SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 2
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(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to .
Commission file number: 0-20418
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KENNEDY-WILSON, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4364537
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9601 Wilshire Boulevard, Suite 220,
Beverly Hills, California 90210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 887-6400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each class Name of each exchange on which registered
Common Stock, $.01 par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X{ No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ( )
As of September 28, 1999, there were outstanding 9,079,277 shares of the
Registrant's Common Stock. The aggregate market value of the Registrant's Common
Stock held by non-affiliates on September 28, 1999 was approximately $50,285,304
based on the closing price of $9.250 per share.
<PAGE>
KENNEDY-WILSON, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
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Caption Page
Part I
Item 1. Business................................................... 3
Item 2. Properties................................................. 10
Item 3. Legal Proceedings.......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........ 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 11
Item 6. Selected Financial Data.................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk....................................................... 22
Item 8. Financial Statements and Supplementary Data................ 23
Part III
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 54
Item 10. Directors and Executive Officers of the Registrant......... 54
Item 11. Executive Compensation..................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 61
Item 13. Certain Relationships and Related Transactions............. 63
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K................................................ 66
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<PAGE>
ITEM 1. Business
Overview
We are an integrated, international real estate services and investment
company. Founded in 1977, we were later incorporated in Delaware and became a
public company in 1992. Through our subsidiaries, we deliver a complementary
array of real estate services. Headquartered in Beverly Hills, we have
approximately 640 full and 50 part time employees in offices throughout the U.S.
and in an office in Tokyo. We initially gained recognition in the U.S. real
estate market through our residential real estate auction services. Over time,
we diversified our business so that we now provide:
-- Commercial and residential property management and leasing;
-- Management of real estate and note pool investments; and
-- Commercial and residential brokerage, including auction marketing.
In addition to these real estate related services, we invest for our
account in:
-- Commercial and residential real estate; and
-- Pools of secured and unsecured distressed notes
Our clients include large U.S. and Japanese financial institutions, major
corporations, pension funds, real estate developers, insurance companies and
governmental entities.
We have had a presence in Japan for ten years through which we have
developed significant relationships with Japanese companies and financial
institutions. In 1995, we opened our Tokyo office. It is staffed with nine
Japanese employees, two of whom are Japanese licensed real estate brokers with
knowledge of the local culture and real estate market. We believe that success
in the Japanese real estate market is determined primarily by a company's
reputation and its business relationships, not solely by its access to capital.
We have entered into joint venture relationships with companies and partnerships
affiliated with Colony Capital, Inc. and Cargill, Incorporated to invest in
Japanese real estate and distressed notes. We believe that these joint venture
parties were attracted to us, in large part, by our strong Japanese presence.
See Note 18 to the Company's financial statements.
Our Business Operations
Property Management And Leasing
On July 17, 1998, we acquired Heitman Properties, Ltd., a national property
management and leasing company founded in 1969. As a result of this acquisition,
we have become a nationwide commercial and residential property management and
leasing company. We provide a full range of services relating to property
management, including:
-- Commercial and residential building management;
-- Leasing;
-- Construction management;
-- Engineering services;
-- Technical services; and
-- Environmental management.
-3-
We have managers in four regional offices -- Beverly Hills, Houston,
Minneapolis and Chicago -- supervising approximately 600 full-time and 50
part-time employees who assist in managing more than 125 office and industrial
buildings, commercial garages and multi-unit residential complexes in 26
different states and the District of Columbia. We have approximately 48 million
gross square feet of real estate under management, including 15,334 residential
units.
As part of our strategy for providing our property management clients with
the best services possible, we apply the same approach in managing our clients'
properties as we do in managing our own, where our primary objective is to
maximize the return on investment. To this end, we work with each client to
ascertain its goals and expectations and to design strategic plans for marketing
and improving each property in a way that increases the client's returns. We
also strive to maximize our clients' returns by reducing property operating
expenses through the discounts and lower prices that we generally obtain for
vendor services and supplies such as janitorial and gardening services and
office supplies. As a result of our national purchasing programs and service
provider alliances, we can sometimes secure these services and supplies for less
than the manager of a single property.
We are actively seeking to expand our property management and leasing
operations through the acquisition of property management and leasing companies,
the marketing of our property management services to our existing brokerage
clients and the development of new, institutional clients. We have one senior
executive whose sole responsibility is to seek out, evaluate and negotiate
property management and leasing company acquisitions and we have marketing
personnel working out of our Beverly Hills, Phoenix and Chicago offices seeking
new property management engagements. We have also charged our property managers
and leasing agents with the responsibility of bringing in new business and we
compensate them with bonuses when they are successful in doing so. In addition
to expanding our property management business in the U.S, we also intend to
expand that business into Japan in concert with our efforts to invest in
Japanese real estate.
Real Estate Brokerage
Through our offices in Beverly Hills, New York and Tokyo, and with the
assistance of our affiliate in Hong Kong, Kennedy-Goldman, Ltd., we provide
specialized brokerage services for both commercial and residential real estate.
We market and sell on behalf of our clients and ourselves:
-- Office and retail buildings;
-- Multi- and single-family residences;
-- Industrial sites;
-- Hotels and resorts; and
-- Undeveloped land.
The properties for which we have brokered sales are located throughout the U.S.
with a significant concentration in California. We have also sold properties in
Japan, Guam and Canada.
We strive to achieve the best results for our clients and to provide
superior customer service that focuses on personalized attention, frequent
updates on marketing efforts and utilization of our international relationships
and our complementary array of real estate services. The following is a sample
of the real estate services that we provide in connection with our brokerage
activities:
-- Property valuations;
-- Development and implementation of marketing plans;
-- Sealed bid auctions; and
-- Open bid auctions.
-4-
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 located in the U.S. Our clients are located in the U.S., Japan, Canada,
Australia and Hong Kong.
Traditionally, our commercial brokerage marketing in Asia focused primarily
on selling properties located in the U.S. for Asian clients. Over the years, we
have built relationships with large Japanese financial institutions, developers,
investors and property owners and have developed what we believe to be a
reputation among them as successful marketer of commercial and residential real
estate in the U.S. In 1995, in order to establish ourselves as brokers in the
Japanese real estate market, we opened our office in Tokyo and are now brokering
the sales of commercial property in Japan.
When we engage in a competitive bidding process for brokerage engagements,
our brokerage commission rates often structured to demonstrate our confidence in
our ability to sell the property at a high price. For example, we might offer a
property owner a market or below-market brokerage commission rate for selling a
property at the price the owner initially expects and a higher rate for selling
the property for a higher price. On average, our commercial brokerage
assignments last for six months from the listing of the property to the payment
of a brokerage commission upon its sale. Generally, we do not enter into
long-term contracts for brokerage services.
Residential Brokerage Services.
We specialize in designing marketing programs to sell single-family home
developments and condominium projects using conventional sales and
auction-marketing programs. We also design and implement sealed bid marketing
programs for exclusive estates and land for residential development. Most of the
residential properties that we have brokered are located in California. Our
clients include builders, developers, private sellers, financial institutions
and government agencies.
-5-
Auction Services.
We provide our clients with auction marketing services to sell both
commercial and residential real estate. Auctions provide a seller an opportunity
to concentrate the marketing efforts and sell its holdings on one established
date. By doing so, the seller can increase liquidity and avoid long-term
carrying costs and the risk of a drop in market value. For these reasons, we
believe that the net proceeds to the seller following an auction sale of
multiple units often exceeds what the net proceeds would have been had the units
been sold individually through conventional brokerage arrangements. The typical
auction marketing program spans approximately four months from the time that we
sign the agreement with our client to the date of the auction.
Real Estate Investments and Asset Management
We invest in commercial and residential real estate with joint venture
partners and on our own account. We also provide asset management services for
some of our joint ventures.
Our current investment portfolio and our plans for future investments focus
on commercial buildings and multiple and single family residences. Generally, we
purchase properties that are subperforming in a manner which we believe can be
rectified with our expertise or financial resources. For example, a developer of
a residential real estate project may find it difficult or impossible to finish
the project because it cannot properly market the finished product or has
insufficient cash flow. In such a situation, we can purchase the project at a
discounted price then apply our marketing expertise and draw on our financial
resources to finish the project and sell it as a whole or to individual home
buyers for a profit. With regard to commercial properties, we acquire
subperforming buildings, make the improvements necessary to attract tenants,
lease to new tenants and then sell the buildings. We refer to this process as
stabilizing the asset.
We believe that one of our strengths is our ability to quickly identify and
acquire desirable real estate assets. We do so by capitalizing on the
institutional knowledge we have developed through our brokerage and investment
business and by conducting quick and thorough investigations and analyses of the
properties, their financial condition and what we believe to be their financial
potential. We have extensive experience in identifying and analyzing the factors
that impact property values in the regions in which we do business, such as new
construction, the marketability of certain neighborhoods, leasing trends and the
types of businesses seeking various types of commercial space. Our
investigations and analyses are conducted by an experienced in-house team,
occasionally supplemented by outside due diligence professionals.
To date, a significant portion of the real estate in which we have invested
is located in California. Within the next year, we plan to liquidate the
commercial real estate investments that we currently wholly own in the U.S. due
to our belief that we will have stabilized or will soon stabilize these assets
in many markets. While we believe the current cycle of the U.S. commercial real
estate market has matured, we think that Japan offers significant real estate
opportunities due to the recent Asian economic downturn. Presently our brokerage
operations are the source of many of our real estate acquisitions in the U.S.
These operations provide us with unique investment opportunities in the form of
close relationships with clients that have substantial real estate investments.
We expect our property management and brokerage operations to continue to
provide select opportunities for us to acquire additional U.S. real estate
investments suitable for our stabilization techniques.
Occasionally, our clients desire to sell some or all of their real estate
holdings through means other than conventional brokerage or auction services.
For example, financial institutions are generally not in the business of holding
and managing property and they may have regulatory or internal requirements that
mandate the rapid sale of real property acquired through foreclosure. Thus, a
financial institution client that has acquired a property through a foreclosure
may desire to sell it in less time than it would take for a conventional
brokerage or auction sale. Similarly, as a result of the current economic
conditions in Asia, a client in Asia may have the need or desire to sell a real
estate holding in a rapid manner with little publicity. In the past, we have
been able to meet the needs of these types of clients by purchasing their
properties quickly and discretely for our own account.
-6-
Depending on the size of the property, the availability of capital and our
assessment of risks, we either acquire a property as part of a joint venture or
entirely for our own account. Historically, we have used joint ventures to
acquire larger commercial buildings, typically those with more than 250,000
square feet of space. In these transactions, our joint venture partner
contributed the majority of the capital while we contributed the remainder of
the capital along with our marketing expertise. In some cases we have provided
the joint venture fee based asset management services. These transactions have
offered us the ability to leverage our capital and diversify the risks
associated with owning these larger properties.
We generally finance the acquisitions of our wholly-owned real estate with
mortgage loans and mezzanine financing. Currently, all but one of our
wholly-owned commercial properties were acquired with the use of mezzanine
financing. In our typical mezzanine financing transaction, we are required to
make an equity investment of 25% to 35% of the purchase price, of which 70% to
80% of that equity investment is financed by the mezzanine lender. The remainder
of the investment is generally financed by a mortgage lender. Typically, the
mezzanine lender receives interest on its loan and a share of the sale proceeds.
The share of the sale proceeds is generally determined by the amount of the loan
and the period of time which the property is held. In this type of arrangement,
we control the management of the property, including the timing and marketing of
the property's sale.
We are pursuing joint ventures with large international investors,
particularly in Japan. To this end, we have entered into a limited partnership
agreement with affiliates of Colony Capital to invest up to $100.0 million of
which $2.0 million will be invested by us, in Japanese real estate and pools of
distressed notes. The investment strategy of the Kennedy-Wilson/Colony
partnership is to take advantage of depressed Japanese real estate prices and
the weakened Japanese economy by purchasing Japanese real estate and distressed
notes at discounted prices. Once the partnership acquires an asset, whether a
pool of notes or real estate, we manage that investment on behalf of the
partnership for a fee. Thus far, the partnership has purchased a 356,000 square
foot office building in Kawasaki, Japan occupied by high tech tenants and a pool
of notes described in the "Distressed Note Pool Investments" section that
follows this section.
Distressed Note Pool Investments
Since 1994, we have been purchasing and managing pools of distressed notes.
Generally, distressed notes are those where the borrower has stopped making
payments or is late in making payments. Our note pools contain notes that are
secured and unsecured. The secured notes are collateralized by real estate or
personal property.
Historically, we have acquired these pools from regulatory agencies such as
the Federal Deposit Insurance Corporation and the Resolution Trust Corporation.
We have also purchased notes from various U.S. private sellers, such as banks,
savings institutions, mortgage companies and insurance companies. Most of these
notes were originated by lenders in California, Texas and Florida.
Recently, we expanded our operations to include the acquisition of a pool
of Japanese distressed note pools a joint venture. In September, 1998, the
Kennedy-Wilson/Colony partnership purchased for $24.0 million a pool of
distressed Japanese notes with a face value in excess of $400.0 million, some of
which are secured by real estate and personal property. In addition, the pool
also included 17 commercial and residential properties. The Company's investment
and total exposure in this note pool is $660,000. Due to the relatively small
amount of the investment and accordingly, the anticipated immaterial effects of
any potential foreign currency fluctuations, the Company has not hedged this
foreign currency exposure. As of December 31, 1998, this note pool had generated
for the Kennedy-Wilson/Colony partnership revenues in excess of $1.6 million, of
which $109,000 represents revenues for us. In addition to any amounts paid by
the borrowers in this note pool, we will also earn an asset management fee for
managing the notes and real estate acquired.
-7-
In March, 1999, we entered into a joint venture agreement with an entity
affiliated with Cargill, Incorporated. The present investment strategy of the
Kennedy-Wilson/Cargill joint venture is to acquire on a privately negotiated
basis pools of distressed Japanese real estate secured notes that cost from $3.0
million to $10.0 million. In addition to our 5.0% contribution, we will provide
the Kennedy-Wilson/Cargill joint venture asset management and disposition
services on a fee basis. Although, the Kennedy-Wilson/Cargill joint venture has
not yet acquired any assets, we expect it to do so in the near future. In
accordance with our obligations under the Kennedy-Wilson/Colony partnership, we
presented this opportunity to that partnership. The Kennedy-Wilson/Colony
partnership declined the opportunity because, we believe, the assets we intend
to acquire through the Kennedy-Wilson/Cargill partnership do not fit the
Kennedy-Wilson/Colony partnership strategic investment plan.
We also invest in individual distressed notes secured by real property.
Presently, we hold two nonperforming distressed notes secured by undeveloped
land in the Kailua-Kona region of Hawaii that we acquired in 1998. In one of
those notes we have an investment of $3.9 million and it is secured by 450 acres
of ocean front, undeveloped land. In the second note, we have an equity
investment of $540,000. This note is secured by 1,000 acres of undeveloped land.
Mezzanine Lending
In 1997, we began making mezzanine loans to real estate developers for new
single-family, residential developments. Total project costs for these
developments typically range from $5.0 to $25.0 million, and our mezzanine loans
typically range from $500,000 to $1.0 million. We expect to hold these loans for
a period of less than two years. Presently, the borrowers pay interest at 10%
per annum, and we are entitled to a participation in any profits from the
development. We also, generally, collect at the closing of each loan a 1% set-up
fee. We have made three loans of this type, each of which remains outstanding.
The aggregate outstanding principal balance of all three loans is approximately
$1.4 million.
Equity Investments in Other Companies
Kennedy Goldman. In June, 1997 we acquired, a 20% equity interest in
Kennedy Goldman (HK) Limited, a Hong Kong corporation, located in Hong Kong.
Kennedy Goldman is a real estate services company specializing in leasing and
real estate investment brokerage in Hong Kong. We acquired this interest in
order to maintain a presence in the Hong Kong real estate market and business
relations with Asian real estate investors. We have a director on Kennedy
Goldman's Board of Directors. The book value of our investment is $32,000.
Asset One. In April, 1998 we acquired a 40% equity interest in Asset One, a
Japanese corporation with an office in Tokyo. Asset One is a loan servicing
company, Part of Asset One's business includes servicing the loans in our
distressed Japanese loan pools. The book value of our investment is $182,000.
Jutaku Ryutsu. In March, 1998 we acquired a 30% equity interest in Jutaku
Ryutsu, a Japanese corporation with offices in Tokyo, Osaka and Fukuoka, Japan.
Jutaku Ryutsu is a brokerage company that specializes in selling real estate
assets between $500,000 and $10 million in value. Jutaku Ryutsu assists us with
our acquisition due diligence on our Japanese loan pools and real estate and the
disposition of those assets. The book value of our investment is $253,000.
Government Regulations
Our brokerage and property management operations are subject to various
federal, state and local regulations in the U.S. and in Japan. We must have an
officer licensed as a real estate broker or we must associate with a broker
licensed by each state within the U.S. in which we provide brokerage and
property management services. In California, we must have an officer licensed as
a real estate broker in order to be exempt from California's lender licensing
requirements with respect to the real estate secured mezzanine loans that we
make. Each of our employees that performs certain brokerage functions in any
particular state must be a licensed real estate salesperson in that state and he
or she must work under the supervision of a broker licensed by that state. In
addition to these licensing requirements, certain state governmental entities,
such as the California Department of Real Estate, regulate our brokerage and
property management operations by requiring our resident operative subsidiary to
be licensed. We believe that we are in substantial compliance with all material
licensing requirements and regulations in states and countries in which licenses
are required and in which we are engaged in material brokerage and property
management activities.
-8-
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 substantial
compliance with all material licensing and bonding requirements in all states in
which auctioning licenses and bonds are required and in which we are engaged in
material auction activities.
Competition
Because of our unique combination of businesses, we compete with brokerage,
auction, leasing and property management companies as well as companies,
partnerships, trusts and individuals that invest in real estate and distressed
notes. We believe that the brokerage and property management industries are both
highly fragmented and highly competitive. We must compete with conventional
property management companies and commercial and residential real estate brokers
as well as other auction companies. Several of these companies are significantly
larger than us and possess greater financial resources. We compete with real
estate brokerage and auction-marketing companies on the basis of brokerage
commissions charged, marketing expenses paid and quality of service. We compete
with property management and leasing firms on the basis of management fees and
leasing commissions charged and the range and quality of services provided.
Our investment operations compete to varying degrees with real estate
investment partnerships and other investment companies. Many of these
competitors have significantly greater capital resources. Some of these
competitors, however, focus on acquisitions which are larger in size than those
historically targeted by us. We believe that we also compete to a lesser degree
with real estate investment trusts that seek to acquire similar assets. We
compete with these other investors on the basis of the amounts that we pay for
the investments acquired.
Employees
We have approximately 640 full-time and 50 part-time employees in the U.S.
and in Japan. None of our employees are represented by a collective bargaining
agreement. Our compensation policies are designed to attract, retain and motive
the employees that are an integral part of our profitability. Generally,
executive officers and brokers receive a base salary and a variety of
performance based rewards including stock options and either profit sharing or
bonuses. These employees, other than those in our property management and
leasing group, receive a relatively low base salary, with the bulk of their
salary being paid in the form of a performance based bonuses. The upper level
employees in the property management and leasing group receive a market based
salary and performance based bonuses. In either case, the bonuses are based in
part upon the profitability of the group with which the employees are affiliated
as well as our overall performance. As a result, employees are encouraged to
meet individual goals as well as to contribute their expertise and efforts on
behalf of their group. In addition to promoting the generation of revenues, our
bonus structure also encourages our commercial real estate brokers to control
costs because the bonuses paid are based on the profits of the commercial
brokerage operations as opposed to gross brokerage revenues. In furtherance of
our compensation philosophy, we have granted approximately 3% of our employees
stock options to reward excellent performance and to further align their
personal interests with those of our other stockholders. Finally, approximately
4% of our employees are entitled to participate in a deferred compensation plan
in which we match each employee's contribution up to a specified maximum
according to our overall performance.
-9-
ITEM 2. PROPERTIES
Our executive and administrative offices are located at 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California, and consist of approximately
26,000 square feet in an office building managed by us. We also lease space for
our regional and branch offices and sublease space to third parties. These
facilities, including our Beverly Hills headquarters, comprise a total of
approximately 84,488 square feet of leased space, with an annual aggregate base
rental of approximately $1.0 million. Each of these leases is scheduled to
expire within the next five years. We believe that we will be able to renew any
expiring lease or obtain suitable office space to replace such leased facility,
as necessary, without any material increase in our rental costs.
As described above, we also buy and sell real estate in the ordinary course
of our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business and routine. These matters are generally covered by insurance. The
ultimate disposition of these ordinary proceedings is not presently
determinable. We believe based upon currently available information, that the
outcome of these proceedings will not have a material adverse effect on our
financial position or results of operations and that the existing proceedings,
individually or collectively, are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our stockholders during the
fourth quarter of 1998.
-10-
<PAGE>
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 20% stock dividend paid October 27, 1997; a 200% stock dividend
paid April 10, 1998 and a 50% stock dividend paid December 15, 1998, where
appropriate.
High Low
1997-
First Quarter $2.22 $1.77
Second Quarter $2.97 $2.13
Third Quarter $3.33 $2.73
Fourth Quarter $4.39 $3.08
1998-
First Quarter $8.78 $3.67
Second Quarter $12.67 $6.33
Third Quarter $9.00 $6.00
Fourth Quarter $8.50 $5.00
As of March 2, 1999, there were approximately 1,250 holders of our Common
Stock. Since the completion of our initial public offering in August 1992, we
have not paid any cash dividends, and we have no present intention to commence
the payment of cash dividends. However, our Board of Directors may determine to
pay cash dividends on our Common Stock in the future depending on our results of
operations, financial condition, contractual restrictions and other factors our
Board may deem relevant from time to time. Presently, our loan agreement with
FBR Asset Investment Corporation prohibits us from declaring or paying any
dividend with respect to our Common Stock without first obtaining the consent of
FBR Asset Investment Corporation.
On December 18, 1998, we purchased 100% of the issued and outstanding stock
of TechSource Services, Inc. from its four stockholders for $225,000 cash and
28,300 shares of our common stock at a per share price of $8.027. The sale was
exempt from registration under the Securities Act of 1933 under Section 4(2)
thereof. We reasonably believed prior to the sale of our shares that each of the
purchasers had such knowledge and experience in financial and business matters
that each was capable of evaluating the merits and risks of an investment in our
Company.
-11-
<PAGE>
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, 1998. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues..................................................... $ 38,647 $ 20,610 $31,967 $26,999 $50,872
Total expenses..................................................... $ 37,589 $ 33,752 $28,376 $22,768 $44,710
Income (loss) from operations...................................... $ 1,058 $(13,142) $ 3,591 $ 4,231 $ 6,162
Net income (loss).................................................. $ 1,010 $(13,186) $ 3,531 $ 4,030 $ 5,325
Basic income (loss) before extraordinary items per share........... $ 0.13 $ (1.74) $ 0.50 $ 0.65 $ 0.85
Basic extraordinary item per share................................. N/A N/A N/A 0.01 N/A
Basic net income per share......................................... $ 0.13 $ (1.74) $ 0.50 $ 0.66 $ 0.85
Basic weighted average shares ..................................... 7,594 7,575 7,087 6,104 6,254
Diluted income before extraordinary items per share................ $ 0.13 N/A $ 0.50 0.64 $ 0.78
Diluted extraordinary item per share............................... N/A N/A N/A 0.01 N/A
Diluted net income per share ..................................... $ 0.13 N/A $ 0.50 0.65 $ 0.78
Diluted weighted average shares.................................... 7,686 N/A 7,094 6,187 6,801
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................................... $ 37,014 $ 37,651 $51,114 $45,718 $204,816
Long term debt..................................................... $ 7,610 $ 24,449 $20,516 $15,102 $136,130
Total liabilities.................................................. $ 15,995 $ 29,706 $40,732 $34,124 $182,036
Total stockholders' equity......................................... $ 21,019 $ 7,945 $10,382 $11,594 $ 22,780
</TABLE>
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are an international real estate services and investment company. We
provide property management and leasing services, asset management, commercial
and residential brokerage, and auction services to clients primarily in the U.S.
and Japan. Our clients include financial institutions, major corporations, real
estate developers, insurance companies and governmental agencies. We also invest
in commercial and residential real estate, as well as individual and pools of
distressed notes both in the U.S. and Japan. Our revenues in 1996, 1997, and
1998 were $32.0 million, $27.0 million, and $50.9 million, respectively. Our net
income in the same periods was $3.5 million, $4.0 million, and $5.3 million,
respectively.
In 1998, we substantially increased our activities in Japan, including a
joint venture with an affiliate of Colony Capital, Inc. This joint venture
provides a framework for the investment of up $100.0 million, $2.0 million of
which would be invested by us, in Japanese real estate and pools of distressed
notes, of which approximately half has been invested to date. Under the terms of
the joint venture agreement, we provide Japanese real estate expertise and
receive acquisition, management and disposition fees. The joint venture
agreement also requires us to provide 2.0% of the required equity in any
investment. In addition, we made minority investments in brokerage and loan
servicing businesses in Japan and have expanded the size of our direct employee
base in Japan to nine real estate professionals. As part of our strategy, we
plan to grow our business in Japan, continuing to emphasize fee based sources of
income. In furtherance of this strategy, we entered into a joint venture and
strategic alliance with an affiliate of Cargill, Incorporated in March 1999 to
invest in small- and medium-sized pools of distressed notes.
When we sell residential real property, we recognize as gross revenues the
total sales price of residential real estate property and we recognize as an
expense the purchase price and improvements associated with that real estate.
Therefore, a sale of residential real property in any reported period has a
disproportionate effect on revenues and expense in that period relative to sales
of other investments and our other business lines. Our commercial real property
investments are accounted for on a net gain on sale basis.
Our 1998 growth was due principally to our acquisition of our property
management and leasing company, Heitman Properties, Ltd., in July 1998. We
funded this acquisition with a $21.0 million loan from Colony-KW, LLC. We made
this acquisition as part of a strategy to increase recurring fee income as a
percentage of total revenues. We expect that this acquisition will be a platform
for future growth of our property management business in both the U.S. and
Japan. We acquired Heitman Properties for $21.0 million in cash and we accounted
for this transaction under the purchase method of accounting, resulting in
goodwill of $16.0 million which we are amortizing on a straight-line basis over
30 years.
Historically, we have purchased for our own account commercial and
residential real estate in the U.S. During 1996, 1997, and 1998, we acquired
$13.1 million, $10.8 million, and $102.1 million , respectively, of commercial
properties, and $2.2 million, $2.8 million, and $7.6 million , respectively, of
residential properties. We held or hold all these properties for resale. We
anticipate selling these domestic, wholly-owned properties within the next year.
-13-
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. Between July 17, 1998 and
December 31, 1998, this subsidiary generated $12.7 million of our $14.2 million
in property management fees and leasing commissions. As of December 31, 1998, it
had under management a portfolio of approximately 48 million square feet of
commercial, industrial and apartment properties located in 26 states and the
District of Columbia.
Brokerage. Brokerage commission revenues in 1998 were $4.9 million,
representing 9.7% of total revenues and a 16.6% decrease over brokerage
commission revenues in 1997 of $5.9 million. There were a total of 30
transactions in 1998 with an aggregate value of $522.9 million, compared to 57
transactions in 1997 with an aggregate value of $423.8 million. This reflects a
continued trend toward increased brokerage commissions from commercial sales and
decreased brokerage commissions from residential sales. Commercial properties
typically have higher sales prices but lower brokerage commission rates compared
to residential properties. The costs associated with a commercial assignment
tend to be lower than those associated with residential assignments.
Investments. Sales of residential real estate were $13.8 million in 1998,
representing 27.2% of total revenues, compared to $6.8 million in 1997. This
equates to a 104.8% increase. This increase is due to sales from four projects
in 1998, including a 10 unit single family home development in North Los
Angeles, seven units of a 23 unit single family development in Palm Desert, and
the bulk sale of a 24 unit condominium project in west Los Angeles. This
compares to revenues in 1997 from the sale of 13 units of a 14 unit condominium
project located in Orange County, California, the sale of the remaining seven
units in a condominium project in Hawaii, and the sale of a land lot zoned for
condominium development in Beverly Hills. The sales of residential real estate
for both years reflect our strategy to sell upon completion of planned
improvements, rather than holding for speculation.
Equity in income of investments with related parties and affiliates and
gain on sale of partnership increased in total to $4.7 million in 1998, or 9.2%
of total revenue, a 227.7% increase from the $1.4 million realized in 1997. The
gain on sale of 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 properties, which included increasing average occupancy of the
properties from approximately 45% at acquisition in 1996 to approximately 80% at
the time of sale. Both 1998 and 1997 included revenues from the sale of 88
condominium units from a 109 unit joint venture project located in near downtown
Los Angeles. The sales of these units occurred over the two years as planned
improvements to the units were completed.
Gain on sale of commercial real estate was $2.7 million 1998, or 5.2% of
total revenues, down 58.2% from $6.3 million in 1997. The decline resulted from
the fact that in 1997 we sold five commercial properties including a 46,000
square foot property in Santa Monica, a 50,000 square foot property in West Los
Angeles, 30,000 square foot property in Anaheim, a 61,000 square foot in
Pasadena and a 20,000 square foot property in Santa Monica. In 1998, we sold two
commercial properties, consisting of a 36,000 square foot building in Santa
Monica, and a 28,000 square foot building in downtown Los Angeles. All
properties were sold after the completion of the stabilization process.
-14-
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.
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.
-15-
Provision for income taxes was $837,000 in 1998, a 200% increase over the
$280,000 in 1997. The tax expense has been significantly less than the statutory
rate due to substantial net operating losses carryforward which have been
utilized in reducing the Company's federal tax liabilities. At December 31,
1998, the Company has available net operating losses carryforward totaling
approximately $219,000.
Comparison of the Years ended December 31, 1997 and 1996
Total revenues.
Total revenues in 1997 were $27.0 million, a 15.5% decrease from $32.0
million in 1996. Earnings before taxes for 1997 were $4.2 million, representing
a 17.8% increase over 1996. Net income for 1997 was $4.0 million, representing a
14.1% increase over 1996. Despite the decrease in sales of residential real
estate earnings before taxes, net income increased because of an increase in the
sale of commercial real estate. We had no property management revenues from 1996
or 1997.
Brokerage. Revenues from brokerage commissions were $5.9 million in both
1997 and 1996, representing 21.8% of total revenues in 1997 and 18.4% of total
revenues in 1996. In 1997 there were 57 transactions totaling $424.0 million in
value, compared to 70 transactions in 1996 totaling $359.6 million in value.
Also, in 1997 a greater proportion of the brokerage commissions were earned from
commercial property sales, as opposed to 1996 when sales of residential
properties, especially through the auction process, were greater. Commercial
properties typically have higher sales prices but lower brokerage commission
rates compared to residential properties. The costs associated with a commercial
assignment tend to be lower than those associated with residential assignments.
Investments. Residential real estate sales were $6.8 million in 1997, equal
to 25% of total revenues, compared to $19.7 million in 1996 representing a 65.8%
decline. Residential real estate sales in 1997 consisted of revenues from three
projects, including 13 units of a 14 unit condominium property in Orange County,
the remaining seven units in a condominium property in Hawaii, and land lot in
Beverly Hills. This compares to residential real estate sales in 1996 which
included revenues from four projects, including 33 condominium units from a
property in Hawaii, 42 condominium units from a property in south San Francisco,
nine units from a property in west Los Angeles, and the remaining unit from a
condominium project located in San Francisco.
Equity in income of investments with related parties and non-affiliates was
$1.4 million in 1997, or 5.3% of total revenues, compared to $178,000 in 1996.
The increase is due primarily to sales of 88 condominium units in a 109 unit
joint venture property located near downtown Los Angeles.
Gain on sale of commercial real estate was $6.3 million in 1997,
representing 23.5% of total revenues, compared to $1.4 million in 1996, equating
to a 336.0% increase. The increase is due primarily to the fact that in 1997 we
sold five commercial properties, including a 46,000 square foot property in
Santa Monica, California, a 50,000 square foot property in west Los Angeles, and
a 30,000 square foot property in Anaheim, California, a 61,000 square foot
property in Pasadena, California, and a 20,000 square foot property in Santa
Monica. In 1996 we sold one commercial property consisting of 56,000 square feet
in Santa Monica.
Gains on restructured notes receivable were $4.0 million in 1997, or 15.0%
of total revenues, compared to $3.1 million in 1996, which equates to a 32.0%
increase. The increase reflects the increased collections from the note pools
acquired in 1996 and 1997.
Rental income net was $1.6 million in 1997, or 6.0% of total revenues,
versus $1.5 million in 1996, resulting in a 11.0% increase. The increase
resulted from an increase in the average occupancy of properties in our
portfolio in 1997 due to our management and leasing programs.
-16-
Total Operating Expenses.
Total expenses in 1997 were $22.8 million, a 20.0% decrease from $28.4
million in 1996. Despite the decrease in sales of residential real estate,
earnings before taxes and net income increased because of an increase in the
sales of commercial real estate. We had no property management revenues in 1996
or 1997.
Brokerage commission and marketing expenses decreased 40.5% to $928,000 in
1997 from $1.6 million in 1996, reflecting the continued trend of less auction
marketing revenues which is typically more costly than single asset commercial
brokerage transactions.
Cost of residential real estate sold decreased 66.2% to $5.6 million in
1997 from $16.7 million in 1996. This was due primarily to the decreased
revenues from sales of residential real estate discussed above.
Compensation and related expenses increased 62.0% to $7.7 million in 1997
from $4.7 in 1996, resulting from an increase in executive employees and from
increased incentive compensation, including the implementation of a deferred
compensation program designed to maximize our profits.
General and administrative expenses increased 49.1% to $4.7 million in 1997
from $3.1 million in 1996, due to an increase in occupancy costs associated with
opening our office in New York as well as the necessity of additional corporate
space, and to increased legal costs associated with increased collection and
restructuring of notes receivable and leasing and sales of commercial and
residential real estate.
Depreciation and amortization increased 195% to $790,000 in 1997 from
$268,000 in 1996. Although commercial properties held for sale at the end of
1997 totaled approximately $14.1 million, compared to approximately $25.1
million at the end of 1996, the average balance during 1997 was higher.
Interest expense increased 59.8% to $3.1 million in 1997 from $2.0 million
in 1996. Although our total debt decreased to $28.9 million from $37.6 million
in 1996, the average balance in 1997 was higher.
Liquidity and Capital Resources
Our liquidity and capital resources requirements include expenditures for
real estate held for sale, distressed notes pools, the acquisition of property
management portfolios, and working capital needs. Historically, we have not
required significant capital resources to support our brokerage operations. We
finance our operations with internally generated funds and borrowings under our
revolving lines of credit as described below. Our investments in real estate are
typically financed by mortgage loans secured primarily by that real estate.
These mortgage loans are generally nonrecourse in that, in the event of a
default, recourse will be limited to the mortgaged property serving as
collateral, subject to certain exceptions that are standard in the real estate
industry. Exceptions where the lender may proceed against the borrower or
guarantor, if any, generally include the voluntary transfer of the mortgaged
property by the borrower, the voluntary initiation of bankruptcy proceedings by
the borrower, fraud or misrepresentation in obtaining the loan, and other
similar acts.
Cash provided by operating activities was about $3.7 million in 1998,
compared to $3.0 million in cash used in operating activities in 1997. The
change included an increase in accounts receivable attributable primarily to the
property management fees which are received one month in arrears, as well as
leasing commissions earned but not received until the related tenant moves in,
offset by increased accrued expenses which includes bonuses and deferred
compensation. The $3.0 million cash used in operating activities in 1997
compares to $533,000 in cash provided by operating activities in 1996. The
change resulted from an increase in 1997 in gains on sale of real estate, which
are excluded from cash flows from operating activities, offset by an increase in
accrued expenses.
-17-
Cash used in investing activities was about $136.0 million in 1998,
compared to $21.5 million in cash provided by investing activities in 1997. The
change resulted primarily from our purchases of real estate held for sale of
$123.0 million which was attributable to our commercial property acquisitions.
In addition, in 1998, we purchased Heitman Properties, Ltd. for about $21.0
million, which was allocated to contracts, furniture and fixtures, and goodwill.
The $21.5 million in cash provided by investing activities in 1997 compares to
cash used in investing activities in 1996 of $11.7 million. The change resulted
primarily from proceeds from sale of real estate held for sale in the amount of
$36.3 million and collection of notes receivable of $4.9 million, offset by
purchases of real estate held for sale in the amount of $18.8 million.
Cash provided by financing activities was about $131.8 million in 1998,
compared to cash used in financing activities in 1997 of about $10.0 million.
The change resulted from $114.7 million in mortgage loans payable related
primarily to the purchase of the commercial properties referred to above 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. and
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. The $10.0 million in cash used in
financing activities in 1997 compares to cash provided by financing activities
of $10.8 million in 1996. The change resulted from repayments of mortgage loans
payable of $19.7 million and repayment of notes payable of $7.1 million.
Prior to September 1998, we had a $15.0 million unsecured credit facility
with East-West Bank with an interest rate of prime plus 2.0%. In September 1998,
we increased that facility to $21.0 million with interest payable monthly at a
rate of LIBOR plus 2.0% and a maturity date of June 30, 2000. We use this
facility primarily for working capital purposes and acquisitions. The
outstanding balance on this facility was $13.1 million as of December 31, 1998.
In July 1998, we entered into a bridge loan agreement with Colony K-W, LLC
that provided us with $21.0 million in subordinated debt, the proceeds from
which we utilized to consummate our acquisition of Heitman Properties, Ltd. This
debt bears interest at a rate of 14.0%, and the principal is payable in three
installments of $7.0 million due on July 30 in each of 1999, 2000 and 2001.
As of December 31, 1998, we had $115.1 million in mortgage notes payable.
We used proceeds from these loans to finance the acquisition of several
commercial and residential properties, and are secured by both first and second
mortgage liens. All but $5.3 million of these loans are non recourse against the
borrower or guarantor, if any, except in certain circumstances that are standard
in the real estate industry. We plan to repay each note upon the sale of the
corresponding secured property.
In June 1998, we entered into a term loan agreement with FBR Asset
Investment Corporation which had an original principal amount of $10.0 million
bearing interest at 12.0% per annum. As of November, 1998 the loan terms were
amended so that after December 3, 1998, the interest rate was 13% per annum
payable monthly plus 4% per annum compounded monthly and payable at maturity and
the loan was extended to June 1999; however, we plan on refinancing this debt on
or prior to maturity. As of December 31, 1998, the outstanding principal balance
was $7.5 million. We used the proceeds of this loan to purchase note pools.
To the extent that we engage in additional strategic investments, including
real estate, note portfolio, or acquisitions of other property management
companies, we may need to obtain third party financing which could include bank
financing or the public sale or private placement of debt or equity securities.
We believe that existing cash, plus capital generated from property management
and leasing, brokerage, sales of real estate owned, collections from notes
receivable, as well as our current line of credit with East-West Bank, will
provide us with sufficient capital requirements for the foreseeable future.
-18-
Our need, if any, to raise additional funds to meet our working capital and
capital requirements will depend on numerous factors, including the success and
pace of the implementation of our strategy for growth. We regularly monitor
capital raising alternatives to be able to take advantage of other available
avenues to support our working capital and investment needs, including strategic
partnerships and other alliances, bank borrowings, and the sale of equity or
debt securities. We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends.
Recent Developments
On March 5, 1999, we executed a letter of intent relating to our proposed
acquisition of a property management company. The acquisition price is less than
$2.5 million. We intend to finance a portion of this acquisition with borrowings
under our East-West line of credit.
Inflation
Our long-term leases contain provisions designed to mitigate the adverse
impact of inflation on its results from operations. Such provisions include
escalation clauses, which generally increase rental rates during the terms of
the respective agreements. Such escalation clauses are often related to
increases in the CPI or similar inflation indices. In addition, many of our
leases and management agreements are for terms of less than ten years, which
permits us to seek to increase rents and fees at market rates if they are below
then existing market rates. Many of our leases require the tenants to pay a pro
rata share of operating expenses, including common area maintenance, real estate
taxes, insurance and utilities, thereby reducing our exposure to increases in
costs and operating expenses resulting from inflation. See Note 1 of Notes to
the Company's Consolidated Financial Statements.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Investments and Hedging Activities was issued June 1998, applicable
for all fiscal years beginning after June 15, 1999. At this time, management has
not completed their analysis of this pronouncement's impact on the Company's
financial statements.
Year 2000 Issue
What Is The Year 2000 Issue?
It is difficult to estimate the impact the Year 2000 Issue may have on our
business, financial condition and results of operations. Based on current
testing, we have identified two primary systems affected by the Year 2000 Issue.
First, we rely upon information technology systems to run software for
databases, accounting, word processing, e-mail and other programs necessary to
our business. Second, certain mechanical systems in the buildings we manage and
own, such as fire safety systems, key card access devices and air conditioning
and heating units, may be reliant, to some degree, on computer systems for
various functions.
What Is The State Of Readiness Of Our Information Technology Systems?
In January, 1999, we formed an internal information services group that
developed a plan to bring our information technology systems into Year 2000
compliance by September, 1999, consisting of the following:
- -- Educate management of the nature and scope of the Year 2000 Issue;
- -- Inventory all hardware and software system which we use;
- -- Scan these systems with two industry standard programs for Year 2000
compliance and repair or replace those identified as non-compliant;
-19-
- -- Install new computer network and server which will allow us to back up all
of our data every evening; and
- -- Test new systems in a "non-live environment" by turning their internal
clocks forward while monitoring and recording responses and hire outside
consultants to audit and validate our results.
We project our new network will be up and running no later than June 1,
1999, and we presently anticipate to be through with all internal testing by
September, 1999. We plan to have outside consultants perform and complete their
valuation audit of our testing by the fourth quarter of 1999. We estimate based
on current testing that we will have to replace approximately 20 computers of
the 120 in use at our five corporate offices.
Most of the properties to which we provide property management services
have computer terminals. While these terminals will be tested, they will not be
placed on our network. We do not presently believe Year 2000 compliance problems
with these terminals will have a material adverse affect on our property
management operations.
What Is The State Of Readiness Of Our Building Systems?
In the first quarter of 1998, we formed a Year 2000 Compliance Task Force
to formulate and draft a Year 2000 compliance program for the various properties
we manage. Each individual property owner is ultimately responsible for assuring
its properties are ready for Year 2000, and our role as property manager is
limited to identifying potential problems and recommending remedial action.
However, we will make the necessary Year 2000 renovations to the properties we
own.
As of February 28, 1999, approximately 60% of the properties under
management in 1998 are participating in the Year 2000 compliance program. For
those properties, we have substantially completed reviews of the preliminary
inventories and testing and have submitted proposals to those owners. We will
contract owners of non-participating buildings to determine if they would now
like to participate in our Year 2000 compliance program.
How Does The Year 2000 Issue Impact Us?
We are not currently aware of any internal Year 2000 problems that could be
reasonably expected to have a material adverse impact on our business, results
of operations and financial condition. The vendors from which we will acquire
hardware and software for our new information technology system have indicated
the products we plan to use are currently Year 2000 compliant. The current
review of the preliminary systems inventories from our participating managed
properties revealed few Year 2000 Issues.
However, there can be no assurance that we will not discover Year 2000
problems with our systems that will require their repair or replacement. We
cannot give assurances that third-party software, hardware or services
incorporated into our material systems or systems upon which we are reliant will
not need to be revised or replaced, which could be time consuming and expensive.
In addition, we cannot give assurances that governmental agencies, utilities
third-party service providers and others outside of our control will be Year
2000 compliant. The failure of such entities to become compliant could result in
a systemic failure beyond our control, such as loss of telecommunications or
electricity, which could adversely impact our information technology systems or
may allow tenants at the buildings we own or manage to terminate leases if such
failures persist.
-20-
What Will It Cost To Implement The Year 2000 Plans?
We estimate that we will incur approximately $150,000 in our Year 2000
compliance efforts, of which we have spent approximately $12,000 to date. The
majority of this amount will be spent on replacing hardware and software and on
testing. We have not had to defer any of our information technology plans as a
result of our Year 2000 preparations. However, these estimates are based on our
current assessment and are subject to change. We will continue to assess our
Year 2000 Issue compliance efforts and as a result, we may need to revise our
budget to implement new measures in the future.
Contingency Plan
We are currently developing a Year 2000 Contingency Plan. The results of
current and future testing and response of vendors, manufactures and service
providers will be taken into account in developing this plan.
Forward-Looking Statements
Certain statements contained in this document may constitute
"forward-looking statements" within the meaning of the federal securities laws.
Forward-looking statements are statements containing a projection of revenues,
income (loss), earnings (loss), capital expenditures, dividends, capital
structure or other financial terms or our plans and objectives for future
operations.
The Forward-looking statements in this document are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are:
- -- general volatility of the capital markets and the market price of our
common shares;
- -- changes in the real estate market, interest rates or the general economy of
the markets in which we operate;
- -- our ability to identify and complete acquisitions and successfully
integrate businesses we acquire; our ability to employ and retain qualified
employees;
- -- our ability, and the ability of our significant vendors, suppliers and
customers, to achieve Year 2000 compliance;
- -- changes in government regulations that are applicable to our regulated
brokerage and property management businesses;
- -- changes in the demand for our services; and
- -- degree and nature of our competition.
When used in our documents or oral presentations, the words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal," or similar words are intended to identify forward-looking
statements. We qualify any and all such forward-looking statements entirely by
these cautionary factors.
-21-
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
The table below represents contractual balances of our financial
instruments at the expected maturity dates as well as the fair value at December
31, 1998. The expected maturity categories take into consideration actual
amortization of principal and 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, 1998 and 1997 (See Consolidated
Financial Statements Note 2, Fair Value of Financial Instruments). The Company
increased its borrowings with variable interest rates to $132.0 million in 1998
from $27.7 million in 1997. Substantially all of these loans are secured by
commercial and residential real estate. 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.
<TABLE>
<CAPTION>
PRINCIPAL MATURING IN:
------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------------- ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
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
=================== ================== ================== =================== ==================
11.19% 14.49% 9.66% 10.16% 10.66%
=================== ================== ================== =================== ==================
<CAPTION>
Fair Value
Thereafter Total December 31, 1998
------------------- ------------------ -------------------------
<S> <C> <C> <C>
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
=================== ================== =========================
11.46% 10.56%
=================== ==================
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MATURING IN:
------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------------- ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets
Cash and cash equivalents $ 10,448,000
Average interest rate 4.00%
=================== ================== ================== =================== ==================
$ 10,448,000
=================== ================== ================== =================== ==================
Interest rate sensitive
liabilities
Variable, rate borrowings $ 16,648,000 $ 131,000 $ 214,000 $ 214,000 $ 214,000
Average interest rate 9.04% 9.29% 9.79% 10.29% 10.79%
Fixed rate borrowings -- --
Average interest rate
=================== ================== ================== =================== ==================
$ 16,648,000 $ 131,000 $ 214,000 $ 214,000 $ 214,000
=================== ================== ================== =================== ==================
9.04% 9.29% 9.79% 10.29% 10.79%
=================== ================== ================== =================== ==================
<CAPTION>
Fair Value
Thereafter Total December 31, 1997
------------------- ------------------ -------------------------
<S> <C> <C> <C>
Interest rate sensitive assets
Cash and cash equivalents $ 10,448,000 $ 10,448,000
Average interest rate
=================== ================== =========================
$ 10,448,000 $ 10,448,000
=================== ================== =========================
Interest rate sensitive
liabilities
Variable rate borrowings $ 10,235,000 $ 27,656,000 $ 27,656,000
Average interest rate 10.79% 9.72%
Fixed rate borrowings $ 1,250,000 $ 1,250,000 $ 1,250,000
Average interest rate 10.00% 10.00%
=================== ================== =========================
$ 11,485,000 $ 28,906,000 $ 28,906,000
=================== ================== =========================
10.70% 9.73%
=================== ==================
</TABLE>
-22-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENNEDY-WILSON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report........................................ 24
Consolidated Balance Sheets as of December 31, 1998, and 1997....... 25
Consolidated Statements of Income for the Three Years
Ended December 31, 1998........................................... 26
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 1998..................................... 27
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998........................................... 28
Notes to Consolidated Financial Statements.......................... 30
Schedule III - Real Estate and Accumulated Depreciation
-23-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kennedy-Wilson, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Kennedy-Wilson,
Inc. and subsidiaries (the "Company"), as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kennedy-Wilson, Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 26, 1999
-24-
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
ASSETS 1997 1998
-----------------------------------
ASSETS
Cash and cash equivalents $10,448,000 $ 9,838,000
Cash - restricted (Note 2) 174,000 8,168,000
Accounts receivable 1,018,000 6,674,000
Notes receivable (Notes 3 and 8) 9,546,000 23,115,000
Real estate held for sale
(Notes 4 and 9) 18,628,000 122,407,000
Investments with related parties
and non-affiliates (Notes 5 and 11) 4,899,000 9,209,000
Contracts, furniture, fixtures and
equipment and other assets (Note 6) 1,005,000 9,238,000
Goodwill, net (Note 2) 16,167,000
----------------------------------
TOTAL ASSETS $45,718,000 $204,816,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 666,000 $ 1,752,000
Accrued expenses and other liabilities 4,553,000 15,721,000
Deferred taxes (Note 12) 628,000
Notes payable (Note 8) 4,764,000 14,291,000
Borrowing under lines of credit
(Note 7) 9,039,000 13,514,000
Mortgage loans payable (Note 9) 15,102,000 115,130,000
Subordinated debt (Note 10 ) - 21,000,000
----------------------------------
Total liabilities 34,124,000 182,036,000
----------------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock, $.01 par value;
shares authorized 2,000,000;
none issued
Common stock $.01 par value;
shares authorized: 10,000,000 in
in 1998 and 5,000,000 in 1997;
shares issued: 6,597,075 in
1998 and 1,316,344 in 1997 13,000 66,000
Additional paid-in capital 23,814,000 28,888,000
Accumulated deficit (10,913,000) (5,970,000)
Notes receivable from stockholders (1,320,000) (204,000)
----------------------------------
Total stockholders' equity 11,594,000 22,780,000
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,718,000 $204,816,000
==================================
See notes to consolidated financial statements.
-25-
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1997 1998
---------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Property management and leasing fees (Note 18) $ 14,194,000
Commissions $ 4,821,000 $ 5,001,000 3,716,000
Commissions - related parties (Note 11) 1,052,000 894,000 1,201,000
Sales of residential real estate 19,743,000 6,753,000 13,828,000
Equity in income of investments with related parties and
non-affiliates (Note 5) 178,000 1,431,000 612,000
Gain on sale of joint venture 4,077,000
Gain on sale of commercial real estate 1,454,000 6,339,000 2,654,000
Rental income, net 1,467,000 1,629,000 4,583,000
Gain on restructured notes receivable (Note 2 and 3) 3,057,000 4,036,000 3,911,000
Other income 195,000 916,000 2,096,000
---------------- -------------- --------------
TOTAL REVENUE 31,967,000 26,999,000 50,872,000
---------------- -------------- --------------
OPERATING EXPENSES:
Commissions and marketing expenses 1,560,000 928,000 532,000
Cost of residential real estate sold 16,523,000 5,592,000 12,249,000
Cost of residential real estate sold - related parties 209,000
Compensation and related expenses 4,726,000 7,658,000 14,582,000
General and administrative 3,126,000 4,661,000 6,890,000
Depreciation and amortization 268,000 790,000 2,059,000
Interest expense 1,964,000 3,139,000 8,398,000
---------------- -------------- --------------
TOTAL OPERATING EXPENSES 28,376,000 22,768,000 44,710,000
---------------- -------------- --------------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEMS 3,591,000 4,231,000 6,162,000
PROVISION FOR INCOME TAXES (Note 12) 60,000 280,000 837,000
---------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEMS 3,531,000 3,951,000 5,325,000
---------------- -------------- --------------
EXTRAORDINARY ITEMS (Note 17) 79,000
---------------- -------------- --------------
NET INCOME $ 3,531,000 $ 4,030,000 $ 5,325,000
---------------- -------------- --------------
================ ============== ==============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Basic income before extraordinary items per share $0.50 $0.65 $0.85
Basic extraordinary items per share N/A $0.01 N/A
Basic net income per share $0.50 $0.66 $0.85
Basic weighted average shares 1 1 6,254,470
Diluted income before extraordinary items per share $0.50 $0.64 $0.78
Diluted extraordinary items per share N/A $0.01 N/A
Diluted net income per share $0.50 $0.65 $0.78
Diluted weighted average shares 1 1 1
</TABLE>
See notes to consolidated financial statements.
-26-
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Notes
Common Stock Additional Accumulated Receivable from
Shares Amount Paid-in-Capital Deficit Stockholders Total
--------------- ----------- ---------------- ---------------- ---------------- ---------------
--------------- ----------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,680,719 $17,000 $22,727,000 $(14,799,000) $ 7,945,000
Repurchase of common stock (198,000) (2,000) (1,091,000) (1,093,000)
Net income 3,531,000 3,531,000
--------------- ----------- ---------------- ---------------- ---------------- ---------------
BALANCE, DECEMBER 31, 1996 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) 4,607,204
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
=============== =========== ================ ================ ================ ===============
</TABLE>
See notes to consolidated financial statements.
-27-
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1997 1998
----------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,531,000 $ 4,030,000 $ 5,325,000
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 268,000 790,000 2,059,000
Equity in income of investments with related parties
and non-affiliates (178,000) (1,431,000) (612,000)
Gain on sale of joint venture (4,077,000)
Gains on sales of real estate (1,454,000) (7,500,000) (4,233,000)
Gains on restructured notes receivable - non-cash (537,000) (689,000) (627,000)
Deferred taxes 628,000
Extraordinary gain, net (79,000)
Change in assets and liabilities:
Accounts receivable 751,000 (24,000) (5,656,000)
Other assets (720,000) (184,000) (1,403,000)
Accounts payable (191,000) (227,000) 1,086,000
Accrued expenses and other liabilities (937,000) 2,343,000 11,168,000
----------------- --------------- ---------------
Net cash provided by (used in) operating activities 533,000 (2,971,000) 3,658,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (197,000) (178,000) (7,280,000)
Dispositions of contracts, furniture, fixtures and
equipment 559,000 18,000
Purchase and additions to real estate held for sale (21,341,000) (18,841,000) (122,671,000)
Proceeds from sales of real estate held for sale 25,914,000 36,304,000 21,743,000
Proceeds from sale of joint venture 5,348,000
Additions to notes receivable (13,015,000) 4,930,000 (26,235,000)
Payments from notes receivable 13,293,000
Additions to goodwill (16,412,000)
Repayments from (loans to) stockholders (1,320,000) 1,116,000
Distributions from joint ventures 20,000 2,775,000 2,271,000
Contributions to joint ventures (3,607,000) (2,153,000) (7,240,000)
----------------- --------------- ---------------
Net cash (used in) provided by investing activities (11,667,000) 21,517,000 (136,049,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 26,577,000 14,320,000 114,679,000
Repayment of mortgage loans payable (30,510,000) (19,734,000) (14,651,000)
Borrowings under lines of credit 15,345,000 14,063,000 40,348,000
Repayment of lines of credit (7,453,000) (13,941,000) (35,873,000)
Borrowings under notes payable 10,128,000 3,737,000 19,740,000
Repayment of notes payable (1,933,000) (7,168,000) (10,213,000)
Issuance of subordinated debt 21,000,000
Cash - restricted (decrease) increase (217,000) 222,000 (7,994,000)
Issuance (repurchase) of common stock (1,094,000) (1,498,000) 4,745,000
----------------- --------------- ---------------
Net cash provided by (used in) financing activities 10,843,000 (9,999,000) 131,781,000
----------------- --------------- ---------------
Net (decrease) increase in cash (291,000) 8,547,000 (610,000)
Cash, beginning of year 2,192,000 1,901,000 10,448,000
----------------- --------------- ---------------
Cash, end of year $ 1,901,000 $ 10,448,000 $ 9,838,000
================= =============== ===============
-28-
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 2,113,000 $ 2,930,000 $ 7,754,000
Interest capitalized $ 57,000 $ 340,000 $ 640,000
Income taxes $ 34,000 $ 246,000 $ 633,000
</TABLE>
See notes to consolidated financial statements.
-29-
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Note 1 - ORGANIZATION
Kennedy-Wilson, Inc., a Delaware corporation, incorporated in 1992, and its
wholly owned subsidiaries (the "Company") provide real estate property
management, brokerage and marketing services throughout the U.S. and in
Japan, primarily to institutional investors, financial institutions,
developers and government agencies. The Company also acquires, renovates
and resells commercial and residential real estate; invests in
non-performing note receivable portfolios; and invests in various real
estate joint ventures. In July 1998, the Company acquired from Heitman
Financial Ltd., a wholly owned subsidiary of United Asset Management
Corporation, all of the outstanding shares of Heitman Properties, Ltd., a
property management company for approximately $21 million. The Company used
the purchase method of accounting to record the transaction. Accordingly,
the results of operations of Heitman Properties, Ltd., (renamed
Kennedy-Wilson Properties, Ltd.) are included in the consolidated financial
statements from the date of acquisition, (See Note 19).
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries and joint
ventures in which the Company has a controlling interest. For foreign
operations, assets and liabilities are translated at year-end exchange
rates, and income statement items are translated at average exchange rates
prevailing during the year. All significant inter-company transactions have
been eliminated.
Revenue Recognition: Property management fees are recognized over time as
earned based upon the terms of the management agreement. Brokerage
commissions are generally recognized when all services to be provided by
the Company have been performed and title to real property has passed from
the seller to the buyer. Residential real estate sales revenue and gains on
sale of commercial property are recognized at the close of escrow when
title to the real property passes to the buyer. The Company follows the
guidelines for profit recognition as set forth by Statement of Financial
Accounting Standards (SFAS) No. 66 Accounting for Sales of Real Estate. 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 statement of income.
Revenues on notes receivable are recognized based on the following
guidelines. 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.
-30-
Goodwill - The Company's purchase of Heitman Properties Ltd., a property
management company in July 1998 resulted in goodwill totaling approximately
$16.0 million. Goodwill results from the difference between the purchase
price and the fair value of assets acquired based upon the Purchase Method
of accounting for business combinations under Accounting Principals Board
Opinion Number 16. The allocated amount, as determined by Company
management, is being amortized over 30 years using the straight-line
method. Goodwill is reviewed for impairment on a regular basis by Company
management by comparison to future expected undiscounted cash flows.
Amortization of goodwill for the year ended 1998 totaled $244,000.
Cash and Cash Equivalents - Cash consists of cash and all highly liquid
investments purchased with maturities of three months or less and
refundable deposits in escrow.
Restricted Cash - Restricted cash consists of 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 - During 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. 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 a
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 Company reports the fair value of
financial instruments in accordance with SFAS 107, Disclosures about Fair
Value of Financial Instruments. The estimated fair value of the Company's
financial instruments is determined using available market information and
appropriate valuation methodologies. Considerable 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.
Cash, accounts receivable and accounts payable are carried at their book
values as the recorded amount of these instruments approximates fair market
value due to their short term maturities. Notes receivable approximate
market value as they are negotiated based upon market values of loans with
similar characteristics. Bank lines of credit, and short and long term debt
approximate fair market value as the interest rates are comparable to the
rates currently being offered to the Company.
-31-
Concentration of Credit Risk - Financial instruments that subject the
Company to credit risk consist primarily of accounts and notes receivable
and cash and cash equivalents. Credit risk is generally diversified due to
the large number of entities composing the Company's customer base and
their geographic dispersion throughout the U.S. and in Japan. The Company
performs ongoing credit evaluations of its customers and debtors. Cash and
cash equivalents are invested in institutions insured by government
agencies. Certain accounts contain balances in excess of the insured
limits.
Inflation - The Company's long-term leases contain provisions designed to
mitigate the adverse impact of inflation on its results from operations.
Such provisions include escalation clauses, which generally increase rental
rates during the terms of the respective agreements. Such escalation
clauses are often related to increases in the CPI or similar inflation
indices. In addition, many of the Company's leases and management
agreements are for terms of less than ten years, which permits the Company
to seek to increase rents and fees at market rates if they are below then
existing market rates. Many of the Company's leases require the tenants to
pay a pro rata share of operating expenses, including common area
maintenance, real estate taxes, insurance and utilities, thereby reducing
the Company's exposure to increases in costs and operating expenses
resulting from inflation.
Earnings Per Share - In accordance with SFAS No. 128, Earnings per Share,
basic income per share for any period is computed by dividing net income by
the weighted average number of shares of common stock outstanding during
such period. Diluted net income per share for any period is computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during such period.
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 6,254,470, 6,104,497, and 7,086,848 for the
years ended December 31, 1998, 1997 and 1996, respectively. The diluted
weighted average number of shares used to compute net income per share were
6,801,356, 6,187,280 and 7,093,958 for the years ended December 31, 1998,
1997 and 1996, respectively.
Foreign Currency Translation - The Company accounts for foreign currency
translation in accordance with SFAS No. 52, Foreign Currency Translation.
The Company has evaluated the effects of foreign currency exchanges gains
and losses for all periods presented and has determined that they are
immaterial.
Impact of New Accounting Pronouncements-SFAS No. 130, Reporting
Comprehensive Income, was issued June 1997, applicable for fiscal years
beginning after December 15, 1997. Other than for the effects of foreign
currency translations, which are immaterial, the Company has no additional
items which require disclosure. SFAS No. 133, Accounting for Derivative
Investments and Hedging Activities was issued June 1998, applicable for all
fiscal years beginning after June 15, 1999. At this time, management has
not completed their analysis of this pronouncement's impact on the
Company's financial statements.
Reclassification - Certain reclassifications have been made to the 1997 and
1996 balances to conform with the 1998 presentation.
Note 3 - Notes Receivable
Notes receivable consists primarily of non-performing notes and related
assets acquired from financial institutions. A majority of these notes are
typically collateralized by real estate, personal property or guarantees.
-32-
Note 4 - Real Estate Held For Sale
Real estate held for sale is comprised of commercial, 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 $1,026,000 and $119,000 at December 31, 1998 and 1997 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 that will be completed within a one year period. In November
1998, a formal plan of disposition was initiated and the Company ceased
depreciating its commercial real estate.
Real estate held for sale includes the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
----------------- ---------------
<S> <C> <C>
Commercial properties and land:
1055 Wilshire Blvd., Los Angeles, California - 281,649 Sq. Ft. office building $ 24,937,000
6380 Wilshire Blvd., Los Angeles, California - 132,730 Sq. Ft. office building 16,223,000
5900 Sepulveda Blvd., Van Nuys, California - 74,428 Sq. Ft. office building 6,771,000
7080 Hollywood Blvd., Los Angeles, California - 161,140 Sq. Ft. office building 19,821,000
6255 Sunset Blvd., Los Angeles, California - 306,025 Sq. Ft. office building 29,166,000
Zeller, Long Beach, California - 1 residential and 2 commercial buildings 41,000
802 Huntington Dr., Monrovia, California - 20,876 Sq. Ft. automotive center 1,399,000
1304 15th St., Santa Monica, California - 37,000 Sq. Ft. office building $ 3,089,000
Santa Monica, California lots, 4 in 1998, 3 in 1997. 1,080,000 2,402,000
4350 11th Ave., Los Angeles, California - 9,000 Sq. Ft. office building 438,000 336,000
301 S. Fair Oaks Dr., Pasadena, California - 51,710 Sq. Ft. office building 8,808,000 8,886,000
----------------- ---------------
14,135,000 109,982,000
----------------- ---------------
Residential properties and land:
Vista Paseo Heights, Palm Desert, California - 23 housing lots 2,902,000
Cathedral City, California, - 112 housing lots 2,386,000
Vulcan Mtn., San Diego, California - 155 acres of land 283,000
Riverside, California - 3.78 acres of land 87,000
Koala, Hawaii 3,000 acres of land. 4,611,000
Pacific Palisades, California - 3 residential homes in 1998; 1 in 1997 608,000 2,156,000
Riverside, California - 9 lots in 1998, 31 housing lots 293,000
Los Angeles, CA - residential home 237,000
Villa Del Este, Corona Del Mar, California - 14 condominium units 112,000
Vista Del Valle, Granda Hills, California, 10 housing lots. 2,810,000
Juneau, Alaska - 9 housing lots 433,000
----------------- ---------------
4,493,000 12,425,000
----------------- ---------------
$18,628,000 $122,407,000
================= ===============
</TABLE>
-33-
All real estate is held for sale at December 31, 1998. Except for the
Zeller property, the Riverside lots, 4350 11th Ave, and the land in Hawaii,
all properties are encumbered by mortgage loans that are non-recourse
subject to standard real estate industry exceptions (See Note 9 - Mortgage
Loans Payable). In November 1998, as a result of the Company's decision to
sell all its commercial properties during 1999, the Company stopped
depreciating and amortizing the commercial real estate held for sale. 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, $428,000, and
$535,000 for 1998, 1997 and 1996, respectively.
Note 5 - Investments with Related Parties and Non-Affiliates
The Company has a number of partnerships and joint venture interests
ranging from 6% to 50%, some with former related parties, that were formed
to acquire, manage, develop and or sell real estate assets. These
investments are accounted for under the equity method. Summarized financial
data of the ventures are as follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
With Related With
Parties Non-Affiliates Total
---------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET
ASSETS:
Cash and cash equivalents $ 463,000 $ 15,000 $ 478,000
Receivable 32,000 44,000 76,000
Real Estate 31,018,000 5,829,000 36,847,000
---------------------------------------------------
TOTAL ASSETS $31,513,000 $5,888,000 $37,401,000
===================================================
LIABILITIES:
Accounts payable
and accrued expense $ 173,000 $ 38,000 $ 211,000
Mortgages payable 18,354,000 4,480,000 23,834,000
---------------------------------------------------
Total Liabilities 18,527,000 4,518,000 23,045,000
===================================================
PARTNERS CAPITAL:
Kennedy-Wilson 3,118,000 685,000 3,803,000
Related parties 9,868,000 9,868,000
Other partners 685,000 685,000
---------------------------------------------------
Total partners' capital 12,986,000 1,370,000 14,356,000
---------------------------------------------------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $ 31,513,000 $5,888,000 $37,401,000
===================================================
STATEMENT OF INCOME:
Revenues $ 2,195,000 $ 390,000 $ 2,585,000
Expenses 1,690,000 258,000 1,948,000
---------------------------------------------------
NET INCOME $ 505,000 $ 132,000 $ 637,000
===================================================
Net income allocated to:
Kennedy-Wilson $ 112,000 $ 66,000 $ 718,000
Related parties 393,000 66,000 459,000
---------------------------------------------------
NET INCOME $ 505,000 $ 132,000 $ 637,000
===================================================
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
With Related With
Parties Non-Affiliates Total
---------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET
ASSETS:
Cash and cash equivalents $ 3,319,000 $1,159,000 $ 4,478,000
Receivable 1,186,000 455,000 2,271,000
Real Estate 52,050,000 972,000 53,002,000
---------------------------------------------------
TOTAL ASSETS $57,185,000 $2,586,000 $59,771,000
===================================================
LIABILITIES:
Accounts payable
and accrued expense $ 2,248,000 $ 524,000 $ 2,772,000
Mortgages payable 43,836,000 - 43,836,000
---------------------------------------------------
Total Liabilities 46,084,000 524,000 46,608,000
===================================================
PARTNERS CAPITAL:
Kennedy-Wilson 3,509,000 1,390,000 4,899,000
Related parties 7,592,000 - 7,592,000
Other partners - 672,000 672,000
---------------------------------------------------
Total partners' capital 11,101,000 2,062,000 13,163,000
---------------------------------------------------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $57,185,000 $2,586,000 $59,771,000
===================================================
-35-
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
===================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
With
Non-Affiliates
----------------------------
<S> <C>
BALANCE SHEET
ASSETS:
Cash and cash equivalents $ 10,588,000
Receivable 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
============
-36-
STATEMENT OF INCOME:
Revenues $ 49,049,000
Expenses 45,070,000
------------
NET INCOME $ 3,979,000
============
Net income allocated to:
Kennedy-Wilson $ 612,000
Other partners 3,367,000
------------
NET INCOME $ 3,979,000
============
</TABLE>
<PAGE>
In November 1998, the Company sold its 25% interest in the joint venture
known as Downtown Properties LLC for approximately $5.5 million. The
company recognized a gain on sale of approximately $4.1 million.
The agreement for one of the investments with non-affiliates, known as
Hilltop Colony LLC, was amended in 1997, resulting in approximately
$335,000 of additional net income allocated to the Company in 1997.
Note 6 - Contracts, Furniture, Fixtures and Equipment and Other Assets
In July 1998, the Company allocated approximately $7.3 million to the
property management contracts acquired as part of the acquisition of
Heitman Properties, Ltd. The Company is amortizing these contracts over a 7
year period. In 1998 the Company recorded $545,000 in amortization expense
for these contracts.
Contracts, furniture fixtures, equipment and other assets consist of the
following:
December 31,
---------------------------
1997 1998
---------------------------
Contracts $ 7,262,000
Office furniture and equipment $ 192,000 851,000
Leasehold improvements 20,000
Equipment under capital leases 44,000 6,000
---------------------------
256,000 8,119,000
Less accumulated depreciation and amortization (100,000) (706,000)
---------------------------
156,000 7,413,000
Prepaid insurance, taxes and commissions 337,000 671,000
Loan fees 225,000 130,000
Deposits and prepaid rents 120,000 386,000
Investments in marketable securities 250,000
Other 167,000 388,000
---------------------------
$ 1,005,000 $ 9,238,000
===========================
-37-
<PAGE>
Note 7 - Borrowings Under Lines of Credit
In 1998, the Company entered into a loan agreement that provides the
Company with a $21 million revolving credit facility (the "facility"). The
facility is available for acquisitions and working capital. The loans under
the facility bear interest at three month LIBOR plus 2%, payable monthly.
At December 31, 1998, LIBOR was approximately 5.1%. The facility expires in
June 2000. The principal amount of outstanding loans was $13,057,000 at
December 31, 1998 and $8,952,000 at December 31, 1997
The Company's Japanese subsidiary has unsecured yen denominated lines of
credit pursuant to which it can borrow up to $1 million. At December 31,
1998, yen borrowings in the principal amount of $457,000 were outstanding
under these lines of credit and $87,000 at December 31, 1997. These
borrowings bear interest rates from 1.9% to 2.6% per annum.
The Company's ability to borrow under these facilities is subject to
compliance with certain financial covenants. As of December 31, 1998 and
1997, the Company was in compliance with the convenants.
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,
---------------------------
1997 1998
---------------------------
Note payable to FBR Asset Investment Corporation,
fixed interest rate of 17% per annum, 13%
payable monthly, 4% payable at maturity, due
in full at the earlier of (i) the closing of a
public offering or (ii) June 3, 1999, whichever
comes first $ 7,500,000
Note payable, fixed interest rate of 12%, inter-
est 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 rate based on
Prime Rate plus 1.5%, payable monthly, 10% at
December 31, 1997, due June 1998 $ 1,000,000
Note payable, variable interest rate based on
Prime Rate plus 1.5%, payable monthly, 10% at
December 31, 1997, due May 1998 3,764,000
---------------------------
$ 4,764,000 $14,291,000
===========================
-38-
<PAGE>
Note 9 - Mortgage Loans Payable
December 31,
---------------------------
1997 1998
---------------------------
Commercial Properties:
Mortgage note payable, variable interest based
on the 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 $ 7,300,000 $ 7,613,000
Mortgage note payable, fixed interest of 10%,
principal and interest payable from excess
cash flow as defined, due November 24, 2007,
collateralized by 301 S. Fair Oaks, Pasadena,
California 1,250,000 1,250,000
Mortgage note payable, variable interest based
on LIBOR plus 3.5%, 8.75% at December 31, 1998,
principal and interest payable monthly, due March
31, 2001, collateralized by 6380 Wilshire, Los
Angeles, California 13,263,000
Mortgage note payable, variable interest based
on LIBOR plus 4%, 9.22% at December 31, 1998,
interest payable monthly, due March 31, 2001,
secured by common shares of the single purpose
entity holding title to 6380 Wilshire, Los
Angeles, California 2,561,000
Mortgage note payable, variable interest base on
Prime Rate plus 1.5%, 9.25% at December 31, 1998,
principal and interest payable monthly, due
January 30, 2001, collateralized by 5900
Sepulveda, Los Angeles, California 4,951,000
Mortgage note payable, variable interest based
on LIBOR plus 4%, 9.22% at December 31, 1998,
interest payable monthly, due January 23, 2001,
secured by common shares of the single purpose
entity holding title to 5900 Sepulveda, Los
Angeles, California 1,610,000
Mortgage note payable, variable interest based
on LIBOR plus 4.875%, 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 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 base on
the monthly weighted average interest rate for the
Eleventh District Savings and Loan Associations
plus 2.5%, 10% at December 31, 1998, principal and
interest payable monthly, due May 1, 2002,
collateralized by automotive center in Monrovia,
California 1,096,000
Mortgage note payable, variable interest base 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 base on
LIBOR plus 4%, 9.22% at December 31, 1998,
principal and interest payable monthly, due
September 15, 2001, secured by common shares of
the single purpose entity holding title to 6255
Sunset, Los Angeles, California 5,300,000
Mortgage note payable, variable interest base on
LIBOR plus 3.56%, 9.1225% at December 31, 1998,
principal and interest payable monthly, due
September 11, 2001, collateralized by 7080
Hollywood, Los Angeles, California 16,800,000
-39-
Mortgage note payable, variable interest base on
LIBOR plus 4%, 9.22% at December 31, 1998,
principal and interest payable monthly, due
August 30, 2001, secured by common shares of
single purpose entity holding title to 7080
Hollywood, Los Angeles, California 3,359,000
Mortgage note payable, variable interest based on
LIBOR, 8.32% at December 31, 1997, principal and
interest payable monthly, due September 1, 2003,
collateralized by 1304 15th Street., Santa Monica,
California 2,952,000
Mortgage note payable, variable interest based on
Prime Rate plus 1%, 9.5% at December 31, 1998,
principal and interest payable monthly, due
September 1, 2003, collateralized by 15th Street
lot, Santa Monica, California 885,000
---------------------------
12,387,000 109,833,000
---------------------------
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 base on
Prime Rate plus 1.5%, 9.25% at December 31, 1998,
interest payable monthly, due March 19, 1999,
collateralized by three single family homes
located in Pacific Palisades, California 1,628,000
Mortgage note payable, variable interest base on
Prime Rate plus 1%, 8.75% at December 31, 1998,
interest payable monthly, due November, 20 1999,
collateralized by 112 housing lots in Cathedral
City, California 1,478,000
Mortgage note payable, variable interest base on
Prime Rate plus 4%, 9.25% at December 31, 1997,
principal and interest payable monthly, due
October 31, 1999, collateralized by 10 residential
homes, Granada Hills, California 2,294,000
Mortgage note payable, variable interest base on
Prime Rate plus 1.5%, interest payable monthly,
due November, 20 1999, collateralized by 14
condominium units, Corona Del Mar, California 421,000
---------------------------
2,715,000 5,297,000
---------------------------
Total Mortgage Loans Payable $15,102,000 $ 115,130,000
===========================
<PAGE>
All of the mortgage loans payable are secured by deeds of trust on the
respective real estate properties (See Note 4). Aggregate maturities of
notes and mortgage notes payable are as follows:
1999 $5,582,000
2000 408,000
2001 99,412,000
2002 1,114,000
2003 83,000
Thereafter 8,531,000
============
$115,130,000
============
-40-
Note 10 - Subordinated Debt
In July 1998, the Company incurred $21 million in subordinated debt to
finance its purchase of Heitman Properties, Ltd. The debt has a fixed
interest rate of 14%, payable monthly and a maturity date of January 15,
2000. The Company has the option to prepay $7 million after January 15,
1999 and before July 16, 1999 and the option to prepay $14 million
thereafter. The debt is secured by the common stock of a wholly owned
subsidiary, Kennedy-Wilson Properties, Ltd.
Note 11 - Related Party Transactions
In January 1998, the Company acquired a 15% interest in a joint venture
Downtown Properties, NY. LLC, with a former related party, which owns a
commercial property with approximately 1.0 million square foot of rental
space, located in Manhattan, New York. The Company's investment at December
31, 1998 was approximately $4.2 million.
In March 1998, the Company acquired 40% interest in a joint venture Beverly
Crescent, LLC, with a former related party. 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 and recorded a gain of approximately
$298,000.
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 reired. As at
December 31, 1998, Mr. Gaw no longer had an ownership interest in the
Company, and had resigned from his positions with the Company.
In 1998, the firm of Kulik, Gottesman & Mouton Ltd., was paid a total of
$496,000 in attorney fees. In addition, Kent Mouton, a partner in the firm
and a member of the Company's Board of Directors, was paid a total of
$27,500 in director's fees. For 1997, the amounts were $470,000 and
$21,000, respectively.
In 1997, the Company entered into a joint venture with parties who are
affiliated with Goodwin Gaw, who at that time, was one of the Company's
Managing Directors, a member of the Board of Directors, and a significant
stockholder. The purpose of the joint venture is an investment in a Los
Angeles office building. See Note 5.
During 1998, 1997, the Company received brokerage and leasing commissions
from affiliates and partnerships with related parties in the amounts of
$1,201,000 and $894,000 respectively.
During 1998, 1997, the Company received $179,000 and $156,000, respectively
in commissions from the sale of properties owned by a partnership which
includes William J. McMorrow, the Company's Chief Executive Officer and
Chairman of the Board and Lewis A. Halpert, a director, Executive Managing
Director and President of the Company's Brokerage Group, as principals. The
Company was also reimbursed $210,000 for marketing expenses in 1997.
In 1996, the Company accrued and subsequently paid $209,000 as profit
participation to William J. McMorrow and Lewis A. Halpert for a loan
advanced to the Company in 1995. The loan terms were reviewed and approved
by disinterested members of the Company's Board of Directors.
-41-
<PAGE>
Note 12 - Income Taxes
The provisions for income taxes consists of the following:
Year Ended December 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
Current
Federal $80,000 $104,000
State $60,000 200,000 105,000
---------------------------------------------
60,000 280,000 209,000
Deferred 628,000
=============================================
Total $60,000 $280,000 $837,000
=============================================
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
Year Ended December 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
Tax computed at statutory rate $ 1,200,000 $ 1,472,000 $ 2,156,000
State income net of federal
benefit 40,000 132,000 145,000
Loss on disposition of foreign
subsidiary (1,189,000)
Foreign income 153,000 (119,000)
Usage of net operating loss
carryforward (1,490,000) (1,361,000)
Other 9,000 13,000 16,000
---------------------------------------------
Provision for income taxes $ 60,000 $ 280,000 $ 837,000
=============================================
<PAGE>
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:
-42-
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Deferred Income Tax Deferred Income Tax
------------------------------------ ------------------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Prepaid expenses $ - $ (100,000) $ - $ (266,000)
Accrued reserves 490,000 - 592,000 -
State taxes 20,000 - - -
Deferred auction marketing expenses 42,000 - 51,000 -
Deferred Gain on sale of Asset - (691,000) - (1,200,000)
Depreciation 612,000 - - -
Charitable contribution carryover 31,000 - - -
Federal net operating loss carryover 3,035,000 - 2,206,000 -
State net operating loss carryover 480,000 - - -
Overseas operating loss carryover - - 442,000 -
------------------ ----------------- ------------------ -----------------
Subtotal 4,710,000 (791,000) 3,291,000 (1,466,000)
------------------ ----------------- ------------------ -----------------
Valuation allowance (3,919,000) - (1,825,000) -
TOTAL $ 791,000 $ (791,000) $ 1,466,000 $(1,466,000)
================== ================= ================== =================
</TABLE>
The provisions for income taxes consist of the following:
Year ended December 31,
-------------------------------------------------------
1996 1995 1994
------------------ ----------------- ------------------
Current:
Federal - -
State $ 60,000 $ 44,000 $ 48,000
------------------ ----------------- ------------------
60,000 44,000 48,000
Deferred - - -
Total provision $ 60,000 $ 44,000 $ 48,000
================== ================= ==================
As of December 31, 1998, the Company has available a net operating loss
carryforward approximately $219,000 to offset future federal taxable
income. This carryforward expires through the year 2011. The Company has
tax credits to carryforward of approximately $173,000 to offset future
federal income taxes.
<PAGE>
Note 13 - Commitments and Contingencies
Lease Commitments - Future minimum rental commitments, net of sublease
income, as of December 31, 1998 under the non-cancelable operating leases
are as follows:
Year Ending
December 31,
1999 $1,865,000
2000 1,748,000
2001 1,687,000
-43-
2002 933,000
2003 612,000
Thereafter
-------------------
Future Minimum lease payments $6,845,000
===================
Approximately $2,627,000 is due the Company in years 1999 through 2002
under sublease agreements.
Rental expense amounted to $931,000, $433,000, and $200,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Employment Agreements - The Company has entered into employment agreements
with all of its principal officers which provide for annual base
compensation in the aggregate amount of $1,255,000 and expire at various
dates through December 1999. The employment agreements provide for the
payment of an annual bonus based upon the achievement of certain
agreed-upon earnings objectives. The Company also has employment agreements
with various other non-officer employees which provide for minimum annual
compensation of $2,021,000 in total, and expiring at various dates through
December 1999.
-44-
Litigation - The Company is currently a defendant in certain routine
litigation arising in the ordinary course of business. It is management's
opinion that the outcome of these actions will not have a material effect
on the financial position or results of operations of the Company.
Note 14 - Stock Option Plans and Warrants
The Company currently has the 1992 Incentive and Non-statutory Stock Option
Plan, which includes a Plan A and a Plan B and the 1992 Non-Employee
Director Stock Option Plan ("Plan C"). An aggregate of 1,080,000 shares of
common stock are reserved for issuance under Plan A and B. The Company has
81,000 shares of common stock reserved for issuance under Plan C. Plan A
permits the granting of Incentive Stock Options to employees, including
employee-directors. Plan B permits the granting of nonstatutory stock
options to employees, including employee-directors and consultants. Plan C
permits the granting of options to non-employee-directors. Options granted
under Plan A and B have an option price of 100% of the fair market value of
the common stock on the date of grant. Under Plan C each director, upon
being elected to the Board of Directors, is automatically granted an option
to purchase 13,500 shares at the fair market value at the date of grant.
Additionally, each director is granted an option to purchase an additional
540 shares at the fair market value on the date of grant when re-elected.
The vesting schedule for options granted under Plan A and Plan B is
determined by a committee of the Board of Directors and the Compensation
Committee of the Board of Directors is currently responsible. Options
granted under Plan C become exercisable on the first anniversary of the
date of the initial grant provided that the optionee continues to serve as
a director for at least one year from the date of such initial grant.
Options granted under Plan A may be exercised for a period of up to five
years from the grant date; options granted under Plan B may be exercised
for a period of up to 10 years from the grant date. Under Plan C, options
expire on the earlier of the tenth anniversary of the date of grant and 90
days after the individual ceases to be a director of the Company.
-45-
Details of activity under the plans for the years ended December 31, 1996,
1997 and 1998 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Outstanding Exercise Price Weighted Average
Stock Options Options Per Share Exercise Price
<S> <C> <C> <C>
Balance January 1, 1996 163,783 $12.96-$0.93 $8.11
Granted 162,540 $1.55-$0.95 $1.23
Forfeited (28,837) $12.96 $12.96
----------------------------------------------------------------
Balance December 31, 1996 297,486 $12.96-$0.93 $3.72
Granted 558,000 $3.72-$2.17 $2.61
Forfeited (23,166) $12.96-$2.17 $12.96
----------------------------------------------------------------
Balance December 31, 1997 832,320 $12.96-$2.17 $2.72
Granted 420,900 $3.67-$8.33 $6.74
Exercised (120,450) $0.95-$3.73 $1.63
Forfeited (16,200) $3.01-$7.41 $3.74
----------------------------------------------------------------
Balance December 31, 1998 1,116,570 $0.95-$8.33 $4.11
================================================================
</TABLE>
<TABLE>
<CAPTION>
Number of Weighted Average Number of
Range of Outstanding Shares Weighted Average Remaining Exercisable Shares
Exercise Prices at 12/31/98 Exercise Price Contractual Life as of 12/31/98
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 $ 1.07 108,000 $1.01 2.02 72,000
$ 1.55 $ 2.13 378,000 $1.96 3.18 117,000
$ 3.33 $ 3.72 295,800 $3.67 3.90 56,550
$ 7.00 $ 8.33 292,650 $7.81 4.65
$ 0.93 $ 12.96 42,120 $8.67 4.81 42,120
====================== ======================
1,116,570 287,670
====================== ======================
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" and will continue to use the
intrinsic value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, no compensation cost has been recognized for
the options granted under the Stock Plan. Had compensation cost for the
Company's Stock Plan been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's net
income on a proforma basis at December 31, 1998 would have been $4,114,085.
In addition, on a proforma basis, the Company's basic and diluted net
income per share at December 31, 1998, would have been $0.66 and $.60,
respectively. The effect for 1997 and 1996, was not disclosed as it was not
material.
-46-
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: (a) no dividend yield, (b) expected volatility of the
Company's stock of 63%, (c) risk free interest rate of 4.75%, (d) expected
option life of three years. The effects of applying SFAS No. 123 may not be
representative of the effects on disclosed pro forma net income for future
years because options vest over several years and additional awards can be
made each year.
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 preceding December4, 1998. The warrants have an
expiration date of June 3, 2003. The loan agreement prohibits the Company
from declaring or paying any dividend with respect to its common stock
without first obtaining the consent of FBR Asset Investment Corporation.
Stock Repurchase
In November 1998, the Company purchased 135,000 shares of the Company's
stock from a former officer and director. See Note 11.
Stock Dividend
In December 1998, the Company declared a 3 for 2 stock split in the form of
a 50% dividend. In March 1998, the Company declared a 3 for 1 stock split
in the form of a 200% stock dividend. In October 1997, the Company declared
a twenty percent stock dividend. All historical share and per share amounts
have been retroactively restated to reflect the dividends.
Increase in Authorized Capital
On April 29, 1998 at a Regular Meeting of the Company's stockholders, the
Company's Certificate of Incorporation was amended to increase the
authorized capital stock to 10 million of common shares and 2 million
preferred shares. On December 15, 1997, at a Special Meeting of the
Stockholders, an amendment to the Company's Certificate of Incorporation
was passed effecting an increase to the number of authorized shares from
2,500,000 to 6,000,000, consisting of 5,000,000 shares of common stock and
1,000,000 shares of preferred stock.
-47-
Note 16 - Employee Benefit Arrangements
Employee Profit Sharing Plan
The Company maintains a profit sharing plan covering all full time
employees over the age of 21, who have completed three months of service
prior to January 1 and July 1 of each year. Contributions to the profit
sharing plan are made solely at the discretion of the Company's Board of
Directors. No contributions were made for the years ended December 31,
1998, 1997 and 1996.
In addition, the Company has a qualified profit sharing plan under
provisions of Section 401(k) of the Internal Revenue Code. Under this plan,
participants are able to make salary deferral contributions of up to 15% of
their total compensation, up to a specified maximum. The 401(k) plan also
includes provisions which authorize the Company to make discretionary
contributions. During 1998 and 1997 the Company made matching contributions
of $27,000 and $24,000, respectively to this plan.
Deferred Compensation Plan
In 1997, the Company established a non-qualified deferred compensation plan
to provide specified benefits to a select group of management or highly
compensated employees and directors who contribute materially to the
continued growth, development and future business success of the Company.
Under this plan, participants are able to make salary deferral contribution
of up to 100% of their total compensation. The plan also includes
provisions which authorize the Company to make discretionary contributions.
During 1998 and 1997, the Company made matching contributions of $1,078,000
and $314,000, respectively.
Notes Receivable from Stockholders
In December 1997, a group of key employees, including its principal
executive officers, purchased 73,314 shares of the Company's outstanding
stock for cash in a private transaction with an institutional investor. The
purchase represents approximately 5.6% of the Company's outstanding shares.
The Company provided recourse loans for the employees to purchase the stock
totaling approximately $1.3 million. The terms of the notes receivable are
Prime plus 1% (9.5% at December 31, 1997) interest payable semi-annually
with a maturity date of the earlier of 3 years, or at termination of
employment, or sale of stock by the employee. As at December 31, 1998 and
1997 $204,000 and $1,320,000 were outstanding on these loans, respectively.
Note 17 - Extraordinary Items
During 1997, the Company recognized a $79,000 extraordinary gain comprised
of a $288,000 gain from debt extinguishment and a $209,000 loss from loan
prepayment penalties.
Note 18- Segment Information
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments. 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. In the property management segment, approximately $7.4
million or 52.0% of the fees are generated by property management contracts
with Heitman Financial Ltd.
-48-
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.
The following tables reconcile the Company's income and expense activity
for the year ended December 31, 1996 and balance sheet data as of December
31, 1996. The Company did not generate material intersegment revenues for
the periods ended December 31, 1998, 1997 and 1996. The Company does not
disclose based on geographic segments due to immateriality.
<PAGE>
<TABLE>
<CAPTION>
1996 Reconciliation of Reportable Segment Information
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
-------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Equity in income of investments and related parties
and non-affiliates $178,000 $178,000
Interest Income $15,000 58,000 $29,000 102,000
Other revenues 5,873,000 25,747,000 67,000 31,687,000
-------------- ---------------- ------------- ----------------
TOTAL REVENUES: 5,888,000 25,983,000 96,000 31,967,000
Depreciation and amortization 48,000 2,000 218,000 268,000
Interest Expense 14,000 1,595,000 355,000 1,964,000
Other expenses 5,025,000 18,440,000 2,679,00 26,144,000
-------------- ---------------- ------------- ----------------
OPERATING EXPENSES: 5,087,000 20,037,000 3,252,000 28,376,000
-------------- ---------------- ------------- ----------------
Income before provision for income taxes 801,000 5,946,000 (3,156,000) 3,591,000
Provision for taxes 60,000 60,000
-------------- ---------------- ------------- ----------------
NET INCOME $801,000 $5,946,000 ($3,216,000) $3,531,000
============== ================ ============= ================
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
-------------- ---------------- ------------- -----------------
TOTAL ASSETS $1,154,000 $48,387,000 $1,573,000 $51,114,000
============== ================ ============= ================
TOTAL LIABILITIES $774,000 $29,484,000 $10,474,000 $40,732,000
STOCKHOLDERS' EQUITY 380,000 18,903,000 (8,901,000) 10,382,000
-------------- ---------------- ------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$1,154,000 $48,387,000 $1,573,000 $51,114,000
============== ================ ============= ================
</TABLE>
-49-
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1997 and balance sheet data as of December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
1997 Reconciliation of Reportable Segment Information
BROKERAGE INVESTEMENTS CORPORATE CONSOLIDATED
-------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Equity in income of investments with related parties
and non-affiliates $1,432,000 $1,432,000
Interest Income 516,000 $17,000 533,000
Other revenues $5,895,000 19,137,000 2,000 25,034,000
-------------- ---------------- ------------- ---------------
REVENUES: 5,895,000 21,085,000 19,000 26,999,000
Depreciation and amortization 34,000 483,000 273,000 790,000
Interest expense 7,000 2,791,000 341,000 3,139,000
Other expenses 4,678,000 9,228,000 4,933,000 18,839,000
-------------- ---------------- ------------- ---------------
OPERATING EXPENSES: 4,719,000 12,502,000 5,547,000 22,768,000
-------------- ---------------- ------------- ---------------
Income before provision for income taxes 1,176,000 8,583,000 (5,528,000) 4,231,000
Provision for taxes 280,000 280,000
-------------- ---------------- ------------- ---------------
Income before provision for extraordinary items 1,176,000 8,583,000 (5,808,000) 3,951,000
Extraordinary items 213,000 (134,000) 79,000
-------------- ---------------- ------------- ---------------
NET INCOME $1,176,000 $8,796,000 ($5,942,000) $4,030,000
============== ================ ============= ===============
BROKERAGE INVESTEMENTS CORPORATE CONSOLIDATED
-------------- ---------------- ------------- ---------------
============== ================ ============= ===============
TOTAL ASSETS $1,132,000 $37,117,000 $7,469,000 $45,718,000
============== ================ ============= ===============
TOTAL LIABILITIES $290,000 $19,919,000 $13,915,000 $34,124,000
STOCKHOLDERS' EQUITY 842,000 17,198,000 (6,446,000) 11,594,000
============== ================ ============= ===============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,132,000 $37,117,000 $7,469,000 $45,718,000
============== ================ ============= ===============
-50-
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
1998 Reconciliation of Reportable Segment Information
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Equity in income of investments with
related parties and non-affiliates $4,689,000 $4,689,000
Interest Income 1,283,000 1,283,000
Other revenues $14,194,000 $4,917,000 25,632,000 $157,000 44,900,000
---------------- ------------- ----------------- ------------- ------------------
TOTAL REVENUES: 14,194,000 4,917,000 31,604,000 157,000 50,872,000
Depreciation and amortization 838,000 34,000 1,137,000 50,000 2,059,000
Interest expense 1,342,000 8,000 5,619,000 1,429,000 8,398,000
Other expenses 6,131,000 3,140,000 15,494,000 9,488,000 34,253,000
---------------- ------------- ----------------- ------------- ------------------
TOTAL OPERATING EXPENSES: 8,311,000 3,182,000 22,250,000 10,967,000 44,710,000
---------------- ------------- ----------------- ------------- ------------------
Income before provision for income taxes 5,883,000 1,735,000 9,354,000 (10,810,000) 6,162,000
Provision for income taxes 837,000 837,000
---------------- ------------- ----------------- ------------- ------------------
NET INCOME $5,883,000 $1,735,000 $9,354,000 ($11,647,000) $5,325,000
================ ============= ================= ============= ==================
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
TOTAL ASSETS $27,697,000 $2,368,000 $160,537,000 $14,214,000 $204,816,000
================ ============= ================= ============= ==================
TOTAL LIABILITIES $3,111,000 $959,000 $128,034,000 $29,142,000 $161,246,000
STOCKHOLDERS' EQUITY 24,586,000 1,409,000 32,503,000 (35,718,000) 22,780,000
================ ============= ================= ============= ==================
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $27,697,000 $2,368,000 $160,537,000 ($6,576,000) $184,026,000
================ ============= ================= ============= ==================
</TABLE>
<PAGE>
Note 19 - Earnings per Share
The following table reconciles the denominator used in calculating the
earning per share for the periods ending December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
BASIC EARNINGS PER SHARE 1996 1997 1998
------------------------
--------------- --------------- ---------------
<S> <C> <C>
Net Income Available to Common Stockholders $ 3,531,000 $ 4,030,000 $ 5,325,000
=============== =============== ===============
Weighted Average Shares 1,312,379 1,356,777 6,254,470
Weighted Average Effect of Stock Dividends and Stock Splits 5,774,469 4,747,720
--------------- --------------- ---------------
7,086,848 6,104,497 6,254,470
--------------- --------------- ---------------
--------------- --------------- ---------------
Basic per Share Amount $ 0.50 $ 0.66 $ 0.85
=============== =============== ===============
-51-
DILUTED EARNINGS PER SHARE
Net Income Available to Common Stockholders $ 3,531,000 $ 4,030,000 $ 5,325,000
=============== =============== ===============
Weighted Average Shares 7,086,848 6,104,497 6,254,470
Common Stock Equivalents 7,110 82,783 546,886
--------------- --------------- ---------------
Total Diluted Shares 7,093,958 6,187,280 6,801,356
=============== =============== ===============
--------------- --------------- ---------------
Diluted per Share Amount $ 0.50 $ 0.65 $ 0.78
=============== =============== ===============
</TABLE>
<PAGE>
Note 20 - Unaudited Pro Forma Consolidated Statements of Income
The following pro forma consolidated statement of income give effect to the
acquisition of all of the outstanding shares of Heitman Properties, Ltd, a
property management company in July 1998. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable. This unaudited pro forma condensed consolidated information does not
purport to represent what the actual results of operations of the Company would
have been assuming the acquisition had been completed as set forth above, nor do
they purport to predict the results of operations for future periods.
TOTAL REVENUE $63,525,000 $68,736,000
TOTAL OPERATING EXPENSES 50,074,000 58,803,000
----------- -----------
INCOME BEFORE INCOME TAXES 13,451,000 9,933,000
PROVISION FOR INCOME TAXES 3,691,000 2,232,000
----------- -----------
NET INCOME $ 9,760,000 $ 7,701,000
=========== ===========
Pro forma basic net income per share $1.60 $1.23
Pro forma basic weighted average
shares 6,104,497 6,254,470
Pro forma diluted net income per share $1.58 $1.13
Pro forma diluted weighted average
shares 6,187,280 6,801,356
-52-
<PAGE>
Note 21 - Unaudited Consolidated Quarterly Information
<TABLE>
<CAPTION>
1997
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES $5,870,000 $3,966,000 $5,814,000 $11,349,000
TOTAL OPERATING EXPENSES 5,234,000 3,767,000 5,282,000 8,485,000
INCOME BEFORE PROVISION FOR INCOME
TAXES AND
EXTRAORDINARY ITEMS 636,000 199,000 532,000 2,864,000
PROVISION FOR INCOME TAXES 50,000 50,000 65,000 115,000
INCOME BEFORE
EXTRAORDINARY ITEMS 586,000 149,000 467,000 2,749,000
EXTRAORDINARY ITEMS 288,000 (209,000)
NET INCOME $586,000 $437,000 $467,000 $2,540,000
Basic income per share before
extraordinary items $0.09 $0.02 $0.08 $0.46
Basic net income per share $0.09 $0.07 $0.08 $0.43
Basic weighted average shares 6,463,211 6,075,270 5,957,469 5,932,058
Diluted income per share before
extraordinary items $0.09 $0.02 $0.08 $0.45
Diluted net income per share $0.09 $0.07 $0.08 $0.42
Diluted weighted average shares 6,528,483 6,151,593 6,065,619 6,057,639
</TABLE>
<TABLE>
<CAPTION>
1998
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
-53-
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
The Registrant's directors and executive officers are listed below:
Board Term
Name Age Title Expires
- ---- --- ----- ----------
<S> <C> <C> <C>
William McMorrow.................... 52 Chairman of the Board of Directors and Chief 2001
Executive Officer
Lewis Halpert....................... 47 Director and Executive Managing Director, 1999
President of Kennedy-Wilson, Inc.
Residential and Notes Group
Richard Mandel...................... 36 Director and Managing Director, President of 2000
Kennedy-Wilson, Inc. Commercial Group
Barry Schlesinger................... 58 Director and President of Kennedy-Wilson 2000
Properties. Ltd.
Donald Prell........................ 74 Director and Chairman of the Audit Committee 2001
Kent Mouton......................... 45 Director and Chairman of the Compensation 1999
Committee
Thomas Barrack, Jr.................. 51 Director 1999
Freeman Lyle........................ 45 Executive Vice President, Chief Financial Not Applicable
Officer and Secretary
Terry Wachsner...................... 49 Senior Managing Director of Kennedy-Wilson Not Applicable
Properties, Ltd.
</TABLE>
William McMorrow has been Chairman of the Board of Directors (the "Board")
and Chief Executive Officer since joining the Registrant's predecessor company
in 1988. From that time, he has been instrumental to the Registrant's growth
into a diversified real estate services and investment company.
-54-
Prior to 1988, Mr. McMorrow had more than 17 years of finance experience
specializing in problem real estate held by financial institutions and insurance
companies. For five years, he was the Executive Vice President and Chairman of
the Credit Policy Committee at Imperial Bank, a publicly traded company
headquartered in Southern California. During his tenure with the Bank, he was
responsible for restructuring a significant portion of the Bank's assets, as
well as the marketing and disposition of properties it owned. Additionally, Mr.
McMorrow has held senior positions with various other financial services firms
including Fidelity Bank in Pennsylvania, where he was Senior Vice President for
eight years.
Mr. McMorrow holds a Bachelor of Science Degree and Master of Business
Administration from the University of Southern California. He is also a board
member of the George L. Graziadio School of Business at Pepperdine University in
Malibu, California.
Lewis Halpert has been a member of the Board since joining the Registrant's
predecessor company at the same time as Mr. McMorrow in 1988, and is Executive
Managing Director and President of the Registrant's Residential Properties
Group. In these positions, he is actively involved in developing new business
opportunities and is currently overseeing all residential and notes investments.
Mr. Halpert has over 20 years experience in all facets of real estate,
including investments and development, brokerage, management and marketing.
Prior to joining the Registrant, he operated his own independent investment
brokerage firm in Southern California.
Mr. Halpert holds a Bachelor of Arts Degree from California State
University at Sonoma.
Richard Mandel has been a member of the Board since December 1995. He is
President of the Registrant's Commercial Group, responsible for all commercial
brokerage operations in the U.S. and Asia. Since joining the Registrant in 1993,
Mr. Mandel has established the Registrant's office in Tokyo and has been
instrumental in developing Japan-based relationships for the Registrant. In
1996, Mr. Mandel opened the Registrant's New York office. During his tenure, he
has played a prominent role in brokering U.S., European and Australian real
estate assets to investors throughout Asia. In addition, he has advised Japanese
companies with the acquisition and disposition of overseas assets.
Mr. Mandel was previously a director at Jones Lang Wootton where he was
involved with real estate investment banking including the disposition,
analysis, marketing, negotiations and closings relating to real estate assets
and with creating stronger ties to the investment community in Hong Kong,
Singapore, Indonesia and Taiwan. In addition, he advised Asian investors on
their U.S. real estate holdings, created a conduit for Asian investments into
the U.S. and researched new Asian markets.
Mr. Mandel holds a Bachelor of Arts Degree from Washington University in
St. Louis, Missouri and a Master of Business Administration from the JL Kellogg
School of Management at Northwestern University.
Barry Schlesinger has served since July 1998 as a member of the Board and
President of Kennedy-Wilson Properties, Ltd., the Registrant's wholly-owned
property management and leasing subsidiary. Mr. Schlesinger serves as President
of Kennedy-Wilson Properties, Ltd. through an Executive Services Agreement dated
July 17, 1998. From 1990 to July 1998, he served as Chairman of the Board of
Directors and Chief Executive Officer of Heitman Properties, Ltd. The Registrant
purchased Heitman Properties, Ltd. in July, 1998 and renamed it Kennedy-Wilson
Properties, Ltd. Mr. Schlesinger was appointed to the Board in accordance with
the Executive Services Agreement. The Executive Services Agreement is discussed
in more detail in "Certain Transactions."
Prior to joining Heitman Properties, Ltd. in 1971, Mr. Schlesinger was
responsible for project planning and scheduling for Tishman Realty and
Construction Registrant. He has 36 years of real estate experience.
Mr. Schlesinger holds a Bachelor of Science Degree from the New York
University College of Engineering.
Donald Prell has served as a member of the Board since March 1992. For the
past five years Mr. Prell has been a mediation consultant and private investor.
He also serves as a Trustee of the UCLA Foundation.
Kent Mouton has served as a member of the Board since December 1995. Mr.
Mouton has been a partner in the law firm of Kulik, Gottesman & Mouton, LLP in
Los Angeles, California since 1991. He specializes in the practice of real
estate transactions.
-55-
Mr. Mouton holds a Bachelor of Arts Degree and Juris Doctor Degree from
UCLA.
Thomas Barrack, Jr. has served as a member of the Board since July 1998. He
is the Chairman and Chief Executive Officer of Colony Capital, Inc., a company
that manages in excess of $1.0 billion in domestic and international real estate
assets. Colony Capital, Inc. purchased a 10.0% equity interest in the Registrant
in July 1998. Mr. Barrack founded Colony Capital, Inc. in 1991. Prior to forming
Colony Capital, Inc., he was a principal with Robert M. Bass Group, Inc., the
principal investment vehicle of the Fort Worth, Texas billionaire Robert M.
Bass. Mr. Barrack also served as Deputy Under Secretary at the Department of
Interior in Washington, D.C. for a period during the Reagan Administration. Mr.
Barrack also serves as a member of the boards of directors of Continental
Airlines Corporation, Public Storage, Inc., and Harveys Casino Resorts.
Mr. Barrack holds a Bachelor of Arts Degree form the University of San
Diego and a Juris Doctor Degree from the University of Southern California. Mr.
Barrack was appointed to the Board based on the Registrant's agreement with
Colony Capital, Inc., which is discussed in the section headed "Certain
Transactions - Colony Agreements".
Freeman Lyle has been the Registrant's Chief Financial Officer, Executive
Vice President and Secretary since joining the Registrant in April of 1996. He
is responsible for all of the Registrant's financial matters including
overseeing capital structure and arranging and maintaining credit facilities.
Prior to joining the Registrant, Mr. Lyle was the President of Lyle Realty
Group, Inc., which provided investment, financing and consulting services to
real estate owners and lenders. He also served as Vice President of Finance at
R&B Realty Group, an international real estate firm. During his tenure, he was
responsible for the performance of a diversified real estate and loan portfolio.
Mr. Lyle received his Bachelor of Science Degree at California State
University at Northridge and a Master of Business Administration from the
University of Southern California.
Terry Wachsner has been the Senior Managing Director of Kennedy-Wilson
Properties, Ltd. since July 1998 through the Executive Services Agreement
previously described in the discussion of Mr. Schlesinger in this section. He
joined Heitman Properties, Ltd., in 1980 and served as President from 1988 until
the Registrant purchased that company in July 1998. He has 23 years experience
in property management.
Mr. Wachsner holds a Bachelor of Arts Degree in Psychology and a Master of
Arts Degree in Architecture/Urban Planning from UCLA.
Committees of the Board of Directors
The Registrant's Audit Committee is composed of Donald Prell (Chairman) and
Kent Mouton. This committee is responsible for reviewing the Registrant's
financial policies and objectives, and monitoring the Registrant's financial
condition and requirements for funds in conjunction with management. In
addition, the Registrant's Audit Committee meets with the Registrant's
independent auditors to review their audit report and consider any
recommendations.
The Registrant's Compensation Committee is composed of Kent Mouton
(Chairman) and Donald Prell. This committee establishes the Registrant's general
compensation policies and determines the compensation levels for the Chief
Financial Officer and each employee that receives annual compensation in excess
of $100,000. The Compensation Committee also has oversight responsibility for
administering the Registrant's stock option plans (other than Plan C for
non-employee director stock options, pursuant to which options are granted
automatically upon the initial election of a non-employee director and upon each
subsequent re-election).
-56-
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Registrant's directors and certain of its officers, as well as person who
own ten percent or more of the Registrant's outstanding Common Stock
("Insiders"), to file an initial report of beneficial ownership of stock of the
Registrant and reports of changes in beneficial ownership thereafter with the
Securities and Exchange Commission (the "SEC"). Section 16(a) requires Insiders
to deliver copies of all reports filed under Section 16(a) to the Registrant.
Based solely on a review of these copies received, the Registrant believes that
Insiders have complied with all applicable Section 16(a) filing requirements for
fiscal 1998, with the exception of Goodwin Gaw, a former director who resigned
on November 5, 1998, who reported two transactions one day late.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Registrant during each of the last three fiscal years to the Chief Executive
Officer of the Registrant and the four most highly compensated executive
officers of the Registrant who served in either of those capacities during
fiscal 1998 (collectively, the "Named Executive Officers") for services
rendered:
<TABLE>
<CAPTION>
Summary Compensation Table
Number of
securities
Other annual underlying
Name and Position Year Salary Bonus compensation(1) options(2)
- ----------------- ---- ------ ----- --------------- ----------
<S> <C> <C> <C> <C> <C>
William McMorrow.................... 1998 $300,000 $2,219,222 $501,844 37,500
Chairman of the Board and CEO 1997 300,000 1,270,734 120,607 90,000
1996 300,000 450,000 --- ---
Lewis Halpert....................... 1998 $150,000 $ 623,805 $101,133 ---
Executive Managing Director 1997 150,000 396,800 31,083 45,000
1996 125,000 325,000 --- ---
Richard Mandrel..................... 1998 $250,000 $ 315,318 $116,064 37,500
Managing Director 1997 225,000 284,267 35,917 243,000
1996 188,000 100,000 89,000 54,000
Barry Schlesinger(3)................ 1998 $169,231 $ 270,000 --- 75,000
Chairman of Kennedy-Wilson 1997 --- --- --- ---
Properties, Ltd.. 1996 --- --- --- ---
Freeman Lyle........................ 1998 $161,625 $ 140,000 $ 60,325 45,000
Executive Vice-President, Chief 1997 150,000 100,000 15,020 ---
Financial Officer and Secretary 1996 94,000 37,500 --- 54,000
</TABLE>
(1) "Other annual compensation" includes, among other things, deferred
compensation contributions and car allowance contributions. In 1996, this
included a foreign cost of living and housing allowance for Mr. Mandel
while he was based in Hong Kong and Tokyo. In 1996, "Other Annual
Compensation" excluded compensation in the form of other personal benefits,
for each of the named officers other than Mr. Mandel, that did not exceed
the lesser of $50,000 or 10% of the annual salary and bonus reported for
each year.
(2) Adjusted for 200% stock dividend paid April 10, 1998, and a 50% stock
dividend paid December 15, 1998.
(3) Mr. Schlesinger is employed by KW-A, LLC. An Executive Services Agreement
between the Registrant and KW-A, LLC requires the Registrant to pay to
KW-A, LLC all amounts due Mr. Schlesinger under his employment contract
with KW-A, LLC. The Executive Services Agreement is discussed in more
detail in "Certain Transactions - Executive Services Agreement."
-57-
Deferred Compensation Plan
In 1997, the Registrant established a nonqualified deferred compensation
plan (the "Plan") to provide specific benefits to a select group of management
and highly compensated employees or directors who contribute materially to the
Registrant's continued growth, development and future business success. Under
the Plan, participants are able to defer up to 100% of their annual total
compensation including their bonuses. The Registrant is authorized to make
discretionary matching contributions in varying degrees based on the
Registrant's performance. In the fiscal year ended December 31, 1998, the
Registrant contributed approximately $1.1 million to the Plan. This amount
includes the amounts disclosed in the Summary Compensation Table, as applicable,
for the Named Executive Officers in the column labeled other annual
compensation.
Employee Profit Sharing and 401(k) Plans
The Registrant maintains a profit sharing plan (the "Profit Sharing Plan")
covering all full-time employees meeting certain minimum age and service
requirements. Contributions to the Profit Sharing Plan are made solely at the
discretion of the Board. No contributions were made for the years ended December
31,1996, 1997 and 1998.
The Registrant also has a qualified profit sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code (the "401(k) Plan").
Employees who are 21 or older who have completed six months of service prior to
January 1 or July 1 of each year are eligible to participate. Under this plan,
participants are able to reduce their current compensation from 1% up to the
lesser of 15% or the statutorily prescribed annual limit allowable under
Internal Revenue Service Regulations and have that amount contributed to the
401(k) Plan. The 401(k) plan also includes provisions which authorize the
Registrant to make discretionary contributions. During 1998 the Registrant made
$27,000 in matching contributions to this plan. During 1997 the Registrant made
$24,000 in matching contributions. The 401(k) plan has a graduated schedule of
vesting over a six-year period of employment.
Stock Option Plans
Consistent with the Registrant's efforts to employ qualified and
experienced professionals, the Registrant has three stock option plans, the
Incentive Stock Option Plan ("Plan A"), and the Non-statutory Stock Option Plan
("Plan B") and the Non-employee Director Stock Option Plan ("Plan C"). Plan A
and Plan B allow the Registrant to grant stock options to employees and
consultants. The Registrant believes that both plans help to attract and retain
highly qualified individuals to fill high-level executive and officer positions
and to give key employees and consultants an additional incentive to contribute
to the Registrant's overall success. The administration of these two plans is
guided by the Registrant's overall compensation philosophy of rewarding
employees and consultants based on their relative contributions to the
Registrant's overall accomplishments. The Compensation Committee has sole
discretion to decide which eligible employees and consultants are granted
options, the number of options granted, and, subject to the plans, the terms and
condition of each grant. Plan C allows the Registrant to grant stock options to
non-employee directors in order to further align their interests with those of
the Registrant's Stockholders.
The options granted under Plans A and B may be either incentive stock
options or options which are not intended to qualify as incentive stock options.
Only employees, however, are eligible for incentive stock options. In order to
encourage valued employees to stay with the Registrant, the Compensation
Committee typically grants options which vest over a three-year period. The
exercise price for shares of common stock underlying an option is the fair
market value of the stock on the date the option is granted by the Compensation
Committee unless the recipient of the option grant already owns 10% or more of
the Registrant's Common Stock. For those recipients, the exercise price is 110%
of the fair market value of the stock on the date the option is granted. Under
Plans A and B, as amended, an aggregate of 1,700,000 shares of common stock are
reserved for issuance. To date, options for 1,433,000 shares have been issued.
Of these options 1,220,000 remain unexercised and the balance have been
exercised. All options granted under Plan A must be exercised within five years
of the grant date. All options granted under Plan B must be exercised within ten
years of the grant date. No option under either Plan A or Plan B can be granted
after May 11, 2002.
-58-
The amount, price and terms of each grant under Plan C are automatic. Upon
election to the Board, non-employee directors receive an option to purchase
13,500 shares of Common Stock at a price equal to fair market value of the date
preceding the grant. Thereafter, each non-employee director receives an option
to purchase 540 shares of Common Stock on the same terms and conditions each
time he or she is re-elected to the Board. Several aspects of Plan C operate to
encourage capable individuals to remain on the Board. For example, an option
does not vest under Plan C until one year after the date of the grant and only
vests if the holder served as a director during that entire period. Also,
unexercised options lapse the earlier of 90 days after a non-employee director
ceases to be one of the Registrant's directors and the tenth anniversary of the
date the option was granted. No Plan C options may be granted after May 11,
2002. A total of 81,000 shares of common stock are reserved for issuance under
Plan C. As of April 21, 1999, the Registrant had options outstanding under Plan
C for 28,080 shares, of which none have been exercised.
Named Executive Officer Stock Options
The following table provides information about stock option grants made to
each of the Named Executive Officers during 1998.
<TABLE>
<CAPTION>
Stock Option Grants In 1998
Potential realizable
value of assumed
Percentage of annual rates of stock
Number of total options price appreciation of
securities granted to Exercise option terms*
underlying employees in price per Expiration ---------------------
Name of Executive Officer options granted 1998 share Date 5% 10%
- ------------------------- --------------- ------------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
William McMorrow.............. 37,500 9.52% $7.00 4/27/03 $ 72,524 $160,359
Lewis Halpert................. 0 n/a n/a n/a n/a n/a
Richard Mandel................ 37,500 9.52% $7.00 4/27/03 $ 72,524 $160,359
Barry Schlesinger............. 75,000 19.04% $8.33 12/15/03 $172,607 $381,416
Freeman Lyle.................. 45,000 11.42% $3.67 1/20/03 $ 45,628 $100,826
* The potential realized value figures assume that the stock price at the
time each option is granted will appreciate at an annual rate of 5% or 10%.
</TABLE>
-59-
<PAGE>
The following table provides information about stock options held by the
Named Executive Officers as of December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises In 1998
And Option Values As Of December 31, 1998
Number of securities
underlying unexercised Value of unexercised
Number of options in-the-money options on
shares on December 31, 1998 December 31, 1998
acquired on ___ Value
Name of Executive Officer exercise realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ---------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William McMorrow.............. 0 n/a 30,000 97,500 $ 98,340 $196,680
Lewis Halpert................. 0 n/a 15,000 30,000 $ 49,170 $ 98,340
Richard Mandel................ 18,000 $138,834 153,000 217,500 $830,142 $908,694
Barry Schlesinger............. 0 n/a n/a n/a n/a n/a
Freeman Lyle.................. 27,000 $155,610 9,000 63,000 $ 46,746 $251,190
Director Compensation
</TABLE>
Each director who is not also an employee of the Registrant receives a
quarterly retainer of $4,000 plus a fee of $1,000 for each board meeting
attended and $500 for each Board committee meeting attended. In addition, the
Registrant maintains Plan C described above under the heading "Stock Option
Plans" as further compensation for non-employee directors of the Registrant.
Employees of the Registrant who also are directors receive no additional
compensation for their service on our Board or on any committee thereof.
Employment Contracts
Each of the Named Executive Officers has entered into, or is in the process
of entering into, an employment contract for 1999. They are described below:
o Mr. McMorrow's contract provides for a term expiring on December 31,
1999, a base salary of $300,000 per annum and an advance of $100,000,
payable against a bonus of up to 20% of 1999 "profits" between
$3,000,000 and $35,000,000. "Profits" is defined as pre-tax,
pre-reserves and prior to payment of bonuses to other employees and
our contributions to our deferred compensation plan. The bonus is paid
at 6 months based on 1st and 2nd quarter profits and at year end based
on 3rd and 4th quarter profits.
o Mr. Halpert's contract provides for a term expiring on December 31,
1999, a base salary of $150,000 per annum plus a non-repayable advance
of $150,000, payable against an annual incentive bonus of 15% to 25%
of the net profit allocated to the Residential Properties Group.
o Mr. Mandel's contract provides for a term expiring on December 31,
1999, a base salary of $250,000 plus an incentive bonus of 12 1/2% to
20% of the profits allocated to our Commercial Group.
o Mr. Lyle's contract, provides for a term expiring on March 31, 1999, a
base salary of $180,000 plus a discretionary performance bonus of 0%
to 100% of base salary. The Compensation Committee of the Board is in
the process of extending Mr. Lyle's contract on substantially similar
terms.
-60-
o Mr. Schlesinger's employment contract is with KW-A, LLC and provides
for a term expiring on December 31, 2000. KW-A, LLC is a limited
liability company, of which Mr. Schlesinger is a member, that provides
executive management services to the Registrant. Mr. Schlesinger's
employment contract provides for an annual base salary of $400,000
plus (i) an annual incentive bonus of 7.06% of the first $1,700,000 of
net profits of Kennedy-Wilson Properties, Ltd. in excess of
$3,333,000, and a discretionary bonus in respect of the net profits of
Kennedy-Wilson Properties in excess of $5,033,000 and (ii) an "add-on
bonus" in 1999 of $270,000. Under the Executive Services Agreement
dated as of July 17, 1998 with KW-A, LLC the Registrant has agreed to
pay KW-A, LLC an amount equal to all sums payable to Mr. Schlesinger
under the terms of his employment agreement. In return, KW-A, LLC is
obligated to furnish the Registrant with executive management
services. The Executive Services Agreement is discussed in more detail
in "Certain Transactions - Executive Services Agreement."
In addition to compensation as noted above, each contract sets forth the
services the Named Executive Officer is to provide to the Registrant, his
benefits and expenses reimbursement rights and obligations, if any, a
non-competition covenant and confidentiality agreement and terms for
termination. Other than the employment contract for Mr. McMorrow, none of these
employment contracts provide for any severance, change-in-control or related
payments to be paid to the Named Executive Officer upon termination of the
employment contract. Mr. McMorrow's employment contract provides for a severance
payment equal to two times his annual compensation as determined by the
arithmetic average of his salary and bonus for the prior three years in the
event his employment contract is not renewed other than for cause or there is a
change in control of the Registrant.
Compensation Committee Interlocks and Insider Participations
Kent Mouton and Donald Prell were the only two people who served on the
Compensation Committee of the Board in 1998. Neither Mr. Mouton nor Mr. Prell
was an officer or employee of the Registrant during the fiscal year ended
December 31, 1998, nor have either of them been an officer of the Registrant at
any time. Mr. Mouton is a partner in the law firm of Kulik, Gottesman & Mouton.
During the Registrant's fiscal year 1998, the Registrant paid Kulik, Gottesman &
Mouton a total of approximately $496,191 in legal fees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 28, 1999 the total number of
shares of Common Stock beneficially owned and the percentage of the outstanding
shares so owned by (i) each director, (ii) each Named Executive Officer, (iii)
all executive officers and directors as a group and (iv) each beneficial owner
of more than five percent (5%) of the outstanding shares of Common Stock known
to the Registrant. Except as otherwise indicated in the notes following the
table, the stockholders listed in the table are the beneficial owners of the
shares listed with sole voting and investment power over those shares. Shares
subject to options exercisable within 60 days are treated as outstanding when
determining the amount and percentage beneficially owned by a person or entity.
-61-
<TABLE>
<CAPTION>
Number of shares
Name beneficially owned Percent of class
- ---- ------------------ ----------------
<S> <C> <C>
William McMorrow(1)........................................... 1,521,821 22.3
Lewis Halpert(2).............................................. 1,384,047 20.4
Richard Mandel(3)............................................. 282,500 4.0
Barry Schlesinger............................................. 17,499 *
Donald Prell(4)............................................... 14,580 *
Kent Mouton(4)................................................ 14,040 *
Thomas Barrack, Jr.(5)........................................ 858,166 12.3
Freeman Lyle(6)............................................... 131,493 1.9
---------- -----
All Executive Officers and Directors as a Group............... 4,224,147 57.5
Colony Investors, III, L.P.(5)................................ 858,166 12.3
Kenneth Stevens............................................... 766,200 11.3
Cahill, Warnock Strategic Partners Fund, L.P.(7).............. 750,000 10.0
Fidelity Management & Research Company(8)..................... 400,000 5.9
- -----------------
* Less than 1%.
</TABLE>
Except as otherwise indicated in the following notes, the address for
each individual, company, or named group is in care of Kennedy-Wilson, Inc.,
9601 Wilshire Boulevard, Suite 220, Beverly Hills, California 90210.
(1) Includes approximately 4,190 shares held for Mr. McMorrow's account as well
as approximately 275 shares held for the account of Mr. McMorrow's spouse
in the Registrant's 401(k) Profit Sharing Plan and Trust of which Mr.
McMorrow expressly disclaims beneficial ownership, and 42,500 shares which
may be acquired pursuant to exercise of outstanding stock options that are
presently exercisable or exercisable within 60 days.
(2) Includes approximately 1,368 shares held for Mr. Halpert's account in the
Registrant's 401(k) Profit Sharing Plan and Trust, and 15,000 shares which
may be acquired pursuant to exercise of outstanding stock options that are
presently exercisable or exercisable within 60 days.
(3) Includes beneficial ownership of 264,500 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable or exercisable within 60 days.
(4) Includes beneficial ownership of 14,040 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable.
(5) As reported in a Schedule 13D dated July 24, 1998 filed with the Securities
and Exchange Commission (the "SEC"), Colony Investors III, L.P., a Delaware
limited partnership, holds of record 660,127 shares of Common Stock and a
warrant to acquire 198,039 shares of Common Stock that is now exercisable.
The sole general partner of Colony Investors III, L.P. is Colony GP III,
Inc., a Delaware corporation. Mr. Barrack holds a 60% interest in Colony GP
III, Inc. Mr. Barrack and Colony Investors III, L.P. have shared voting and
investment power with respect to those shares. The mailing address of
Colony Investors III, L.P. and Thomas Barrack, Jr., as indicated in the
Schedule 13D, is 1999 Avenue of the Stars, Suite 1200, Los Angeles,
California 90067.
(6) Includes beneficial ownership of 33,000 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable or exercisable within 60 days.
(7) Includes beneficial ownership of 750,000 shares which may be acquired
pursuant to conversion of debentures in the aggregate principal amount of
$7,500,000 at the current exercise price of $10.00 per share. These
debentures are registered in the name of Cahill, Warnock Strategic Partners
Fund, L.P. ("Cahill, Warnock") and Strategic Associates, L.P., an affiliate
of Cahill, Warnock, in the principal amounts of $7,106,000 and $394,000,
respectively. The mailing address of Cahill, Warnock and Strategic
Associates, L.P. is One South Street, Suite 2150, Baltimore, MD 21202.
-62-
(8) As reported in a Schedule 13G, dated February 12, 1999, filed with the SEC.
The mailing address of Fidelity Management & Research Company, as indicated
in the Schedule 13G, is 82 Devonshire Street, Boston, Massachusetts
02109-3614.
ITEM 13. CERTAIN TRANSACTIONS
Transactions with Management and Others
The following are brief descriptions of transactions between the Registrant
or one or more of its subsidiaries and any of the Registrant's directors,
executive officers or stockholders known to the Registrant to own beneficially
more than 5% of Common Stock, or any member of the immediate family of any of
those persons during the fiscal year ended December 31, 1998 where the amount
involved exceeded $60,000.
Property Management Contracts
Barry Schlesinger, a member of the Registrant's Board and Chief Executive
Officer of Kennedy-Wilson Properties, Ltd., holds a 7.1% interest in two
buildings for which the Registrant provides property management services. During
the period of January 1, 1998 to July 16, 1998 Heitman Properties, Ltd. earned
$81,000 in management fees for these buildings. The Registrant acquired Heitman
Properties, Ltd. on July 17, 1998 and renamed it Kennedy-Wilson Properties, Ltd.
During the period of July 17, 1998 to December 31, 1998 the Registrant earned
$23,000 in management fees for these buildings. Presently, the management fees
are $25,000 per year per building. The Registrant expects revenues related to
these buildings to be approximately $50,000 for 1999. The Registrant may
terminate the management contracts on 30 days' notice.
Pioneer Joint Ventures
In November, 1996 the Registrant entered into a joint venture with parties
who are affiliated with Goodwin Gaw, a former member of the Board. In
particular, the Registrant acquired and paid $440,000 for a 25% interest in a
joint venture that purchased a ski resort in Colorado for $7.0 million. In
September, 1997 the Registrant acquired a 50% interest in a joint venture that
purchased for $14.6 million an office building in downtown Los Angeles with
approximately 28,000 square feet. The Registrant acquired an interest in this
joint venture for approximately $1.4 million. In the first calendar quarter of
1998, the Registrant entered into two further joint ventures with parties who
are affiliated with Mr. Gaw. In January 1998, the Registrant acquired for $4.2
million a 15% interest in a joint venture that purchased for $62.0 million a
commercial building in New York with more than 1.0 million square feet. In March
1998, the Registrant acquired for about $300,000 a 40% interest in a joint
venture that acquired a note collateralized by a hotel in Beverly Hills,
California. The Registrant subsequently sold its interest in that note for
$612,717. Mr. Gaw resigned from his position as a member of the Board on
November 5, 1998.
Legal Fees
In 1998, the Registrant paid the firm of Kulik, Gottesman & Mouton a total
of approximately $496,191 in legal fees. Kent Mouton is a partner in that firm
and a member of the Registrant's Board.
-63-
Colony Agreements
Mr. Thomas Barrack, Jr., a member of the Board and a beneficial owner of
more than 5% of Common Stock, holds a 60% interest in Colony GP III, Inc. Colony
GP III, Inc. is the sole general partner of Colony Investors III, L.P. Colony
Investors III, L.P. is the sole member of Colony K-W, LLC.
In July 1998, the Registrant acquired Heitman Properties, Ltd. The purchase
price and a portion of the expenses associated with that acquisition were
financed from the proceeds of a $21.0 million subordinated loan made by Colony
K-W LLC, pursuant to a Bridge Loan Agreement dated as of July 16, 1998 among
Colony K-W LLC, the Registrant and certain of subsidiaries of the Registrant.
The loan bears interest at a rate of 14% per annum and matures on January 15,
2000. The loan is guaranteed by certain of the Registrant's subsidiaries on a
subordinated basis and, pursuant to a Pledge Agreement dated as of July 16, 1998
made by the Registrant in favor of Colony K-W LLC, is secured by a pledge of all
of the outstanding shares of Heitman Properties, Ltd., now known as
Kennedy-Wilson Properties Ltd. The terms of the loan agreement restrict, among
other things, certain borrowings, distributions and mergers involving the
Registrant and the guarantors and is subject to additional customary restrictive
covenants.
On July 16, 1998, Colony Investors III, L.P. entered into a Stock Purchase
Agreement and a Warrant Agreement with the Registrant, pursuant to which Colony
Investors III, L. P. purchased (a) 440,085 shares of Common Stock (660,127
shares as adjusted for the December 15, 1998 50% stock dividend) and (b) a
warrant, exercisable for seven years from July 16, 1998, to purchase an
additional 132,026 shares of Common Stock (198,039 shares as adjusted for such
stock dividend) at an initial exercise price of $15.00 per share ($10.00 per
share as adjusted for such stock dividend) subject to adjustment as provided in
the Warrant Agreement, for a total aggregate purchase price of $5,232,610.
In connection with the purchase of the stock and warrant, Colony Investors
III, L.P. entered into an Investor's Agreement with the Registrant, dated as of
July 16, 1998, pursuant to which the Registrant has agreed, during the term and
subject to the provisions thereof, including the continued ownership of a
specified minimum number of shares of Common Stock, among other things, to take
all action necessary so that the Board will include one class III director
designated by Colony Investors III, L.P., and thereafter, to use its best
efforts to cause a person designated by Colony Investors III, L.P. to be
included in each slate of proposed class III directors put forth by the
Registrant and its stockholders and recommended for election in any proxy
solicitation materials disseminated by the Registrant. Colony Investors III,
L.P.'s initial director nominee was its affiliate, Thomas Barrack, Jr., who is
now a member of the Board. With certain exceptions as described in the
Investor's Agreement, Colony Investors III, L.P. has preemptive purchase rights
to maintain its beneficial ownership percentage for so long as its investment
continues to represent at least 5% of the outstanding Common Stock.
The Registrant and Colony Investors III, L.P. also executed a Registration
Rights Agreement on July 16, 1998 with respect to the warrant and any Common
Stock issuable under that warrant. Pursuant to the Registration Rights
Agreement, and subject to the terms and conditions thereof, the warrant
beneficially owned by Colony Investors III, L.P. is subject to demand and
piggyback registration rights.
Colony Investors III, L.P. is also the general partner of Colony-K-W Genpar
Ltd. and Colony K-W Genpar Ltd. is the general partner of Colony K-W Partners,
L.P. Colony K-W, L.P., K-W Japan Investments, Inc. and EBISU Investors I, LLC
are limited partners in Colony K-W Partners, L.P. K-W Japan Investments, Inc. is
a wholly-owned subsidiary of the Registrant. EBISU Investors I, LLC is owned in
part by William McMorrow (26.32%), Richard Mandel (26.32%) and Lewis Halpert
(10.52%), current directors and executive officers of the Registrant, and
Ryosuke Homma (15.79%), President Kennedy-Wilson Japan, Inc. The remainder is
owned by some of the employees in the Tokyo office of Kennedy-Wilson Japan, Inc.
Colony-K-W Genpar Ltd. and Colony K-W together have a 97.5% interest in
Colony-K-W Partners, L.P., K-W Japan Investments has a 2.0% interest and EBISU
Investors I, LLC has a 0.5% interest. The Colony K-W Partners, L.P. partnership
acquired a pool of distressed notes from Sanwa Bank and its affiliates in
September 1998 for approximately $24.0 million and a building in Kawasaki, Japan
in February 1999 for about $93.4 million.
Muromachi Building Management K.K.
In March 1999, the Registrant entered into a Japanese partnership agreement
with Meguro Investors, LLC. Meguro Investors, LLC is owned in part by William
McMorrow (25%), Richard Mandel (25%) and Ryosuke Homma (25%). The remainder is
owned by some of the employees in the Tokyo office of Kennedy-Wilson Japan, Inc.
The K-W/Meguro partnership purchased an insolvent Japanese real estate holding
company called Muromachi Building Management K.K. The purchase price was
$83,000. Under the terms of the partnership agreement, Meguro Investors LLC is
the beneficial owner of the holding company acquired and the Registrant is the
legal owner.
-64-
Arrowhead Brokerage
William McMorrow and Lewis Halpert each own 20% of real property located in
Lake Arrowhead, California. They have retained the Registrant as the exclusive
broker for selling that property. The Registrant will earn a fee of 4% of the
sale price at the close of escrow. The property's value is estimated at
approximately $12.5 million.
Executive Services Agreement
On July 17, 1998, the Registrant entered into an agreement with KW-A, LLC
to purchase executive management services. Barry Schlesinger, a member of the
Board and Chairman of Kennedy-Wilson Properties, Ltd., Terry Wachsner, Senior
Managing Director of Kennedy-Wilson Properties, Ltd., David Latvaaho, Larry
Beasley and Jerome Powalish are equal members in KW-A, LLC. The Registrant pays
KW-A, LLC an amount equal to all sums payable by KW-A, LLC to its members under
their respective employment agreements whose services the Registrant uses. The
amount received in 1998 by Mr. Schlesinger under this arrangement is described
in the section "Executive Compensation - Employment Contracts". Mr. Wachsner
received $430,000 in 1998. The terms of the Registrant's agreement with KW-A,
LLC expire the earlier of the termination of employment by KW-A, LLC of the last
member or December 31, 2000.
Goodwin Gaw Shares
On November 5, 1998, Goodwin Gaw resigned from his position as a member of
the Board. On November 10, 1998, the Registrant purchased from Mr. Gaw 135,000
shares of Common Stock for $6.716 per share for a total of $906,750. The closing
price for Common Stock on the NASDAQ National Market on that date was $7.281 per
share. All 135,000 shares were subsequently retired.
Brokerage Engagements
In the past the Registrant has been retained, and the Registrant
anticipates that from time to time in the future it will be retained, to perform
auction or brokerage services for entities controlled by certain of the
Registrant's executive officers and/or directors. The Registrant believes that
the terms of these brokerage transactions in the past have been substantially
comparable to those that would have been obtainable in similar transactions with
unaffiliated parties, and that they will have no material effect on the
Registrant.
Indebtedness of Management
In December 1997, the Registrant loaned an aggregate of $1,319,652 to 18
key employees. The company made the loans to enable those employees to acquire
in a private, unsolicited transaction approximately 73,314 shares of Common
Stock from an institutional investor. The terms of each of the loans, other than
the principal balances, are identical. Each loan is unsecured, bears interest at
an annual rate equal to the commercial prime rate of Bank of America in effect
from time to time plus 1%. Interest is payable semiannually on August 31 and
January 31. The principal is due on the earlier of three years following the
making of the loan or six months following the employee/borrower's termination
of employment. The following table provides details of the loans that were made
to the Registrant's directors and executive officers:
<TABLE>
<CAPTION>
December 1997 Loans to Directors and Executive Officers
Maximum Amount Amount owed as of
Borrower owed in 1998 April 21, 1999
- -------- --------------------- --------------
<S> <C> <C>
William McMorrow,....................................... $226,008 $ 0
Chairman of the Board of Directors and Chief
Executive Officer
Lewis Halpert, $225,972 $ 0
Director...........................................
Freeman Lyle,........................................... $225,972 $110,000
Executive Vice President, Chief Financial Officer and
Secretary
Richard Mandel,......................................... $162,000 $ 0
Managing Director
</TABLE>
-65-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules in Item 8 hereof.
(2) Financial Statement Schedules.
SCHEDULE III - REAL ESTATE OWNED S-1
Supplemental financial statement schedules not listed above are
omitted because either they are not applicable, not required or
because the information required is included in the consolidated
financial statements, including the notes thereto.
(3) Exhibits:
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, as amended to date
(Filed as Exhibit 3.1 of the Company's 1998 Annual Report on Form
10-K filed March 12, 1999 and incorporated herein by this
reference).
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 (Filed as
Exhibit 10.2 of the Company's 1998 Annual Report on Form 10-K
filed March 12, 1999 and incorporated herein by this reference).
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 (Filed as Exhibit 10.4.1 of the Company's 1998 Annual Report
on Form 10-K filed March 12, 1999 and incorporated herein by this
reference).
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).
-66-
10.5.1 Fifth Amendment to Employment Agreement dated as of May 19,
1997 between the Company and William J. McMorrow (Filed as
Exhibit 10.5.1 of the Company's 1998 Annual Report on Form 10-K
filed March 12, 1999 and incorporated herein by this reference).
10.5.2 Sixth Amendment to Employment Agreement dated as of August 20,
1998 between the Company and William J. McMorrow (Filed as
Exhibit 10.5.2 of the Company's 1998 Annual Report on Form 10-K
filed March 12, 1999 and incorporated herein by this reference).
10.6 Limited Liability Company Operating Agreement of KW-A, LLC dated
as of July 17, 1998 (Filed as Exhibit 10.6 of the Company's 1998
Annual Report on Form 10-K filed March 12, 1999 and incorporated
herein by this reference).
10.7 Employment Agreement dated as of July 17, 1998 between KW-A, LLC
and Barry Schlesinger (Filed as Exhibit 10.7 of the Company's
1998 Annual Report on Form 10-K filed March 12, 1999 and
incorporated herein by this reference).
10.8 Executive Services Agreement dated as of July 17, 1998 between
the Company and KW-A, LLC (Filed as Exhibit 10.8 of the Company's
1998 Annual Report on Form 10-K filed March 12, 1999 and
incorporated herein by this reference).
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 (Filed as Exhibit
10.9.1 of the Company's 1998 Annual Report on Form 10-K filed
March 12, 1999 and incorporated herein by this reference).
10.9.2 Second Amendment to Employment Agreement dated as of January 1,
1998 between the Company and Richard Mandel (Filed as Exhibit
10.9.2 of the Company's 1998 Annual Report on Form 10-K filed
March 12, 1999 and incorporated herein by this reference).
10.10 Employment Agreement dated January 1, 1996 between the Company
and Lewis Halpert (Filed as Exhibit 10.10 of the Company's 1998
Annual Report on Form 10-K filed March 12, 1999 and incorporated
herein by this reference).
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 (Filed as Exhibit
10.10.2 of the Company's 1998 Annual Report on Form 10-K filed
March 12, 1999 and incorporated herein by this reference).
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 (Filed as Exhibit 10.11.1 of
the Company's 1998 Annual Report on Form 10-K filed March 12,
1999 and incorporated herein by this reference).
10.11.2 Third Amendment to Employment Agreement dated as of August 15,
1998 between the Company and Freeman Lyle (Filed as Exhibit
10.11.2 of the Company's 1998 Annual Report on Form 10-K filed
March 12, 1999 and incorporated herein by this reference).
-67-
10.12 Unsecured Promissory Note dated December 22, 1997 by Freeman
Lyle in favor of the Company (Filed as Exhibit 10.12 of the
Company's 1998 Annual Report on Form 10-K filed March 12, 1999
and incorporated herein by this reference).
10.13 Office Lease dated as of September 1, 1998 between the Company
and Wilshire-Camden Associates (Filed as Exhibit 10.13 of the
Company's 1998 Annual Report on Form 10-K filed March 12, 1999
and incorporated herein by this reference).
10.14 Indemnification Agreement dated August 13, 1992 among the
Company, Kennedy-Wilson International, Inc., William J. McMorrow,
William R. Stevenson, Lewis A. Halpert and Kenneth V. Stevens.
(Filed as Exhibit 10.27 to the Company's Registration Statement
on Form S-1 (Registration No. 33-46978) and incorporated herein
by this reference).
10.15 Form of Stock Option Agreement under the Company's 1992
Incentive and Nonstatutory Stock Option Plan. (Filed as Exhibit
10.23 of the Company's 1992 Annual Report on Form 10-K and
incorporated herein by this reference).
10.16 Form of Stock Option Agreement under the Company's 1992
Non-employee Director Stock Option Plan. (Filed as Exhibit 10.24
of the Company's 1992 Annual Report on Form 10-K and incorporated
herein by this reference).
10.17 Amended and Restated Revolving Credit Agreement dated as of
September 10, 1998 between the Company and East-West Bank (Filed
as Exhibit 10.17 of the Company's 1998 Annual Report on Form 10-K
filed March 12, 1999 and incorporated herein by this reference).
10.18 Loan Agreement dated as of July 28, 1998 between Kennedy-Wilson
Properties, Ltd. and East-West Bank (Filed as Exhibit 10.18 of
the Company's 1998 Annual Report on Form 10-K filed March 12,
1999 and incorporated herein by this reference).
10.19 Guaranty dated as of July 28, 1998 by the Company in favor of
East-West Bank (Filed as Exhibit 10.19 of the Company's 1998
Annual Report on Form 10-K filed March 12, 1999 and incorporated
herein by this reference).
10.20 Loan Commitment Letter dated July 2, 1998 between KW-KAU, LLC,
Kennedy-Wilson International, Inc. and Old Standard Life
Insurance Company (Filed as Exhibit 10.20 of the Company's 1998
Annual Report on Form 10-K filed March 12, 1999 and incorporated
herein by this reference)..
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 (Filed as
Exhibit 10.21.1 of the Company's 1998 Annual Report on Form 10-K
filed March 12, 1999 and incorporated herein by this reference)..
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).
-68-
10.24 Bridge Loan Agreement dated as of July 16, 1998 among the
Company, Kennedy-Wilson International, Inc., K-W Properties,
Kennedy-Wilson Properties, Ltd. and Colony K-W LLC. (Filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated
September 30, 1998 and incorporated herein by this reference).
10.25 Investor's Agreement dated July 16, 1998 between the Company and
Colony Investors III, L.P. (Filed as Exhibit 10.25 of the
Company's 1998 Annual Report on Form 10-K filed March 12, 1999
and incorporated herein by this reference).
10.26 Registration Rights Agreement dated as of July 16, 1998 between
the Company and Colony Investors III, L.P. (Filed as Exhibit 10.4
to the Company's Current Report on Form 8-K/A dated September 30,
1998 and incorporated herein by this reference).
10.27 Warrant Agreement dated as of July 16, 1998 between the Company
and Colony Investors III, L.P. (Filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K/A dated September 30, 1998
and incorporated herein by this reference).
10.28 Form of Warrant issued July 16, 1998 by the Company to Colony
Investors III, L.P. (Filed as Exhibit 10.4 to the Company's 1998
Current Report on Form 8-K dated September 30, 1998 and
incorporated herein by this reference).
10.29 Agreement of Limited Partnership of Colony-KW Partners, L.P.
(Filed as Exhibit 10.29 of the Company's 1998 Annual Report on
Form 10-K filed March 12, 1999 and incorporated herein by this
reference).
21* List of Subsidiaries of the Company.
23* Consent of Deloitte & Touche LLP.
27* Financial Data Schedule.
* Filed herewith.
(b) Current Reports on Form 8-K.
None.
-69-
<PAGE>
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: October 18, 1999
By: /s/WILLIAM J. McMORROW
-----------------------------
William J. McMorrow
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ------
<S> <C> <C>
/s/WILLIAM J. McMORROW Chairman of the Board and Chief Executive Officer October 18, 1999
----------------------- Principal Executive Officer)
William J. McMorrow
/s/FREEMAN A. LYLE Executive Vice President, Chief Financial Officer October 18, 1999
-------------------- and Secretary (Principal Financial and Accounting
Freeman A. Lyle Officer)
/s/LEWIS A. HALPERT Executive Managing Director and Director October 18, 1999
---------------------
Lewis A. Halpert
/s/RICHARD A. MANDEL Managing Director and Director October 18, 1999
---------------------
Richard A. Mandel
--------------------- President, Kennedy-Wilson Properties, Ltd., October 18, 1999
Barry S. Schlessinger and Director
--------------------- Director October 18, 1999
Thomas Barrack
/s/KENT MOUTON
--------------------- Director October 18, 1999
Kent Mouton
/s/DONALD PRELL
--------------------- Director October 18, 1999
Donald Prell
</TABLE>
-70-
<PAGE>
EXHIBIT 21.1
KENNEDY-WILSON, INC.
LIST OF SUBSIDIARIES
State or Other
Jurisdiction of
Name Incorporation
- --------------------------------------------------------- -----------------
11743 Kiowa Partners Corporation California
301 South Fair Oaks, LLC California
453 Barrington Property Group, Inc. California
801 Flower Group, Inc. California
5900 Sepulveda Property Group, Inc. California
Beverly Crescent Inc. California
Carriage Villas Group, Inc. California
Cathedral Hill Vistas California
Dealco One, Inc. California
Dealco Two, Inc. California
Del Mar Pasadena, LLC California
Downtown Properties NY LLC. California
e-KWIC, Inc. California
Edinger Business Centre Group, Inc. California
K-W 1055 Wilshire Group, Inc. California
K-W 6255 Sunset Group, Inc. California
K-W 6380 Wilshire Group, Inc. California
K-W 7080 Hollywood Group California
K-W A, LLC California
K-W Black Oak, Inc. California
K-W Capital Corporation California
K-W Courtyard Homes, LLC California
K-W Courtyard Homes Group, Inc. California
K-W Crescent Group, Inc. California
K-W Del Mar Group, Inc. California
K-W Euclid, Inc. California
K-W Falcon Crest, Inc. California
K-W Hilltop, Inc. California
K-W Japan Investments California
K-W Kau, LLC California
K-W Kau Group, Inc. California
K-W Kohanaiki, LLC California
K-W Kohanaiki Group, Inc. California
K-W Laurelwood, Inc. California
K-W LP Investments, Inc. California
K-W Management Services, Inc. California
K-W Maple Partners, Inc. California
K-W Mitchell, Inc. California
K-W Paseo Group, Inc. California
K-W Paseo Heights, Inc. California
K-W Paseo Heights, LLC California
K-W Puako, LLC California
K-W Portfolio Group I, Inc. California
K-W Portfolio Group II, Inc. California
K-W Properties California
K-W Puako Group, Inc. California
K-W Reno Equity, Inc. California
K-W Rochester 24, LLC California
K-W Rochester Group, Inc. California
K-W Rochester, Inc. California
K-W Santiago, Inc. California
K-W Upland Equities, Inc. California
K-W Valencia Group, Inc. California
K-W Vista Del Valle, LLC California
K-W Westlake 15, Inc. California
KWP Financial V California
Kennedy-Wilson International California
Kennedy-Wilson International of New York, Inc. New York
Kennedy-Wilson Japan K.K. Japan
Kennedy-Wilson Hong Kong Ltd. Hong Kong
Kennedy-Wilson Pennsylvania Management Inc. Delaware
Kennedy-Wilson Portfolio Fund I, LLC California
Kennedy-Wilson Portfolio Fund II, LLC California
Kennedy-Wilson Properties, Inc. Delaware
Kennedy-Wilson Properties, Ltd. Illinois
Kennedy-Wilson Ohio Management Inc. Delaware
Kennedy-Wilson Wisconsin Management Inc. Wisconsin
Kennedy-Wilson Properties of Oregon, Ltd. Oregon
Kennedy-Wilson Properties of Delaware, Ltd. Delaware
Kennedy-Wilson D.C. Properties Ltd. Delaware
Kennedy-Wilson Nevada Management Inc. Delaware
Kennedy-Wilson Minnesota Management Inc. Delaware
Kennedy-Wilson Properties of Louisiana Ltd. Delaware
Kennedy-Wilson Properties of Maryland Maryland
Kennedy-Wilson Properties of North Carolina Ltd. North Carolina
Kennedy-Wilson Properties of Georgia Ltd. Georgia
Kennedy-Wilson Properties of Oklahoma Ltd. Oklahoma
Kennedy-Wilson Properties of Connecticut Ltd. Connecticut
-71-
Kennedy-Wilson Properties of Arizona Ltd. Arizona
Kennedy-Wilson Properties Houston Center Ltd. Texas
Kennedy-Wilson Properties of Texas Ltd. Texas
Kennedy-Wilson Properties of Colorado Ltd. Colorado
Kennedy-Wilson Properties of Rhode Island Ltd. Rhode Island
Kennedy-Wilson Florida Management Inc. Delaware
Kennedy-Wilson Kentucky Management Inc. Delaware
Kennedy-Wilson Properties of Indiana Ltd. California
Kennedy-Wilson Properties of Michigan Ltd. Michigan
Kennedy-Wilson Properties of Missouri Ltd. Missouri
Kennedy-Wilson Properties of Washington Ltd. Washington
Kennedy-Wilson Properties of New York Ltd. Delaware
Kennedy-Wilson Properties of Massachusetts Massachusetts
Kennedy-Wilson Virginia Management Inc. Delaware
-72-
<PAGE>
Kennedy-Wilson Inc.
SCHEDULE III - REAL ESTATE OWNED For Year Ending December 31, 1998
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to
Initial Cost Acquisition
------------------------- ------------------------
Building and Carrying
Commercial Properties Encumbrance Land Improvements Improvements Costs
- --------------------- ----------- ---- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
4 vacant lots, Santa Monica, 2,400,000 2,402,000 - - -
California
1055 Wilshire Blvd., Santa Monica,
California
282,000 square foot office 24,500,000 6,125,000 19,102,000 181,000
building
6380 Wilshire Blvd., Los Angeles,
California
133,000 square foot office 13,000,000 6,000,000 7,362,000 2,861,000 -
building
5900 Sepulveda Blvd., Van Nuys,
California
74,000 square foot office building 6,6000,000 1,667,000 5,148,000 104,000 -
7080 Hollywood Blvd., Los Angeles,
California
161,000 square foot office 19,000,000 5,782,000 14,014,000 107,000 -
building
6255 Sunset Blvd., Los Angeles,
California
282,000 square foot office 27,500,000 3,222,000 25,652,000 403,000 -
building
802 Huntington Drive, Monrovia,
California
282,000 square foot office 401,000 413,000 998,000 - -
building
4350 11th Ave., Los Angeles,
California 337,000 - 337,000 - -
282,000 square foot office
building
3,000 acres of land, Koala, Hawaii 2,712,000 4,110,000 - 501,000
301 S. Fair Oaks, Pasadena,
California 8,550,000 1,841,000 6,987,000 249,000 -
55,000 square foot office building --------- --------- --------- ------- -
105,000,000 31,562,000 79,600,000 3,905,000 501,000
Residential properties:
Pacific Palisades, California
3 residential homes 1,749,250 960,473 788,677 304,369 100,650
Palm Desert, California
23 housing lots 1,535,000 1,535,000 1,125,003 242,318
Cathedral City, California
112 housing lots 1,800,000 1,800,000 579,156 7,557
San Diego, California
155 acres of land 282,812 282,812
Riverside, California
3.7 acres of land 86,548 86,548
------ ------ ---------- ---------- ----------
5,453,610 4,664,833 788,677 2,008,528 350,525
--------- --------- ------- --------- -------
Total $110,453,610 $36,226,833 $80,388,677 5,913,528 851,525
============ =========== =========== ========= =======
Balance at beginning of year $18,747,000
Additions during period:
Acquisitions 118,823,947
Improvements 6,765,053
Other: - 125,589,000
- -----------
Deductions during period
Disposition of real estate 21,743,000
sold
Other: - 21,743,000
- ----------
Balance at end of year $122,593,000
</TABLE>
<PAGE>
Kennedy-Wilson Inc.
SCHEDULE III - REAL ESTATE OWNED For Year Ending December 31, 1998
(continued)
<TABLE>
<CAPTION>
Gross Amounts At Which Carried
At Close of Period
------------------------------------------
Building and Accumulated
Commercial Properties Land Improvements Total Depreciation
- --------------------- ---- ------------ ----- ------------
<S> <C> <C> <C> <C>
4 vacant lots, Santa Monica, 2,402,000 - 2,402,000 -
California
1055 Wilshire Blvd., Santa Monica,
California
282,000 square foot office 6,125,000 19,283,000 25,408,000 (469,000)
building
6380 Wilshire Blvd., Los Angeles,
California
133,000 square foot office 6,000,000 10,223,000 16,223,000 -
building
5900 Sepulveda Blvd., Van Nuys,
California
74,000 square foot office building 1,667,000 5,252,000 6,919,000 (148,000)
7080 Hollywood Blvd., Los Angeles,
California
161,000 square foot office 5,782,000 14,121,000 19,903,000 (83,000)
building
6255 Sunset Blvd., Los Angeles,
California
282,000 square foot office 3,222,000 26,055,000 29,277,000 (122,000)
building
802 Huntington Drive, Monrovia,
California
282,000 square foot office 413,000 998,000 1,411,000 (12,000)
building
4350 11th Ave., Los Angeles,
California - 337,000 337,000 N/A
282,000 square foot office
building
3,000 acres of land, Koala, Hawaii 4,110,000 501,000 4,611,000 N/A
301 S. Fair Oaks, Pasadena,
California 1,841,000 7,236,000 9,077,000 (191,000)
55,000 square foot office building --------- --------- --------- ---------
31,562,000 84,006,000 115,568,000 (1,025,000)
Residential properties:
Pacific Palisades, California
3 residential homes 960,473 1,193,696 2,154,169 N/A
Palm Desert, California
23 housing lots 1,535,000 1,367,321 2,902,321 N/A
Cathedral City, California
112 housing lots 1,800,000 586,713 2,386,713 N/A
San Diego, California
155 acres of land 282,812 282,812 N/A
Riverside, California
3.7 acres of land 86,548 86,548 N/A
------ ---------- ------ ---
4,664,833 3,147,730 7,812,563 -
--------- --------- --------- -
Total 36,226,833 87,153,730 123,380,563 (1,025,000)
========== ========== =========== ===========
</TABLE>
<PAGE>
KENNEDY-WILSON, INC.
SCHEDULE IV - Mortgage Loans on Real Estate
For Year Ended December 31, 1998
<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date
- ------------------------------------------------ ------------ ---------------
<S> <C> <C>
Mortgage note secured by 15 single family 10% July 31, 1999
residential units
Mortgage note secured by single family home 9% April 30, 1999
Mortgage note secured by 39 single family homes 10% July 1, 1999
Mortgage note secured by 211 single family homes 10% December 31, 1999
Balance at beginning of the year $ 1,025,000
Additions during year:
New mortgage loans 1,160,000
Other 0
Deductions during year:
Collections of principal (291,000)
Foreclosures 0
Cost of mortgage sold 0
Amortization of premium 0
Other 0
-----------
869,000
==============
Balance at end of the year $ 1,894,000
==============
</TABLE>
KENNEDY-WILSON, INC.
SCHEDULE IV - Mortgage Loans on Real Estate
For Year Ended December 31, 1998
(continued)
<TABLE>
<CAPTION>
Periodic Face Carrying
Payment Prior Amount of Amount of Delinquent
Terms Liens Mortgage Mortgage Principal/Interest
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Only until February No $ 700,000 $ 700,000 0
1999
Thereafter Level Principal and
Interest
Interest Only 0
Principal due at Maturity No 460,000 460,000
Level Principal and Interest No 0
545,000 450,000
Level Principal and Interest No 0
675,000 284,000
============ ===========
$2,380,000 $1,894,000
============ ===========
</TABLE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-73324 of Kennedy Wilson, Inc. on Form S-8 of our report dated February 26,
1999 appearing in this Annual Report on Form 10-K-A of Kennedy Wilson, Inc. for
the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Los Angeles, California
October 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,838,000
<SECURITIES> 0
<RECEIVABLES> 29,789,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 204,816,000
<CURRENT-LIABILITIES> 18,101,000
<BONDS> 149,644,000
0
0
<COMMON> 66,000
<OTHER-SE> 22,714,000
<TOTAL-LIABILITY-AND-EQUITY> 204,816,000
<SALES> 0
<TOTAL-REVENUES> 50,872,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,710,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,162,000
<INCOME-TAX> 837,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,325,000
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.78
</TABLE>
