill Warnock company.
We have an unsecured credit facility with East West Bank. In July 1999,
we increased the facility to $24.0 million with an interest rate of LIBOR plus
2% and a maturity date of June 6, 2000. We use this facility primarily for
working capital purposes and acquisitions.
In July 1999, we entered into an unsecured revolving loan agreement with
Tokai Bank of California for $15 million with an interest rate of the lessor of
LIBOR plus 2.0% or prime rate, payable monthly and a maturity date of July 2001.
We use this facility primarily for working capital purposes and acquisitions.
In July 1998, we entered into a bridge loan agreement with Colony K-W,
LLC that provided us with $21.0 million in subordinated debt, the proceeds from
which we utilized to consummate our acquisition of Heitman Properties, Ltd. This
debt bears interest at a rate of 14.0%, and a maturity date of July 16, 2000.
The outstanding balance was $9.0 million as of December 31, 1999. Subsequent to
year-end 1999, we paid down an additional $5.0 million in principal.
In May 1999, we completed a public offering of 2,300,000 shares of
common stock. The new shares were priced at $9.00 per share, resulting in net
proceeds of approximately $18.5 million. The proceeds of the offering were used
to pay down existing debt.
As of December 31, 1999, we had $11.4 million in mortgage notes payable.
We used proceeds from these loans to finance the acquisition of commercial and
residential properties, that are secured by both first and second mortgage
liens. All but $5.3 million of these loans are non-recourse against the borrower
or guarantor, except in certain circumstances that are standard in the real
estate industry. We plan to repay each note upon the sale of the corresponding
secured property.
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 with East-West Bank and
Tokai Bank of California, will provide us with sufficient capital requirements
for the foreseeable future.
Our need, if any, to raise additional funds to meet our working capital
and capital requirements will depend on numerous factors, including the success
and pace of the implementation of our strategy for growth. We regularly monitor
capital raising alternatives to be able to take advantage of other available
avenues to support our working capital and investment needs, including strategic
partnerships and other alliances, bank borrowings, and the sale of equity or
debt securities. We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends.
INFLATION
Our long-term leases contain provisions designed to mitigate the adverse
impact of inflation on its results from operations. Such provisions include
escalation clauses, which generally increase rental rates during the terms of
the respective agreements. Such escalation clauses are often related to
increases in the CPI or similar inflation indices. In addition, many of our
leases and management agreements are for terms of less than ten years, which
permits us to seek to increase rents and fees at market rates if they are below
then existing market rates. Many of our leases require the tenants to pay a pro
rata share of operating expenses, including common area maintenance,
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real estate taxes, insurance and utilities, thereby reducing our exposure to
increases in costs and operating expenses resulting from inflation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Investments and Hedging Activities was issued June 1998, applicable
for all fiscal years beginning after June 15, 1999. Management does not expect
this pronouncement to have a material impact on the Company's financial
statements.
YEAR 2000 ISSUE
We identified two primary systems affected by the Year 2000 Issue.
First, we rely upon information technology systems to run software for
databases, accounting, word processing, e-mail and other programs necessary to
our business. Second, certain mechanical systems in the buildings we manage and
own, such as fire safety systems, key card access devices and air conditioning
and heating units, may be reliant, to some degree, on computer systems for
various functions. As of March 28, 2000, we did not experience any significant
Year 2000 problems nor did we experience any interruptions in our normal
operation as a result of the Year 2000 issue, neither internally nor from
outside vendors, supplier, agencies or related parties.
The total cost for our Year 2000 compliance effort was minimal nor did
it have a material effect on our financial position or results from operations.
The majority of the expenditure was spent on replacing hardware and software and
on testing. We do not expect to incur any additional cost associated with the
Year 2000 issue.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document may constitute
"forward-looking statements" within the meaning of the federal securities laws.
Forward-looking statements are statements containing a projection of revenues,
income (loss), earnings (loss), capital expenditures, dividends, capital
structure or other financial terms or our plans and objectives for future
operations.
The forward-looking statements in this document are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are:
- - general volatility of the capital markets and the market price of our
common shares;
- - changes in the real estate market, interest rates or the general economy of
the markets in which we operate;
- - our ability to identify and complete acquisitions and successfully
integrate businesses we acquire;
- - our ability to employ and retain qualified employees;
- - our ability, and the ability of our significant vendors, suppliers and
customers, to achieve Year 2000 compliance;
- - changes in government regulations that are applicable to our regulated
brokerage and property management businesses;
- - changes in the demand for our services; and
- - degree and nature of our competition.
When used in our documents or oral presentations, the words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal," or similar words are intended to identify forward-looking
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statements. We qualify any and all such forward-looking statements entirely by
these cautionary factors.
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, 1999 and
1998. 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, 1999 and 1998. (See Consolidated
Financial Statements - Note 2, Fair Value of Financial Instruments) The Company
decreased its borrowings with variable interest rates to $42.9 million in 1999
from $132.0 million in 1998. 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
-------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
------------ ------------ ------------ ------------ ------------ ------------
Interest rate sensitive
Cash and cash $ 7,243,000
Average interest 4.00%
------------ ------------ ------------ ------------ ------------ ------------
$ 7,243,000
============ ============ ============ ============ ============ ============
Interest rate sensitive
Variable rate $ 26,321,000 $ 16,533,000
Average interest 8.96% 8.74%
Fixed rate $ 10,633,000 $ 2,354,000 $ 1,306,000 $ 7,500,000
Average interest 11.22% 7.18% 6.57% 6.00%
------------ ------------ ------------ ------------ ------------ ------------
$ 36,954,000 $ 18,887,000 $ 1,306,000 $ -- $ -- $ 7,500,000
============ ============ ============ ============ ============ ============
Weighted average
interest rate 9.61% 8.55% 6.57% 0.00% 0.00% 6.00%
============ ============ ============ ============ ============ ============
Fair Value
Total December 31, 1999
------------ -----------------
Interest rate sensitive
Cash and cash $ 7,243,000 $ 7,243,000
Average interest
------------ ------------
$ 7,243,000 $ 7,243,000
============ ============
Interest rate sensitive
Variable rate $ 42,854,000 $ 42,854,000
Average interest 8.88%
Fixed rate $ 21,793,000 $ 21,793,000
Average interest 8.71%
------------ ------------
64,647,000 $ 64,647,000
============ ============
Weighted average
interest rate 8.82%
============
PRINCIPAL MATURING IN:
------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
-------------- -------------- -------------- -------------- --------------
Interest rate sensitive assets
Cash and cash equivalents $ 9,838,000
Average interest rate 4.00%
$ 9,838,000
============== ============== ============== ============== ==============
Interest rate sensitive liabilities
Variable rate borrowings 23,596,000 $ 408,000 $ 99,412,000 $ 1,114,000 $ 83,000
Average interest rate 8.91% 9.16% 9.66% 10.16% 10.66%
Fixed rate borrowings $ 16,789,000 14,000,000
Average interest rate 14.40% 14.65%
-------------- -------------- -------------- -------------- --------------
$ 40,385,000 $ 14,408,000 $ 99,412,000 $ 1,114,000 $ 83,000
============== ============== ============== ============== ==============
Weighted average
interest rate 11.19% 14.49% 9.66% 10.16% 10.66%
============== ============== ============== ============== ==============
--------------------------------- Fair Value
Thereafter Total December 31, 1998
-------------- -------------- ------------------
Interest rate sensitive assets
Cash and cash equivalents $ 9,838,000 $ 9,838,000
Average interest rate
$ 9,838,000 $ 9,838,000
============== ============== ==============
Interest rate sensitive liabilities
Variable rate borrowings $ 7,283,000 $ 131,896,000 $ 131,896,000
Average interest rate 10.66% 9.58%
Fixed rate borrowings 1,250,000 32,039,000 32,039,000
Average interest rate 16.15% 14.58%
-------------- -------------- --------------
$ 8,533,000 $ 163,935,000 $ 163,935,000
============== ============== ==============
Weighted average
interest rate 11.46% 10.56%
============== ==============
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENNEDY-WILSON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report................................................................... 23
Consolidated Balance Sheets as of December 31, 1999, and 1998.................................. 24
Consolidated Statements of Income for the Three Years Ended December 31, 1999.................. 25
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1999.... 26
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1999.............. 27
Notes to Consolidated Financial Statements..................................................... 30
Schedule III - Real Estate and Accumulated Depreciation........................................ 62
Schedule IV - Mortgage Notes on Real Estate.................................................... 63
23
24
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedules listed in the Index at Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 10, 2000
24
25
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
ASSETS 1998 1999
------------- -------------
Cash and cash equivalents (Note 2) ........................................... $ 9,838,000 $ 5,243,000
Cash - restricted (Note 2) ................................................... 8,168,000 2,101,000
Accounts receivable .......................................................... 6,674,000 8,534,000
Notes receivable (Notes 3 and 8) ............................................. 23,115,000 30,643,000
Real estate held for sale (Notes 4 and 9) .................................... 122,407,000 25,733,000
Investments with related parties and non-affiliates (Notes 2, 5 and 11) ...... 9,209,000 23,484,000
Contracts, furniture, fixtures and equipment and other assets (Note 6) ....... 9,238,000 16,237,000
Goodwill, net (Note 2) ....................................................... 16,167,000 23,175,000
------------- -------------
TOTAL ASSETS ...................................................................... $ 204,816,000 $ 135,150,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable ............................................................. $ 1,752,000 $ 2,403,000
Accrued expenses and other liabilities ....................................... 15,721,000 20,602,000
Deferred taxes (Note 12) ..................................................... 628,000 812,000
Notes payable (Note 8) ....................................................... 14,291,000 9,213,000
Borrowing under lines of credit (Note 7) ..................................... 13,514,000 27,533,000
Mortgage loans payable (Note 9) .............................................. 115,130,000 11,401,000
Subordinated debt (Note 10 ) ................................................. 21,000,000 16,500,000
------------- -------------
Total liabilities ......................................................... 182,036,000 88,464,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 14 and 15)
Preferred stock, $.01 par value; shares authorized 2,000,000 as of
December 31, 1998, 5,000,000 as of December 31, 1999;
None issued
Common stock $.01 par value; shares authorized: 10,000,000 in in 1998 and
50,000,000 as of December 31, 1999; shares issued:
6,597,075 in 1998 and 9,066,662 in 1999 ................................ 66,000 91,000
Additional paid-in capital ................................................... 28,888,000 47,156,000
Accumulated deficit .......................................................... (5,970,000) (361,000)
Notes receivable from stockholders ........................................... (204,000) (200,000)
------------- -------------
Total stockholders' equity ................................................. 22,780,000 46,686,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 204,816,000 $ 135,150,000
============= =============
See notes to consolidated financial statements.
25
26
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1999
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
REVENUES (NOTE 2):
Property management and leasing fees (Note 18) ........... $14,194,000 $29,552,000
Commissions ............................................... $ 5,001,000 3,716,000 10,562,000
Commissions - related parties (Note 11) ................... 894,000 1,201,000
Sales of residential real estate .......................... 6,753,000 13,828,000 25,731,000
Equity in income of investments with related parties and
non-affiliates (Note 5) ............................ 1,431,000 612,000 2,049,000
Gain on sale of joint venture ............................. 4,077,000 2,406,000
Gain on sale of commercial real estate .................... 6,339,000 2,654,000 7,069,000
Rental income, net ........................................ 1,629,000 4,583,000 6,352,000
Gain on restructured notes receivable (Note 3) ............ 4,036,000 3,911,000 2,877,000
Interest and other income ................................. 916,000 2,096,000 2,012,000
----------- ----------- -----------
TOTAL REVENUE ............................................. 26,999,000 50,872,000 88,610,000
----------- ----------- -----------
OPERATING EXPENSES:
Commissions and marketing expenses ........................ 928,000 532,000 253,000
Cost of residential real estate sold ...................... 5,592,000 12,249,000 24,254,000
Compensation and related expenses ......................... 7,658,000 14,582,000 28,274,000
General and administrative ................................ 4,661,000 6,890,000 12,444,000
Depreciation and amortization ............................. 790,000 2,059,000 3,506,000
Interest expense .......................................... 3,139,000 8,398,000 11,441,000
----------- ----------- -----------
TOTAL OPERATING EXPENSES .................................. 22,768,000 44,710,000 80,172,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEMS ...................... 4,231,000 6,162,000 8,438,000
PROVISION FOR INCOME TAXES (Note 12) ........................... 280,000 837,000 2,829,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEMS .............................. 3,951,000 5,325,000 5,609,000
----------- ----------- -----------
EXTRAORDINARY ITEMS (Note 17) .................................. 79,000
----------- ----------- -----------
NET INCOME ..................................................... $ 4,030,000 $ 5,325,000 $ 5,609,000
=========== =========== ===========
SHARE DATA (Note 2):
Basic income before extraordinary items per share ......... $ 0.65 $ 0.85 $ 0.68
Basic extraordinary items per share ....................... $ 0.01 N/A N/A
Basic net income per share ................................ $ 0.66 $ 0.85 $ 0.68
Basic weighted average shares ............................. 6,104,497 6,254,470 8,218,983
Diluted income before extraordinary items per share ....... $ 0.64 $ 0.78 $ 0.58
Diluted extraordinary items per share ..................... $ 0.01 N/A N/A
Diluted net income per share .............................. $ 0.65 $ 0.78 $ 0.58
Diluted weighted average shares ........................... 6,187,280 6,801,356 10,014,601
See notes to consolidated financial statements.
26
27
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
Notes
Common Stock Additional Accumulated Receivable from
Shares Amount Paid-in-Capital Deficit Stockholders Total
------------ ------------ --------------- ------------ --------------- ------------
BALANCE, JANUARY 1, 1997 1,482,719 $ 15,000 $ 21,636,000 $(11,268,000) $ 10,383,000
Repurchase of common stock (166,375) (2,000) (1,497,000) (1,499,000)
Stock dividend 3,675,000 (3,675,000)
Notes receivable from
stockholders (Note 16) $ (1,320,000) (1,320,000)
Net income 4,030,000 4,030,000
------------ ------------ --------------- ------------ --------------- ------------
BALANCE, DECEMBER 31, 1997 1,316,344 13,000 23,814,000 (10,913,000) (1,320,000) 11,594,000
Issuance of common stock 808,878 8,000 5,645,000 5,653,000
Repurchase of common stock (135,351) (1,000) (907,000) (908,000)
Stock dividend 4,607,204 46,000 336,000 (382,000)
Repayment on notes receivable
from stockholders (Note 16) 1,116,000 1,116,000
Net income
5,325,000 5,325,000
------------ ------------ --------------- ------------ --------------- ------------
BALANCE, DECEMBER 31, 1998 6,597,075 66,000 28,888,000 (5,970,000) (204,000) 22,780,000
Issuance of common stock
2,469,587 25,000 18,452,000 18,477,000
Repurchase of common stock
(184,000) (184,000)
Repayment on notes receivable
from stockholders (Note 16) 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
============ ============ =============== ============ =============== ============
See notes to consolidated financial statements.
27
28
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 4,030,000 $ 5,325,000 $ 5,609,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ............................. 790,000 2,059,000 3,506,000
Equity in income of investments with related parties
and non-affiliates ................................... (1,431,000) (612,000) (2,049,000)
Gain on sale of joint venture ............................. (4,077,000) (2,406,000)
Gains on sales of real estate ............................. (7,500,000) (4,233,000) (8,546,000)
Gains on restructured notes receivable - non-cash ......... (689,000) (627,000) (1,791,000)
Deferred taxes ............................................ 628,000 184,000
Extraordinary gain, net ................................... (79,000)
Change in assets and liabilities:
Accounts receivable ....................................... (24,000) (5,656,000) (1,860,000)
Other assets .............................................. (184,000) (1,403,000) (1,751,000)
Accounts payable .......................................... (227,000) 1,086,000 651,000
Accrued expenses and other liabilities .................... 2,343,000 11,168,000 2,072,000
------------- ------------- -------------
Net cash (used in) provided by operating activities ... (2,971,000) 3,658,000 (6,381,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment ... (178,000) (7,280,000) (4,806,000)
Dispositions of contracts, furniture, fixtures and
equipment ............................................... 18,000 3,000
Purchase and additions to real estate held for sale ....... (18,841,000) (122,671,000) (26,302,000)
Proceeds from sales of real estate held for sale .......... 36,304,000 21,743,000 45,684,000
Proceeds from sale of joint venture ....................... 5,348,000 6,550,000
Additions to notes receivable ............................. (26,235,000) (16,719,000)
Payments from notes receivable ............................ 4,930,000 13,293,000 10,982,000
Acquisition of property management companies .............. (16,412,000) (7,549,000)
(Loans to) repayments from stockholders ................... (1,320,000) 1,116,000 4,000
Distributions from joint ventures ......................... 2,775,000 2,271,000 2,495,000
Contributions to joint ventures ........................... (2,153,000) (7,240,000) (14,475,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities ..... 21,517,000 (136,049,000) (4,133,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable ........................ 14,320,000 114,679,000 34,055,000
Repayment of mortgage loans payable ....................... (19,734,000) (14,651,000) (56,937,000)
Borrowings under lines of credit .......................... 14,063,000 40,348,000 27,374,000
Repayment of lines of credit .............................. (13,941,000) (35,873,000) (13,355,000)
Borrowings under notes payable ............................ 3,737,000 19,740,000 15,708,000
Repayment of notes payable ................................ (7,168,000) (10,213,000) (20,786,000)
Issuance of subordinated debt ............................. 21,000,000 7,500,000
Repayment of subordinated debt ............................ (12,000,000)
Cash - restricted increase (decrease) ..................... 222,000 (7,994,000) 6,067,000
Issuance of common stock .................................. 5,653,000 18,477,000
Repurchase of common stock ................................ (1,498,000) (908,000) (184,000)
------------- ------------- -------------
Net cash (used in) provided by financing activities ..... (9,999,000) 131,781,000 5,919,000
------------- ------------- -------------
Net increase (decrease) in cash ............................. 8,547,000 (610,000) (4,595,000)
CASH, BEGINNING OF YEAR ..................................... 1,901,000 10,448,000 9,838,000
------------- ------------- -------------
CASH, END OF YEAR ........................................... $ 10,448,000 $ 9,838,000 $ 5,243,000
============= ============= =============
See notes to consolidated financial statements. Continued
28
29
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Year Ended December 31,
------------------------------------------
1997 1998 1999
CASH PAID DURING THE YEAR FOR:
Interest $ 2,930,000 $ 7,754,000 $13,039,000
Interest capitalized $ 340,000 $ 640,000 $ 998,000
Income taxes $ 246,000 $ 633,000 $ 1,367,000
See notes to consolidated financial statements.
29
30
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired a preferred stock interest in five single purpose entities
with the following non-cash 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
equities, cost method of $4.6 million (See Note 11 - Related Party
Transactions). Also during 1999, the Company's other assets increased
approximately $2.8 million as well as an increasing the accrued liabilities for
approximately $2.8 million due to the acquisition of computer and telephone
equipment under capital leases.
30
31
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 1 - ORGANIZATION
Kennedy-Wilson, Inc., a Delaware corporation, incorporated in 1992, and its
wholly owned subsidiaries (the "Company") provide real estate property
management, brokerage and marketing services throughout the U.S. and in Japan,
primarily to institutional investors, financial institutions, developers and
government agencies. The Company also acquires, renovates and resells commercial
and residential real estate; invests in non-performing note receivable
portfolios; invests in internet-related real estate companies and invests in
various real estate joint ventures. In July 1998, the Company acquired from
Heitman Financial Ltd., a wholly owned subsidiary of United Asset Management
Corporation, all of the outstanding shares of Heitman Properties, Ltd., a
property management company. 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
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and joint ventures in
which the Company has a controlling interest. For foreign operations, assets and
liabilities are translated at year-end exchange rates, and income statement
items are translated at average exchange rates prevailing during the year. All
significant inter-company transactions have been eliminated.
REVENUE RECOGNITION: Property management fees are recognized over time as earned
based upon the terms of the management agreement. Brokerage commissions are
generally recognized when all services to be provided by the Company have been
performed and no significant uncertainties remain to close the sale. Residential
real estate sales revenue and gains on sale of commercial property are
recognized at the close of escrow when title to the real property passes to the
buyer. The Company follows the guidelines for profit recognition as set forth by
Statement of Financial Accounting Standards (SFAS) No. 66 Accounting for Sales
of Real Estate. 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 claims and guarantees are
purchased and subsequently structured into 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 AFFILIATES AND JOINT VENTURES - The Company accounts for
investments in affiliates and joint ventures with a non-controlling interest of
50% or less using the equity method.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
31
32
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
GOODWILL - The Company's 1998 purchase of Heitman Properties Ltd., and the five
property management companies purchased in 1999 resulted in goodwill totaling
approximately $24.0 million. Goodwill results from the difference between the
purchase price and the fair value of assets acquired based upon the purchase
method of accounting for business combinations under Accounting Principals Board
Opinion Number 16. The allocated amount, as determined by Company management, is
being amortized over 30 years using the straight-line method. Goodwill is
reviewed for impairment on a regular basis by Company management by comparison
to future expected cash flows. Amortization of goodwill totaled approximately
$612,000 in 1999 and approximately $244,000 in 1998.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consists of cash and all
highly liquid investments purchased with maturities of three months or less and
refundable deposits in escrow.
RESTRICTED CASH - Restricted cash consists of legally restricted cash reserves
held in escrow accounts for capital expenditures, tenant improvements, property
taxes and insurance as required by the Company's mortgage lenders. Typically,
restricted amounts are determined by lenders based upon anticipated cash flows
and expenditures associated with the commercial properties securing the mortgage
loans.
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
SFAS 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 are 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 subjects 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 insured by government agencies. Certain accounts contain
balances in excess of the insured limits.
32
33
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
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 CPI or similar inflation indices. In addition, many
of the Company's leases and management agreements are for terms of less than ten
years, which permits the Company to seek to increase rents and fees at market
rates if they are below 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 outstanding during such period. The basic weighted
average number of shares used to compute net income per share (adjusted for the
20% stock dividend in 1997, and the 200% and 50% stock dividend in 1998) was
6,104,497, 6,254,470, and 8,218,983 for the years ended December 31, 1997, 1998
and 1999, respectively. The diluted weighted average number of shares used to
compute net income per share were 6,187,280, 6,801,356, and 10,014,601 for the
years ended December 31, 1997, 1998 and 1999, respectively. The anti-dilutive
options exclude from the calculations of diluted net income per share, were
450,000, 207,150 and 1,132,870 for the years ended December 31, 1997, 1998 and
1999, respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS- SFAS No. 133, Accounting for Derivative
Investments and Hedging Activities was issued June 1998 and, as amended, is
applicable for all fiscal years beginning after June 15, 2000. Management does
not expect this pronouncement to have a material impact on the Company's
financial statements.
RECLASSIFICATION - Certain reclassifications have been made to the 1998 and 1997
balances to conform to the 1999 presentation.
NOTE 3 - NOTES RECEIVABLE
Notes receivable consists primarily of non-performing notes and related assets
acquired from financial institutions. A majority of these notes are typically
collateralized by real estate, personal property or guarantees.
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. Accumulated depreciation and amortization totaled $912,000
and $1,026,000 at December 31, 1999 and 1998 respectively. 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 it 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 formal plan of disposition.
33
34
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
All real estate is held for sale at December 31, 1999. Except for the 155 acres
of land in San Diego, all properties are encumbered by mortgage loans that are
non-recourse subject to standard real estate industry exceptions (See Note 9 -
Mortgage Loans Payable). During 1999, the Company transferred certain commercial
properties in a related party transaction, (See Note 11 - Related Party
Transactions). Prior to November 1998, the commercial buildings and improvements
were depreciated on the straight-line method over the estimated useful lives as
follows:
Building - 39 years
Tenant Improvement - shorter of lease term or useful life ranging from 2
to 5 years
Depreciation expense was $999,000 and $428,000 for 1998 and 1997, respectively.
Real estate held for sale includes the following:
December 31,
----------------------------
1998 1999
------------ ------------
Commercial properties and land:
1055 Wilshire Blvd., Los Angeles, California - 281,649 Sq. Ft. office building $ 24,937,000
6380 Wilshire Blvd., Los Angeles, California - 132,730 Sq. Ft. office building 16,223,000
5900 Sepulveda Blvd., Van Nuys, California - 74,428 Sq. Ft. office building 6,771,000
7080 Hollywood Blvd., Los Angeles, California - 161,140 Sq. Ft. office bldg 19,821,000
6255 Sunset Blvd., Los Angeles, California - 306,025 Sq. Ft. office building 29,166,000
Zeller, Long Beach, California - 1 residential and 2 commercial buildings 41,000
802 Huntington Dr., Monrovia, California - 20,876 Sq.Ft. automotive center 1,399,000
Santa Monica, California - 4 lots 2,402,000 $ 2,440,000
4350 11th Ave., Los Angeles, California - 9,000 Sq. Ft. office building 336,000
301 S. Fair Oaks Dr., Pasadena, California - 51,710 Sq. Ft. office building 8,886,000
612 S. Flower, Los Angeles, California - office building 16,500,000
------------ ------------
109,982,000 18,940,000
------------ ------------
Residential properties and land:
Vista Paseo Heights, Palm Desert, California - 23 housing lots 2,902,000
Cathedral City, California, - 112 housing lots 2,386,000 4,398,000
Vulcan Mtn., San Diego, California - 155 acres of land 283,000 283,000
Riverside, California - 3.78 acres of land 87,000
Koala, Hawaii - 3,000 acres of land 4,611,000
Pacific Palisades, California - 2 residential homes in 1999; 3 in 1998 2,156,000 2,112,000
------------ ------------
12,425,000 6,793,000
------------ ------------
$122,407,000 $ 25,733,000
============ ============
NOTE 5 - INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of partnerships and joint venture interests ranging
from 2% to 50%, some with former related parties, that were formed to acquire,
manage, develop and or sell real estate assets. These investments are accounted
for under the equity method. Summarized financial data of the ventures are as
follows:
34
35
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
Year Ended December 31, 1997
--------------------------------------------------
With Related With
Parties Non-Affiliates Total
-------------- -------------- --------------
STATEMENT OF INCOME:
Revenues $ 12,913,000 $ 9,284,000 $ 22,197,000
Expenses 12,238,000 7,393,000 19,631,000
-------------- -------------- --------------
NET INCOME $ 675,000 $ 1,891,000 $ 2,566,000
============== ============== ==============
Net income allocated to:
Kennedy-Wilson $ 115,000 $ 1,316,000 $ 1,431,000
Related parties 560,000 560,000
Other partners 575,000 575,000
-------------- -------------- --------------
NET INCOME $ 675,000 $ 1,891,000 $ 2,566,000
============== ============== ==============
DECEMBER 31, 1998
WITH
BALANCE SHEET NON-AFFILIATES
ASSETS
Cash and cash equivalents $ 10,588,000
Receivables 3,278,000
Real estate 109,507,000
------------
Total assets $123,373,000
============
LIABILITIES
Accounts payable and accrued expense $ 7,626,000
Mortgages payable 73,342,000
------------
Total liabilities 80,968,000
------------
PARTNERS' CAPITAL
Kennedy-Wilson 9,209,000
Other partners 33,196,000
------------
Total partners' capital 42,405,000
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $123,373,000
============
DECEMBER 31, 1998
WITH
STATEMENT OF INCOME NON-AFFILIATES
Revenues $ 49,049,000
Expenses 45,070,000
------------
Net Income $ 3,979,000
============
Net income allocation:
Kennedy-Wilson $ 612,000
Other partners 3,367,000
------------
Net Income $ 3,979,000
============
35
36
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
DECEMBER 31, 1999
WITH
BALANCE SHEET NON-AFFILIATES
ASSETS
Cash and cash equivalents $ 37,103,000
Receivables 18,005,000
Real estate 219,476,000
------------
Total assets $274,584,000
============
LIABILITIES
Accounts payable and accrued expense $ 17,312,000
Mortgages payable 188,103,000
------------
Total liabilities 205,415,000
------------
PARTNERS' CAPITAL
Kennedy-Wilson 14,877,000
Other partners 54,292,000
------------
Total partners' capital 69,169,000
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $274,584,000
============
Total investments comprise include the following:
Investment, equity method $ 14,877,000
Investment, cost method - related party and
Others (See Note 11 ) 8,607,000
------------
$ 23,484,000
============
DECEMBER 31, 1999
WITH
STATEMENT OF INCOME NON-AFFILIATES
Revenues $ 63,921,000
Expenses 55,962,000
------------
Net Income $ 7,959,000
============
Net income allocation:
Kennedy-Wilson $ 2,049,000
Other partners 5,910,000
------------
Net Income $ 7,959,000
============
In December 1999, the Company sold its 15%-interest in the joint venture known
as Downtown Properties NY LLC for approximately $6.5 million.
In November 1998, the Company sold its 25%-interest in the joint venture known
as Downtown Properties LLC for approximately $5.5 million.
36
37
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
The agreement for one of the investments with non-affiliates, known as Hilltop
Colony LLC, was amended in 1997, resulting in approximately $335,000 of
additional net income allocated to the Company in 1997.
NOTE 6 - CONTRACTS, FURNITURE, FIXTURES AND EQUIPMENT AND OTHER ASSETS
In July 1998, the Company allocated approximately $7.3 million to the property
management contracts acquired as part of the acquisition of Heitman Properties,
Ltd. In 1999, the Company allocated approximately $2.4 million to the property
management contracts acquired as part of five acquisitions. The Company is
amortizing these contracts over a 7 year period. In 1999 the Company recorded
$1.1 million in amortization expense for these contracts and $545,000 in 1998.
Contracts, furniture fixtures, equipment and other assets consist of the
following:
December 31
------------------------------
1998 1999
------------ ------------
Contracts $ 7,262,000 $ 9,662,000
Office furniture and equipment 851,000 1,947,000
Leasehold improvements 904,000
Computer equipment under capital leases 6,000 2,809,000
------------ ------------
8,119,000 15,322,000
Less accumulated depreciation and amortization (706,000) (2,154,000)
------------ ------------
7,413,000 13,168,000
Prepaid insurance, taxes and commissions 671,000 1,957,000
Loan fees 130,000 17,000
Deposits and prepaid rents 386,000 280,000
Other 638,000 815,000
------------ ------------
$ 9,238,000 $ 16,237,000
============ ============
NOTE 7 - BORROWINGS UNDER LINES OF CREDIT
In July 1999, the Company entered into a loan agreement with East West Bank that
provides the Company with a $24 million revolving credit facility (the
"facility"). The facility is available for acquisitions and working capital. The
loans under the facility bear interest at three-month LIBOR plus 2%, payable
monthly. At December 31, 1999 and 1998, LIBOR was approximately 6.11% and 5.1%,
respectively. The facility expires in June 2000. The principal amount of
outstanding loans was $18,849,000 at December 31, 1999 and $13,057,000 at
December 31, 1998.
The Company's Japanese subsidiary has unsecured yen-denominated lines of credit
pursuant to which it can borrow up to $1 million. At December 31, 1999 and 1998,
yen borrowings in the principal amount of $159,000 and $457,000, respectively
were outstanding under these lines of credit. These borrowings bear interest
rates from 1.9% to 2.6% per annum.
In July 1999, the Company entered into an unsecured revolving loan agreement
with Tokai Bank of California for $15,000,000. The term of the agreement is for
two years and the interest rate is the lesser of LIBOR plus two hundred basis
points or Prime Rate, payable monthly. At December 31, 1999, the facility had an
interest rate of 8.5% or the Prime Rate. The principal amount of outstanding
loans was $8,525,000 at December 31, 1999.
The Company's ability to borrow under these facilities is subject to compliance
with certain financial covenants. As of December 31, 1999 and 1998, the Company
was in compliance with the covenants.
37
38
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 8 - NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable (See Note 3), and included the following:
December 31,
-------------------------
1998 1999
----------- ---------
Note payable to FBR Asset Investment Corporation, fixed interest rate of 17%
per annum, 13% payable monthly, 4% payable at maturity, due in full at the
earlier of (i) the closing of a public offering or (ii) June 3, 1999,
whichever comes first $7,500,000
Note payable, fixed interest rate of 12%, interest payable monthly, due July
1, 1999, interest payable monthly, collateralized by a note receivable 2,289,000
Note payable, variable interest rate based on prime rate plus 1.5%, payable
monthly, 9.25% at December 31, 1998, due April 30, 1999 502,000
Note payable, variable interest based on prime rate plus 4%, 11.75% at
December 31, 1998, collateralized by a 450-acre parcel of land in Hawaii and
a unconditional corporate guaranty by Kennedy-Wilson, Inc., due April 1, 1999 4,000,000
Note payable, variable interest based on prime rate plus 1.5%, interest payable
monthly, 10% at December 31, 1999, due July 1, 2001 $1,748,000
Note payable, variable interest based on prime rate plus 5%, interest payable
quarterly, 13.5% at December 31, 1999, due June 1, 2000 2,195,000
Note payable, fixed rate of 8.5%, interest accrued monthly, principal
payments of $300,000 due January 2000, three additional principal and
interest payments of $666,667, due on each anniversary date, due October 20, 2002 2,019,000
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 5, 2002 1,725,000
Note payable, fixed interest rate of 9.24%, payable monthly, due September 29, 2001 1,021,000
Note payable, fixed interest rate of 9.24%, interest payable monthly, due October 8, 2002 505,000
----------- ----------
$14,291,000 $9,213,000
=========== ==========
NOTE 9 - MORTGAGE LOANS PAYABLE
December 31,
-------------------------
1998 1999
----------- ---------
Commercial Properties:
Mortgage note payable, variable interest based on LIBOR plus 1.75%, 7.5% at
December 31,1998, principal and interest payable monthly, due December 1,
2004, collateralized by 301 S. Fair Oaks, Pasadena, California $ 7,613,000
Mortgage note payable, fixed interest of 10%, principal and interest payable from excess
cash flow as defined, due November 24, 2007, collateralized by 301 S. Fair Oaks,
Pasadena, California 1,250,000
38
39
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
Mortgage note payable, variable interest based on LIBOR plus 3.5%, 8.75% at
December 31, 1998, principal and interest payable monthly, due March 31, 2001,
collateralized by 6380 Wilshire, Los Angeles, California 13,263,000
Mortgage note payable, variable interest based on LIBOR plus 4%, 9.22% at December 31,
1998, interest payable monthly, due March 31, 2001, secured by common shares of the
single purpose entity holding title to 6380 Wilshire, Los Angeles, California 2,561,000
Mortgage note payable, variable interest based on prime rate plus 1.5%, 9.25%
at December 31, 1998, principal and interest payable monthly, due January 30,
2001, collateralized by 5900 Sepulveda, Los Angeles, California 4,951,000
Mortgage note payable, variable interest based on LIBOR plus 4%, 9.22% at
December 31, 1998, interest payable monthly, due January 23, 2001, secured by
common shares of the single purpose entity holding title to 5900 Sepulveda,
Los Angeles, California 1,610,000
Mortgage note payable, variable interest based on LIBOR plus 4.875%, 10.4375%
at December 31, 1998, principal and interest payable monthly, due February 28,
2001, collateralized by 1055 Wilshire, Los Angeles, California 10,894,000
Mortgage note payable, variable interest based on LIBOR plus 2.5%, 8.063% at
December 31, 1998, interest payable monthly, due February 28, 2001,
collateralized by 1055 Wilshire, Los Angeles, California 7,948,000
Mortgage note payable, variable interest based on LIBOR plus 4%, 9.22% at December 31,
1998, principal and interest payable monthly, due February 28, 2001, secured by
common shares of the single purpose entity holding title to 1055 Wilshire, Los Angeles,
California 4,688,000
Mortgage note payable, variable interest based on the monthly weighted average
interest rate for the Eleventh District Savings and Loan Associations plus
2.5%, 10% at December 31, 1998, principal and interest payable monthly, due
May 1, 2002, collateralized by an automotive center in Monrovia, California 1,096,000
Mortgage note payable, variable interest based on LIBOR plus 3.56%, 9.1225% at
December 31, 1998, principal and interest payable monthly, due September
11,2001, collateralized by 6255 Sunset, Los Angeles, California 28,500,000
Mortgage note payable, variable interest based on LIBOR plus 4%, 9.22% at December 31,
1998, principal and interest payable monthly, due September 15, 2001, secured by
common shares of the single purpose entity holding title to 6255 Sunset, Los Angeles,
California 5,300,000
Mortgage note payable, variable interest based on LIBOR plus 3.56%, 9.1225% at
December 31, 1998, principal and interest payable monthly, due September 11,
2001, collateralized by 7080 Hollywood, Los Angeles, California 16,800,000
Mortgage note payable, variable interest based on LIBOR plus 4%, 9.22% at
December 31, 1998, principal and interest payable monthly, due August 30,
2001, secured by common shares of single purpose entity holding title to 7080
Hollywood, Los Angeles, California
3,359,000
39
40
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
Mortgage note payable, variable interest based on LIBOR plus 1.85%, 8.34% at December 31,
1999, interest payable quarterly, principal payable monthly based on a 25 year
amortization, due March 23, 2001, collateralized by 612 S. Flower, Los Angeles,
California $5,759,000
Mortgage note payable, variable interest based on prime rate plus 1.5%, 10% at
December 31, 1999, interest payable monthly, due January 3, 2001,
collateralized by four 15th Street lots, Santa Monica, California 1,000,000
------------ ----------
109,833,000 6,759,000
------------ ----------
Residential Properties:
Mortgage note payable, variable interest based on prime rate plus 1.25%, 9% at
December 31, 1998, principal and interest payable monthly, due March 1, 1999,
collateralized by 23 housing lots in Palm Desert, California 2,191,000
Mortgage note payable, variable interest based on prime rate plus 1.5%, 10% at
December 31, 1999, interest payable monthly, due March 19, 2000,
collateralized by two single family homes located in Pacific Palisades, California 1,628,000 1,384,000
Mortgage note payable, variable interest based on prime rate plus 1%, 9.5% at
December 31, 1999, interest payable monthly, due July 10, 2000, collateralized
by 112 housing lots in Cathedral City, California 1,478,000 3,258,000
----------------------------
5,297,000 4,642,000
----------------------------
Total Mortgage Loans Payable $115,130,000 $11,401,000
============ ===========
All of the mortgage loans payable are secured by deeds of trust on the
respective real estate properties (see Note 4). Aggregate maturities of notes
and mortgage notes payable are as follows:
2000 $8,946,000
2001 10,362,000
2002 1,306,000
Thereafter --
------------
$ 20,614,000
============
NOTE 10 - SUBORDINATED DEBT
In July 1998, the Company borrowed $21 million in subordinated debt from Colony
K-W, LLC, an affiliate of Colony Capital, Inc. to finance its purchase of
Heitman Properties, Ltd. The debt has a fixed interest rate of 14%, payable
monthly and a maturity date of July 16, 2000. The debt is secured by the common
stock of a wholly owned subsidiary, Kennedy-Wilson Properties, Ltd. The
outstanding balance as of December 31, 1999 was $9.0 million. Subsequent to
year-end 1999, the Company paid down an additional $5.0 million in principal.
In April 1999, the Company issued and sold 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.
40
41
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 11 - RELATED PARTY TRANSACTIONS
In December 1999, the Company transferred to Camden Investment Property Group
Inc., ("Camden"), an entity controlled by executives of the Company, all of the
common 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
4000 shares of preferred stock in these entities. In accordance with the
guidance provided by SFAS No. 66 Accounting for Sale of Real Estate, the Company
has not recognized a gain on this transaction. 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. The terms of the preferred shares
provide for the Company to receive in the aggregate an annual cumulative
dividend of $392.50 per share. In addition, the preferred shares bear the right
to receive in the aggregate a liquidation dividend of $3,925 per share. The
Company retains the right of first refusal on any proposed sale. 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 agreement
between the Company and Camden provides that cash first distributed to the
Company until the Company has received $1 million.
In January 1998, the Company acquired a 15% interest in a joint venture,
Downtown Properties, NY. LLC, with entities affiliated with Goodwin Gaw, which
owns a commercial property with approximately 1.0 million square feet of rental
space, located in Manhattan, New York. The Company's investment at December 31,
1998 was approximately $4.2 million. In 1999, the Company sold its interest in
the joint venture.
In March 1998, the Company acquired a 40% interest in a joint venture, Beverly
Crescent, LLC, with entities affiliated with Goodwin Gaw. The joint venture
purchased a note collateralized by a hotel in Beverly Hills, CA. The Company's
original investment was approximately $300,000. In May 1998, the Company sold
its interest in the joint venture.
On November 5, 1998, Goodwin Gaw resigned from his position as a member of our
Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares (as adjusted for the December 15, 1998, 50% stock dividend) of our common
stock for $6.716 per share for a total of $906,750. The closing price for our
shares on the NASDAQ National Market on that date was $7.281 per share.
All 135,000 shares were subsequently retired. As of December 31, 1998, Mr. Gaw
no longer had an ownership interest in the Company, and had resigned from his
positions with the Company.
In 1999, the firm of Kulik, Gottesman & Mouton Ltd. provided legal services
totaling of $382,000. In addition, Kent Mouton, a partner in the firm and a
member of the Company's Board of Directors, was paid a total of $26,500 in
director's fees. For 1998 and 1997, the amounts were $496,000 and $27,500 and
$470,000 and $21,000, respectively.
During 1999, 1998 and 1997, the Company received brokerage and leasing
commissions from affiliates and partnerships with related parties in the amounts
of $2,290,000, $1,201,000 and $894,000, respectively.
During 1998 and 1997, the Company received $179,000 and $156,000, respectively,
in commissions from the sale of properties owned by a partnership which includes
William J. McMorrow, the Company's Chief Executive Officer and Chairman of the
Board and Lewis A. Halpert, a director, Executive Managing Director and
President of the Company's Brokerage Group, as principals. The Company was also
reimbursed $210,000 for marketing expenses in 1997.
41
42
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
In 1997, the Company entered into a joint venture, with parties affiliated with
Goodwin Gaw, who at that time, was one of the Company's Managing Directors, a
member of the Board of Directors, and a significant stockholder. The purpose of
the joint venture was an investment in a Los Angeles office building. See Note
5.
NOTE 12 - INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Current
Federal $ 80,000 $ 104,000 $1,795,000
State 200,000 105,000 263,000
Foreign 587,000
---------- ---------- ----------
280,000 209,000 2,646,000
Deferred 628,000 184,000
---------- ---------- ----------
Total $ 280,000 $ 837,000 $2,829,000
========== ========== ==========
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
Year Ended December 31,
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
Tax computed at statutory rate $ 1,472,000 $ 2,156,000 $ 2,953,000
State income net of federal benefit 132,000 145,000 175,000
Foreign income 153,000 (119,000) (226,000)
Usage of net operating loss carryforward (1,490,000) (1,361,000)
Other 13,000 16,000 (73,000)
----------- ----------- -----------
Provision for income taxes $ 280,000 $ 837,000 $ 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, 1998 December 31, 1999
-------------------------- -------------------------
Assets Liabilities Assets Liabilities
Prepaid expenses $ (81,000) $ (183,000)
Accrued reserves $103,000 $ 34,000
Deferred auction marketing expenses 20,000 27,000
Foreign subsidiary 637,000 530,000
Asset basis and depreciation differences (1,336,000) (1,220,000)
Federal net operating loss carryforward 29,000
-------- ----------- -------- -----------
Total $789,000 $(1,417,000) $591,000 $(1,403,000)
======== =========== ======== ===========
42
43
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Lease Commitments - Future minimum rental commitments, net of sublease income,
as of December 31, 1999 under the non-cancelable operating leases are as
follows:
Year Ending
December 31,
- ------------
2000 $2,769,000
2001 2,408,000
2002 1,632,000
2003 1,269,000
2004 351,000
Thereafter 20,000
----------
Future Minimum lease payments $8,449,000
==========
Approximately $2,227,000 is due the Company in years 2000 through 2003 under
sublease agreements.
Rental expense amounted to $433,000, $931,000 and $1,953,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Future minimum capitalized leases as of December 31, 1999 are as follows:
Year Ending
December 31,
- ------------
2000 $ 798,000
2001 773,000
2002 510,000
2003 318,000
2004 316,000
Thereafter 634,000
----------
Total minimum lease payments 3,349,000
Less amount representing interest 540,000
----------
Present value of net minimum lease payments $2,809,000
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 $1,300,000 and expire at various dates through December
2000. 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 $5,930,000 in total and expiring at
various dates through December 2000.
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.
43
44
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 14 - STOCK OPTION PLANS AND WARRANTS
The Company currently has the 1992 Incentive and Non-statutory Stock Option
Plan, which includes a Plan A and a Plan B and the 1992 Non-Employee Director
Stock Option Plan ("Plan C"). An aggregate of 1,700,000 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. Plan A permits the granting of
Incentive Stock Options to employees, including employee-directors. Plan B
permits the granting of nonstatutory stock options to employees, including
employee-directors and consultants. Plan C permits the granting of options to
non-employee-directors. Options granted under Plan A and B have an option price
of 100% of the fair market value of the common stock on the date of grant. Under
Plan C each director, upon being elected to the Board of Directors, is
automatically granted an option to purchase 13,500 shares at the fair market
value at the date of grant. Additionally, each director is granted an option to
purchase an additional 540 shares at the fair market value on the date of grant
when re-elected. The vesting schedule for options granted under Plan A and Plan
B is determined by a committee of the Board of Directors and the Compensation
Committee of the Board of Directors is currently responsible. Options granted
under Plan C become exercisable on the first anniversary of the date of the
initial grant provided that the optionee continues to serve as a director for at
least one year from the date of such initial grant. Options granted under Plan A
may be exercised for a period of up to five years from the grant date; options
granted under Plan B may be exercised for a period of up to 10 years from the
grant date. Under Plan C, options expire on the earlier of the tenth anniversary
of the date of grant and 90 days after the individual ceases to be a director of
the Company.
Details of activity under the plans for the years ended December 31, 1997, 1998
and 1999 are as follows:
Outstanding Exercise Price Weighted Average
Stock Options Options Per Share Exercise Price
Balance January 1, 1997 297,486 $0.93 - $12.96 $ 3.72
Granted 558,000 $2.17 - $3.72 $ 2.61
Forfeited (23,166) $2.17 - $12.96 $ 12.96
---------
Balance December 31, 1997 832,320 $2.17 - $12.96 $ 2.72
Granted 420,900 $3.67 - $8.33 $ 6.74
Exercised (120,450) $0.95 - $3.73 $ 1.63
Forfeited $3.01 - $7.41 $ 3.74
(16,200)
---------
Balance December 31, 1998 1,116,570 $0.95 - $8.33 $ 4.11
Granted 402,180 $7.09 - $10.43 $ 8.09
Exercised (110,550) $0.95 - $3.72 $ 2.66
Forfeited $1.57 - $12.96 $ 7.22
(54,540)
---------
Balance December 31, 1999 1,353,660 $0.95 - $12.96 $ 5.28
=========
44
45
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Contractual Average Exercisable Average
Exercise Prices 12/31/99 Life Exercise Price 12/31/99 Exercise Price
-------------- ------------------------ ---------------- ---------------- ----------------
$1.00 $1.81 216,000 2.54 $1.43 180,000 $1.36
$2.13 $3.72 437,250 3.67 $2.97 243,750 $2.88
$7.00 $8.50 512,650 4.83 $7.54 101,049 $7.71
$8.56 $10.43 145,100 5.28 $8.92 0 $ 0
$0.93 $12.96 42,660 3.64 $8.92 28,620 $6.76
------------- ---------------
1,353,660 553,419
============= ===============
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, 1998 and 1999 would have been $4,114,000 and
$4,819,000, respectively. In addition, on a pro forma basis, the Company's basic
and diluted net income per share at December 31, 1999, would have been $0.59 and
$0.48, respectively. For December 31, 1998, the Company's basic and diluted net
income per share, on a pro forma basis, would have been $0.66 and $0.60,
respectively. The effect for 1997 was not disclosed, as it was not material. The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: (a) no dividend yield, (b) expected volatility of the Company's
stock of 63%, (c) risk free interest rate of 6%, (d) expected option life of
three years. The effects of applying SFAS No. 123 may not be representative of
the effects on disclosed pro forma net income for future years because options
vest over several years and additional awards can be made each year.
NOTE 15 - CAPITAL STOCK TRANSACTIONS
Issuance of Capital Stock and Warrants
In July 1998, Colony Investors III, L.P. acquired a 10% equity position in the
Company. The purchase involved a private placement sale of 660,128 shares of the
Company's common stock and warrants exercisable for seven years to purchase
198,039 shares of the Company's common stock at $10.00 a share.
In June 1998, as part of the loan (see Note 8) obtained from FBR Asset
Investment Corporation, the Company issued warrants of 131,096 shares which
represent 2% of the outstanding shares on a fully diluted bases on June 3, 1998.
The warrants have an exercise price of $7.56 per share, which reflects the
average of the closing price for a share of common stock on NASDAQ for the
twenty business days proceeding December 4, 1998. The warrants have an
expiration date of June 3, 2003.
In April 1999, the Company purchased at fair value, 21,000 shares of the
Company's common stock from one of the holders of the debentures. The shares are
being held as treasury stock.
45
46
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
In May 1999, the Company completed a public offering of 2,300,000 shares of its
common stock. The new shares were priced at $9.00 per share, resulting in
aggregate proceeds of approximately $18 million. The proceeds of the offering
were used to pay down existing debt.
Stock Repurchase
In November 1998, the Company purchased 135,000 shares of the Company's stock
from a former officer and director. See Note 11.
Stock Dividend
In December 1998, the Company declared a 3 for 2 stock split in the form of a
50% dividend. In March 1998, the Company declared a 3 for 1 stock split in the
form of a 200% stock dividend. In October 1997, the Company declared a 20% stock
dividend. All historical share and per share amounts have been retroactively
restated to reflect the dividends.
NOTE 16 - EMPLOYEE BENEFIT ARRANGEMENTS
Employee Profit Sharing Plan
The Company maintains a profit sharing plan covering all full-time employees
over the age of 21, who have completed three months of service prior to January
1 and July 1 of each year. Contributions to the profit sharing plan are made
solely at the discretion of the Company's Board of Directors. No contributions
were made for the years ended December 31, 1997, 1998 and 1999.
In addition, the Company has a qualified profit sharing 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 1997, 1998 and 1999 the Company made matching
contributions of $24,000, $27,000 and $39,000, respectively to this plan.
Deferred Compensation Plan
In 1997, the Company established a non-qualified deferred compensation plan to
provide specified benefits to a select group of management and key employees who
contribute materially to the continued growth, development and future business
success of the Company. Under this plan, participants are able to make salary
deferral contribution of up to 100% of their total compensation. The plan also
includes provisions, which authorize the Company to make discretionary
contributions. During 1997, 1998 and 1999, the Company made matching
contributions of $314,000, $1,078,000 and $1,000,000, respectively.
Notes Receivable from Stockholders
In December 1997, a group of key employees, including its principal executive
officers, purchased 73,314 shares of the Company's outstanding stock for cash in
a private transaction with an institutional investor. The purchase represented
approximately 5.6% of the Company's outstanding shares. The Company provided
recourse loans for the employees to purchase the stock totaling approximately
$1.3 million. The balance outstanding as of December 31, 1999 was $200,000. The
terms of the notes receivable are prime plus 1%, interest payable semi-annually,
with a maturity date of the earlier of 3 years, or at termination of employment,
or sale of stock by the employee
46
47
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 17 - EXTRAORDINARY ITEMS
During 1997, the Company recognized a $79,000 extraordinary gain comprised of a
$288,000 gain from debt extinguishment and a $209,000 loss from loan prepayment
penalties.
NOTE 18- SEGMENT INFORMATION
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments. 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 - As a result of recent acquisitions, the Company has become
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 it's 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
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.
47
48
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1997. The Company did not generate material intersegment
revenues for the periods ended December 31, 1999, 1998 and 1997. The Company
does not disclose based on geographic segments due to immateriality. The Company
does not use capital expenditures by segment as part of the decision making
process. The amounts representing investments with related parties and
nonaffiliates are included in the investment segment.
1997 Reconciliation of Reportable Segment Information
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------ ------------ ------------
Property management and leasing fees
Commissions $ 5,895,000 $ 5,895,000
Sales of residential real estate $ 6,753,000 6,753,000
Equity in income of investments with related parties
and non affiliates 1,431,000 1,431,000
Gain on sale of commercial real estate 6,339,000 6,339,000
Rental income, net 1,629,000 1,629,000
Gain on restructure notes receivable 4,036,000 4,036,000
Interest and other income 897,000 $ 19,000 916,000
------------ ------------ ------------ ------------
REVENUES: 5,895,000 21,085,000 19,000 26,999,000
Depreciation and amortization 483,000 307,000 790,000
Interest expense 2,791,000 348,000 3,139,000
Other expenses 4,678,000 9,228,000 4,933,000 18,839,000
------------ ------------ ------------ ------------
OPERATING EXPENSES: 4,678,000 12,502,000 5,588,000 22,768,000
------------ ------------ ------------ ------------
Income before provision for income taxes 1,217,000 8,583,000 (5,569,000) 4,231,000
Provision for taxes 280,000 280,000
------------ ------------ ------------ ------------
Income before provision for extraordinary items 1,217,000 8,583,000 (5,849,000) 3,951,000
Extraordinary items 213,000 (134,000) 79,000
------------ ------------ ------------ ------------
NET INCOME $ 1,217,000 $ 8,796,000 $ (5,983,000) $ 4,030,000
============ ============ ============ ============
48
49
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1998 and balance sheet data as of December 31, 1998.
1998 Reconciliation of Reportable Segment Information
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
Property management and leasing fees $ 12,725,000 $ 735,000 $ 734,000 $ 14,194,000
Commissions 4,890,000 27,000 4,917,000
Sales of residential real estate 13,828,000 13,828,000
Equity in income of investments with
related parties and non affiliates 350,000 262,000 612,000
Gain on sale of joint venture 4,077,000 4,077,000
Gain on sale of commercial real estate 2,654,000 2,654,000
Rental income, net 4,583,000 4,583,000
Gain on restructure notes receivable 3,911,000 3,911,000
Interest and other income 52,000 1,889,000 $ 155,000 2,096,000
------------ ------------ ------------ ------------ ------------
TOTAL REVENUES: 12,725,000 6,027,000 31,965,000 155,000 50,872,000
Depreciation and amortization 1,125,000 934,000 2,059,000
Interest expense 6,375,000 2,023,000 8,398,000
Other expenses 8,470,000 3,329,000 26,883,000 8,321,000 34,253,000
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES: 8,470,000 3,329,000 21,633,000 11,278,000 44,710,000
------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 4,255,000 2,698,000 10,332,000 (11,123,000) 6,162,000
Provision for income taxes 837,000 837,000
------------ ------------ ------------ ------------ ------------
NET INCOME $ 4,255,000 $ 2,698,000 $ 10,332,000 ($11,960,000) $ 5,325,000
============ ============ ============ ============ ============
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
TOTAL ASSETS $ 7,780,000 $ 3,275,000 $162,499,000 $ 31,262,000 $204,816,000
============ ============ ============ ============ ============
TOTAL LIABILITIES $ 2,525,000 $ 1,535,000 $138,592,000 $ 39,384,000 $182,036,000
STOCKHOLDERS' EQUITY 5,255,000 1,740,000 23,907,000 (8,122,000) 22,780,000
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,780,000 $ 3,275,000 $162,499,000 ($31,262,000) $204,816,000
============ ============ ============ ============ ============
50
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
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 $ 5,000 $ 29,552,000
Commissions 9,489,000 1,073,000 10,562,000
Sales of residential real estate 25,731,000 25,731,000
Equity in income of investments with
related parties and non affiliates 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
Rental income, net 2,877,000 2,877,000
Gain on restructure notes receivable 6,352,000 6,352,000
Interest and other income 274,000 1,259,000 $ 479,000 2,012,000
------------ ------------ ------------ ------------ ------------
TOTAL REVENUES: 26,622,000 16,959,000 44,550,000 479,000 88,610,000
Depreciation and amortization 912,000 2,594,000 3,506,000
Interest expense 9,299,000 2,142,000 11,441,000
Other expenses 19,922,000 5,409,000 26,868,000 13,026,000 65,225,000
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES: 6,131,000 3,140,000 37,079,000 17,762,000 80,172,000
------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 6,700,000 11,550,000 7,471,000 (17,283,000) 8,438,000
Provision for income taxes 2,829,000 2,829,000
------------ ------------ ------------ ------------ ------------
NET INCOME $ 6,700,000 $ 11,550,000 $ 7,471,000 $(20,112,000) 5,609,000
============ ============ ============ ============ ============
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
TOTAL ASSETS $ 15,021,000 $ 16,670,000 $ 54,104,000 $ 49,355,000 $135,150,000
============ ============ ============ ============ ============
TOTAL LIABILITIES $ 3,066,000 $ 3,380,000 $ 22,726,000 $ 59,292,000 $ 88,464,000
STOCKHOLDERS' EQUITY 11,955,000 13,290,000 31,378,000 (9,937,000) 46,686,000
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,021,000 $ 16,670,000 $ 54,104,000 $ 49,355,000 $135,150,000
============ ============ ============ ============ ============
50
51
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
NOTE 19 - EARNINGS PER SHARE
The following table reconciles the calculation for the earning per share for the
periods ending December 31, 1999, 1998 and 1997:
YEAR ENDED DECEMBER 31,
----------------------------------------
BASIC EARNINGS PER SHARE 1997 1998 1999
- ------------------------ ----------- ----------- -----------
Net Income Available to Common Stockholders $ 4,030,000 $ 5,325,000 $ 5,609,000
=========== =========== ===========
Weighted Average Shares 6,104,497 6,254,470 8,218,983
----------- ----------- -----------
Basic per Share Amount $ 0.66 $ 0.85 $ 0.68
=========== =========== ===========
DILUTED EARNINGS PER SHARE
- --------------------------
Net Income $ 4,030,000 $ 5,325,000 $ 5,609,000
Income effect of dilative securities, tax effected 204,000
----------- ----------- -----------
Net Income available for stockholders $ 4,030,000 $ 5,325,000 $ 5,813,000
Weighted Average Shares 6,104,497 6,254,470 8,218,983
Weighted average shares, convertible debentures 461,538 534,246
Options and warrants 82,783 85,348 1,261,372
----------- ----------- -----------
Total Diluted Shares 6,187,280 6,801,356 10,014,601
=========== =========== ===========
----------- ----------- -----------
Diluted per Share Amount $ 0.65 $ 0.78 $ 0.58
=========== =========== ===========
NOTE 20 - UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
The following pro forma consolidated statement of income give effect to the
acquisition of five management companies acquired during 1999. The pro forma
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.
1998 1999
PRO FORMA PRO FORMA
------------ ------------
TOTAL REVENUE $ 75,522,000 $105,590,000
TOTAL OPERATING EXPENSES 67,961,000 95,352,000
------------ ------------
INCOME BEFORE INCOME TAXES 7,561,000 10,238,000
PROVISION FOR INCOME TAXES 1,327,000 3,414,000
------------ ------------
NET INCOME $ 6,234,000 $ 6,824,000
============ ============
52
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
Pro forma basic net income per share $ 1.00 $ 0.83
Pro forma basic weighted average shares 6,254,470 8,218,983
Pro forma diluted net income per share $ 0.92 $ 0.70
Pro forma diluted weighted average shares 6,801,356 10,014,601
NOTE 21 - UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
1998
--------------------------------------------------------
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
----------- ----------- ----------- -----------
REVENUES $ 4,397,000 $ 6,459,000 $20,834,000 $19,182,000
TOTAL OPERATING EXPENSES 3,625,000 6,221,000 19,132,000 15,732,000
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 772,000 238,000 1,702,000 3,450,000
PROVISION FOR INCOME TAXES 98,000 36,000 311,000 392,000
----------- ----------- ----------- -----------
NET INCOME $ 674,000 $ 202,000 $ 1,391,000 $ 3,058,000
=========== =========== =========== ===========
Basic net income per share $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share $ 0.11 $ 0.03 $ 0.20 $ 0.43
----------- ----------- ----------- -----------
Diluted weighted average shares 6,366,289 6,583,598 7,093,199 7,150,513
=========== =========== =========== ===========
1999
------------------------------------------------------
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ----------- -----------
REVENUES 16,857,000 13,115,000 32,296,000 26,342,000
TOTAL OPERATING EXPENSES 15,084,000 11,685,000 28,717,000 24,686,000
---------- ---------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,773,000 1,430,000 3,579,000 1,656,000
PROVISION FOR INCOME TAXES 603,000 500,000 1,078,000 648,000
---------- ---------- ----------- ----------
NET INCOME 1,170,000 930,000 2,501,000 1,008,000
========== ========== =========== ===========
Basic net income per share $ 0.17 $ 0.12 $ 0.28 $ 0.11
Basic weighted average shares 6,707,284 8,000,080 9,066,662 9,066,662
Diluted net income per share $ 0.16 $ 0.11 $ 0.25 $ 0.10
Diluted weighted average shares 7,329,809 9,247,329 10,393,787 10,351,925
52
53
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, 1999, 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, 1999 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, 1999, 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, 1999, and such information is incorporated herein by
reference.
53
54
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
SCHEDULE IV - NOTES RECEIVABLE ON REAL ESTATE S-2
Supplemental financial statement schedules not listed above are
omitted because either they are not applicable, not required or
because the information required is included in the consolidated
financial statements, including the notes thereto.
(3) Exhibits:
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of the Company, as amended
to date.
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the
Company's 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.
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.
54
55
Exhibit Number Description
-------------- -----------
10.5.4* Eighth Amendment to Employment Agreement dated as of
December 13, 1999 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 Schlessinger.
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* Four Amendment to Employment Agreement dated as of
January 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, 1998 between the Company and Lewis Halpert.
10.11 Employment Agreement dated April 1, 1996 between the
Company and Freeman Lyle. (Filed as Exhibit 10.13 to the
Company's 1997 Annual Report on form 10-K and
incorporated herein by this reference).
10.11.1 Second Amendment to Employment Agreement dated April 1,
1998 between the Company and Freeman Lyle.
10.11.2 Third Amendment to Employment Agreement dated as of
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.
10.12 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).
55
56
Exhibit Number Description
-------------- -----------
10.15 Form of Stock Option Agreement under the Company's 1992
Incentive and Nonstatutory Stock Option Plan. (Filed as
Exhibit 10.23 of the Company's 1992 Annual Report on
Form 10-K and incorporated herein by this reference).
10.16 Form of Stock Option Agreement under the Company's 1992
Non-employee Director Stock Option Plan. (Filed as
Exhibit 10.24 of the Company's 1992 Annual Report on
Form 10-K and incorporated herein by this reference).
10.17 Amended and Restated Revolving Credit Agreement dated as
of September 10, 1998 between the Company and East-West
Bank.
10.18 Loan Agreement dated as of July 28, 1998 between
Kennedy-Wilson Properties, Ltd. and East-West Bank.
10.19 Guaranty dated as of July 28, 1998 by the Company in
favor of East-West Bank.
10.20 Loan Commitment Letter dated July 2, 1998 between
KW-KAU, LLC, Kennedy-Wilson International, Inc. and Old
Standard Life Insurance Company.
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 Property Group Inc.
21* List of Subsidiaries of the Company.
57
Exhibit Number Description
-------------- -----------
23* Consent of Deloitte & Touche LLP.
27* Financial Data Schedule.
* Filed herewith.
(b) CURRENT REPORTS ON FORM 8-K.
None.
58
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 30, 2000
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 Chief Executive Officer March 30, 2000
- -------------------------------------- (Principal Executive Officer)
William J. McMorrow
/s/FREEMAN A. LYLE Executive Vice President, Chief Financial Officer and March 30, 2000
- -------------------------------------- Secretary (Principal Financial and Accounting Officer)
Freeman A. Lyle
/s/LEWIS A. HALPERT Executive Managing Director and March 30, 2000
- --------------------------------------
Lewis A. Halpert Director
/s/RICHARD A. MANDEL Managing Director and Director March 30, 2000
- --------------------------------------
Richard A. Mandel
/s/BARRY SCHLESSINGER President Kennedy-Wilson Properties, Ltd., and Director March 30, 2000
- --------------------------------------
Barry S. Schlessinger
/s/THOMAS BARRACK Director March 30, 2000
- --------------------------------------
Thomas Barrack
/s/KENT MOUTON Director March 30, 2000
- --------------------------------------
Kent Mouton
/s/DONALD PRELL Director March 30, 2000
- --------------------------------------
Donald Prell
58
59
Kennedy-Wilson Inc.
SCHEDULE III - REAL ESTATE OWNED Costs Capitalized
For Year Ended December 31, 1999 Subsequent to
Initial Cost Acquisition
--------------------------- ----------------------------
Building and Carrying
Commercial properties: Encumbrance Land Improvements Improvements Costs
------------ ------------ ------------ ------------ -----------
4 vacant lots., Santa Monica, California $ 1,000,000 $ 2,402,000 -- -- --
612 South Flower, Los Angeles, California
282,000 square foot office building 5,759,000 12,292,000 $ 4,208,000 -- --
------------ ------------ ------------ ------------ -----------
6,759,000 14,694,000 4,208,000 -- --
------------ ------------ ------------ ------------ -----------
Residential properties:
Pacific Palisades, California
3 residential homes 1,384,000 960,000 789,000 $ 262,000 $ 101,000
Cathedral City, California
112 housing lots 3,258,000 1,800,000 2,590,000 8,000
San Diego, California
155 acres of land -- 283,000
------------ ------------ ------------ ------------ -----------
4,642,000 3,043,000 789,000 2,852,000 109,000
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total $ 11,401,000 $ 17,737,000 $ 4,997,000 $ 2,852,000 $ 109,000
============ ============ ============ ============ ===========
Gross Amounts At Which Carried
At Close of Period
--------------------------------------------
Buildings and
Commercial properties: Land Improvements Total
------------ ------------ ------------
4 vacant lots., Santa Monica, California $ 2,402,000 $ 38,000 $ 2,440,000
612 South Flower, Los Angeles, California
282,000 square foot office building 12,292,000 4,208,000 16,500,000
------------ ------------ ------------
14,694,000 4,246,000 18,940,000
------------ ------------ ------------
Residential properties:
Pacific Palisades, California
3 residential homes 960,000 1,152,000 2,112,000
Cathedral City, California
112 housing lots 1,800,000 2,598,000 4,398,000
San Diego, California
155 acres of land 283,000 283,000
------------ ------------ ------------
3,043,000 3,750,000 6,793,000
------------ ------------ ------------
------------ ------------ ------------
Total $ 17,737,000 $ 7,996,000 $ 25,733,000
============ ============ ============
Balance at beginning of year $122,407,000
Additions during period:
Acquisitions 16,500,000
Improvements 3,163,000
Other: 5,739,000 25,402,000
---------- -
Deductions during period:
Disposition of real estate sold 36,839,000
Transfer of real estate 85,237,000 122,076,000
---------- -----------
Balance at end of year $ 25,733,000
============
S-1
60
KENNEDY-WILSON, INC.
SCHEDULE IV - Notes Receivable on Real Estate
For Year Ended December 31, 1999
Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal/
Description Rate Date Terms Liens Mortgage Mortgage Interest
- ------------------------------------------------------------------------------------------------------------------------------------
Construction Loans:
Note secured by deed of 10% April 30, 2000 Accrued Interest First, No $ 701,000 $ 809,000
trust on 15 single then Principal Pay Down
family residential units
in California
Note secured by deed of 10% July 31, 2000 Level Principal No 342,000 371,000
trust on 16 single family and Interest
homes in California
Note secured by deed of 10% July 31, 2000 Level Principal No 301,000 326,000
trust on 23 single family and Interest
homes in California
Note secured by third trust 10% November 1, 2000 Level Principal No 1,500,000 1,448,000
deed on residential and and Interest
commercial property in
California
Note secured by deed of 12% March 31, 2002 Level Principal No 5,760,000 5,034,000
trust on 1,044.79 acres of and Interest
land in California
Note secured by deed of 10% Upon completion Level Principal No 675,000 578,000
trust on 211 single family and sale of last and Interest
homes in Nevada unit
First Mortgage:
Note secured by 542 acres
of land in Hawaii N/A December 31, 1990 None No 48,925,000 8,831,000
----------- -----------
$58,204,000 $17,397,000
=========== ===========
Balance at beginning of the year $ 1,894,000
Additions during year:
New mortgage loans 16,469,000
Deductions during year:
Collections of principal (966,000)
----------
15,503,000
-----------
Balance at end of the year $17,397,000
===========
S-2